On December 15, 2008, the Appellate Body of WTO released the final report concerning the issue of automobile accessories between China as a party and Canada, European Union and the U.S.A as another party. This report contained the decision on the same issue by the Expert Panel of WTO on July 2008, and brought in the verdict that China’s policy related to this case violated the “National Treatment Principle” of WTO Rules. This is the first time China lost a case after joining this worldwide organization.
China has been a member of WTO since December 2001, and actualized its pledges to abolish the automobiles import quota beginning January 1, 2005, and then promised to reduce respectively the import tax ratio of complete automobile to 25 percent as of July 1, 2006. But in the first quarter of 2005, China Custom found the import amount of automobile components & parts (C&P) had been increasing steeply. The subsequent investigation discovered that some companies imported huge amounts of C&P that were enough to assemble complete cars, thereby paying only the lower import tax ratio of C&P (10 percent).
So the Chinese Government promulgated a new regulation entitled “Measures for the Administration of Import of Automobile Components and Parts Featuring Complete Vehicles” (C&P Regulation) which was effective as of April 1, 2005. According to the C&P Regulation, there would be three measures to clarify whether the import of C&P was equivalent to the import of complete vehicles: [Measure A] CKD (Complete Knock Down) assembly or SKD (Semi Knock Down) assembly; [Measure B] imported vehicle body and assembled engine system; and [Measure C] the summation of costs of imported C&P is or is over 60 percent of total costs of a complete vehicle. If the import of the C&P was determined by Customs as equivalent to the import of a complete vehicle, the C&P would be taxed at 25 percent as an import of complete vehicle.
Beginning in November 2005, the European Union, the United States and Canada early or late began to ask China to decline the entering bulwark for overseas automobile C&P producers. In March 2006, the United States and the European Union formally brought an accusation against China concerning the breaching by WTO rules of the C&P Regulation.
In April 2006, China agreed to consultation with above plaintiffs under the WTO frame of conflicts settlement, and then announced in July 2006 it would postpone the implementation of Measure C of the C&P Regulation to July 2008.
In October 2006, WTO set up an Expert Panel to investigate such dissension due to the disagreement of consultations abovementioned.
In February 2008, the Expert Panel released the primary investigation report to assert that China acts against the Rules of WTO and breaches its pledge when China joined into WTO in 2001, and then in July 2008, the Expert Panel gave the formally same judge on the first instance. China subsequently appealed to the WTO and was given the final report as you see at the beginning of this article. This report kept the judgment by Expert Panel of Measure C but agreed China’s policy of Measure A and B.
Of course, things will not end right now. The case will go to the execution period, then WTO will give China nine to fifteen months to revise the policy and regulations. If China fails to do that, there must be a new round of negotiation about compensation or a new litigation which probably will cause some kind of corresponding sanctions.
It will be a complex and long-term course, and this course was not our focus. What we are interested in is the domestic reaction. As opposed to the calm government reaction, popular reaction seemed over-fevered. Some people, including a few officers and executives of enterprises, even doubt the justness of WTO rules and query the government’s original decision to enter WTO.
We do not want to discuss whether China should join WTO because it is a too big topic. We just want to remind everyone that the global economy and international trading is just like a game, and China has been in this game for years. Every game has its own rules, no matter who is the rule maker. If the rule was not fair enough or the majority of participants could not gain their own benefits, no one would join into this game but the rule makers.
Actually, since WTO’s establishment, the most frequent losers of trade conflict cases are developed countries that originally created the WTO rules. And, in the past five years, most of the world’s main automakers were setting up joint-venture factories in China and the world C&P suppliers were doing the same things. That is the trend whether China won or lost the case under WTO frame.
The Chinese electric appliances industry has now begun to acquire a few competitive advantages to the world. Please recall this is one of the earliest industries that were out of the governmental protection in China.
We are in the game and the first thing is to abide by the rules of this game. So if you cannot change the rules, you should stop complaining and do something else. People should know more about the rules and try to use these rules adequately and cleverly. That is the spirit of fairness.