The dispute between China, the United States and the European
Union (EU) on auto trade has now reached a turning point.
On March 30, Brussels and Washington filed a joint complaint to
the World Trade Organization (WTO) concerning China's auto policy,
accusing the country of charging unfair taxes on imports of car
parts.
The trade row surfaced more than half a year after China
published a regulation on imports of auto parts with the
characteristics of the "complete vehicle."
In recent years, the country's auto market has witnessed an
explosive growth because of continued economic expansion.
However, the majority of powerful car makers belong to joint
ventures with foreign companies.
To form manufacturing capability and capture the market share as
early as possible, the foreign partners often import bulk car parts
almost equivalent to the finished vehicles.
In doing so, they minimize technological transfers to China,
while maintaining technological advantages and dominance over their
Chinese partners.
As a result, there is only a simple assembling process in China,
which has been referred to as "putting four wheels on."
Thus, only a very small portion of the value of the vehicle has
been realized in China, while evading a high duty charged on the
complete imported vehicle.
However, such a manufacturing model often conforms with the
short-sighted goals of some local governments and officials, often
receiving plenty of support and encouragement.
But such a "simple assembling workplace" status seriously
hampers the country's efforts to improve its auto manufacturing
ability and promote the technological improvement of domestic
automakers.
Under this context, it is urgent to put forward the concept of
the "finished vehicle." China needs to promulgate a regulation on
imports of auto parts in an attempt to prompt foreign partners to
produce core auto parts in China, thus reducing the country's
dependence on imported components.
The accusations lodged by the US and EU concerning the country's
policy on imports of auto parts is unreasonable.
China is by no means willing to adopt and implement any subsidy
and preferential policies for domestic automakers that contravenes
WTO rules.
However, the United States and the European Union should keep in
mind that liberalization is not a basic goal of the WTO and its
predecessor GATT (the General Agreement on Tariffs and Trade), but
a means to push for the realization of basic targets of the global
multilateral trading system. One of GATT and WTO's basic targets is
to promote economic and social progress in developing
countries.
The global multilateral trading mechanisms also endow their
member states with a series of policy tools that they can adopt and
apply.
In the latest trade row with its American and European trading
partners, China's relevant regulations are not in breach of WTO
requirements.
According to the prevailing world practice, added value of a
product usually decides its manufacturing origin. A car, which is
assembled in China, with almost all parts imported from foreign
countries, is therefore not regarded as "China-made."
In other words, it is completely reasonable to levy duty upon
the car parts with finished vehicle characteristics according to
the taxation standard applied to the finished car.
In accordance with WTO clauses, its member states should not
demand foreign-funded corporations based in their territory to
purchase or use home-made products in an obligatory manner.
Neither China's policies on the auto industry nor its regulation
on the import of car parts has violated the above-mentioned
principle.
According to the WTO dispute settlement mechanism, there is a
60-day consultation phase for China, the US and the EU to negotiate
a solution since filing the complaint.
Should that fail, the US and EU may ask the multilateral trading
body to arbitrate and rule.
The US and the EU have expressed their hopes to seek a solution
to the trade friction through consultations before the formal
launching of the WTO procedure.
The final result of the trade row will certainly be decided
through the parties' relevant economic and political capacities,
alongside their mastering of WTO rules and negotiation.
However, the dispute comes just months after the creation of
China's car policy regulation. Furthermore, the 2003-2004 trading
quarrels with the United States, which concerned duty on
semiconductors, caused the US Government to file a formal complaint
to the WTO. This demonstrates the potential risk of trade rows that
China's policy on industrial development may face.
The reactions from a nation's trading partners usually decide to
a large extent the viability of domestic economic policies.
Thus, while making any policies on its industrial development, a
country should take into full consideration their influence upon
trading partners and their possible responses.
China currently advocates and attaches high importance to
self-innovation and to developing an advanced manufacturing sector.
At the same time, trading disputes have a tendency to escalate.
It is not an overstatement to claim that the country has become
the world's largest victim of trade protectionism.
As trade frictions with foreign nations begin escalating, the
disputes begin to affect the economic structure.
It is expected that China's trade disputes with foreign nations
will remain long-standing.
This is due to the country's high rate of saving and low
consumption, which cannot be reversed in the short term. This is
coupled with a trade surplus over the US and EU, which exert the
largest influences upon global trading systems and rules.
As regards to its industrial development policy, China has
encountered the largest conflict of interests with the US, the EU
and other developed trading partners.
This suggests that China's policy on industrial development is
likely to become the target of US and EU condemnation.
The country's policy on industrial development will inevitably
exert a substantial influence upon the world's economy.
While trying to pursue the best development policy for domestic
industries, the country's choices will always fall under the
restraints of international factors.
The nation should make in-depth research into the viability of
all its policies on industrial development in advance, and consider
possible causes of conflicts with foreign countries. Only through
this will China maintain a stable relationship with external
factors and ensure the development of a prosperous domestic
sector.
The author is an associate research fellow at the Institute
of International Trade and Economic Co-operation under the Ministry
of Commerce.
(China Daily April 10, 2006)
