As soon as the final ruling in March is issued, domestic production of luxury cars and commercial vehicles may see short-term benefits
This marks the first time in seven years since China joined the WTO that it has lost a major trade case. The dispute centered around China’s auto parts import policy, which was challenged by the United States, the European Union, and Canada.
On February 13, local time in Geneva, Switzerland, the World Trade Organization (WTO) finalized the ruling on a complaint regarding China’s import rules for auto parts. A panel of three independent members found that China's high tariffs on imported auto parts violated its commitments upon joining the WTO, leading to a loss for China.
The core issue: What are the import tariffs on large auto components?
The dispute originated from the "Measures for the Administration of the Import of Auto Parts That Constitute the Characteristics of Complete Vehicles," introduced by China on April 1, 2005. These measures were designed to prevent foreign automakers from assembling cars with only four wheels in China. Instead, they required full tariffs to be applied on key vehicle components. This led to an increase in tariffs from 13.8% to 28%, which the EU, US, and Canada argued was discriminatory and against WTO principles.
The EU first raised concerns about China's auto parts policy as early as November 2005, and later, along with the US and Canada, formally filed a complaint with the WTO. The case went through several stages before the preliminary ruling in February 2008. In July 2006, China delayed the implementation of the "Measures" until July 2008, but the dispute remained unresolved until the final decision was made.
Who is affected: mainly domestic luxury and commercial vehicles
Although China delayed the enforcement of the auto parts policy, it did not mean that foreign automakers could bypass regulations by simply assembling cars with just four wheels.
According to an interview with a customs officer from Huangpu Customs, he handled numerous cases involving imported auto parts that formed the core components of vehicles, including parts from Guangzhou Isuzu. Additionally, the Mercedes-Benz Fuzhou Light Vehicle Base faced delays in approval due to the ongoing dispute, with one insider stating that the six-year period had a direct impact on their operations.
These examples reflect how China’s component import policies have influenced the auto industry. Most joint-venture companies, especially those from Japan, have already localized their parts, so the policy had minimal impact on them. For instance, Guangzhou Honda has achieved a localization rate of over 90% for its main models, making the policy less relevant. However, luxury brands like Mercedes-Benz, BMW, Volvo, Cadillac, and commercial vehicles such as Guangzhou Isuzu and Neoplan are more affected. These vehicles rely heavily on imported large components, and their localization remains challenging due to high quality standards and low volume.
Jin Yongsheng, a senior analyst at Xinhuaxin, noted that in the short term, if the policy is relaxed, domestic production of these luxury and commercial vehicles could see significant benefits. However, in the long run, manufacturers are expected to gradually increase local sourcing to reduce costs.
Will the final ruling in March change?
Under WTO rules, if China refuses to amend its policies, the complainants—such as the EU and the US—could impose sanctions. However, Song Hao, director of the International Trade Research Office at the Chinese Academy of Social Sciences, believes the chances of overturning the ruling are very slim. “No previous dispute resolution panel has issued a final decision that contradicted the preliminary ruling,†he said. Still, the final ruling in March is still pending, and no conclusion can be drawn yet.
Is this specific to your car?
Jin Yongsheng also pointed out that the number of luxury cars produced in China is relatively small, so the disputed import duties are not significant. Overall, this case might be part of larger trade tensions between China and Western countries, where auto parts policies are used as a pretext for broader disputes.
As the situation unfolds, it will be important to monitor how Chinese automakers adapt and whether the policy changes lead to long-term shifts in the industry.
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