WTO asks China to change auto tax rules

China violates global trade rules by requiring automakers operating there to buy most components from local suppliers or face higher tariffs, the World Trade Organization ruled.

The decision, issued today in Geneva on a complaint brought by the European Union, US and Canada, is the first time China has lost a case since it joined the global trade body in 2001.

China compels Ford Motor Co, Volkswagen AG, Renault SA and other automakers operating there to buy more than half their auto parts from local suppliers or the imported components face more than twice the standard duty. The US, EU and Canada contended that the system violates trade rules, and the WTO sided with them today.

The ruling "leaves no doubt that China's discriminatory treatment of US auto parts has no place in the WTO system," US Trade Representative Susan Schwab said in a statement.

China can now change its policy or appeal the decision. If the WTO upholds the ruling on appeal, China may face retaliatory tariffs on its exports.

The case was filed in March 2006 as the richest nations began ramping up their criticisms of China's trade policies. US lawmakers have accused China of using a combination of subsidies, tax incentives and an undervalued currency to give an unfair advantage to domestic companies, helping to drive up the Asian nation's record trade surplus.

China passed Canada to become the largest source of imports into the US last year, and has run up record trade deficits with the US each of the past six years.

Export Market: The case also reflects China's increasing importance as an export market. Overseas carmakers including General Motors Corp and Toyota Motor Corp have invested more than $20 billion in Asia's biggest auto market, seeking to offset slumping sales in the US, Europe and Japan.

"We believe China's treatment of US automotive component imports is highly discriminatory," said John Engler, the president of the National Association of Manufacturers. The result shows that the WTO system works, he said.

In April 2005, China began a system of levying tariffs on auto parts based on the amount of imports in the complete vehicle. Automakers must register with Chinese authorities and provide detailed information on the quantity and value of foreign parts used in their vehicles.

If a threshold of foreign parts is reached, those parts are subject to the 25 per cent tariff that applies to complete vehicles instead of the 10 per cent tariff applied to parts.

That difference in duty rates is an unfair discrimination against foreign parts, a violation of global trade rules, the US, EU and Canada argued. The WTO judges sided in large part against China today. It didn't rule on all the complaints brought by the rich nations.

Wang Baodong, a spokesman for the Chinese Embassy in Washington, didn't return a telephone message.