China Programme • Volume 10 • Number 6 • September 2006

China’s Introduction to Dispute Settlement

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China’s import regulations for car parts have been challenged at the WTO, but the country may also soon initiate dispute settlement proceedings of its own against anti-dumping duties on its shoe exports to the EU.

The two disputes illustrate the predicament of richer countries eager to exploit the export opportunities offered by China’s huge market and rising purchasing power on the one hand, and the need to deal with the pressure from domestic industries for protection against Chinese imports the other.

Row Over Car Part Regulations

On 28 September, China rebuffed its first ever WTO panel request from Canada, the EU and the US. At issue are measures the complainants say are designed to bolster the Chinese automobile manufacturing sector through imposing two different tariff rates on imported car parts. While the ordinary MFN tariff for such items is around 10 percent, imported components that make up a certain numerical or value level of a Chinese-made vehicle – about 60 percent – are taxed at the MFN rate applied to entire cars, typically 25 percent. As a Member can block a panel request only once, it will be approved at the next meeting of the Dispute Settlement Body.

The complainants allege that China has violated its scheduled tariff commitments, as well as the national treatment principle inscribed in GATT Article III. For instance, the EU said that China had acted inconsistently with Article III:4 “by imposing specified thresholds for imported parts in an assembled vehicle above which an additional charge applies on each imported part included in the vehicle. In addition, the EU maintained that China imposed “additional administrative requirements on importers and manufacturers that may not meet the required threshold for domestic content.”

The US charged that the import policy was inconsistent with the Agreement on Traderelated Investment Measures (TRIMs) “by requiring motor vehicle manufacturers in China to purchase or use domestic auto parts in order to obtain advantages such as the avoidance of administrative burdens and the payment of additional charges and by imposing restrictions which generally restrict the importation by a manufacturer of auto parts used in or related to its local production.” In addition, the import regulations are alleged to violate Article 3 of the Agreement on Subsidies and Countervailing Measures (SCM) by giving car manufacturers incentives to use domestic over imported parts.

The Office of the US Trade Representative said in a press release that such regulations encouraged auto manufacturers in China to use Chinese parts in the assembly process, as well provided “an incentive for auto parts producers to relocate manufacturing facilities to China.”

China’s WTO Ambassador Sun Zhenyu expressed regrets over the panel requests, and noted that China had provided ‘unprecedented opportunities’ in automobiles and auto parts for its trading partners’ since its WTO accession. Ambassador Sun also said that China’s regulations on importing auto parts complied with WTO rules, and were adopted to prevent tax evasion by companies that import whole cars as spare parts to avoid the higher tariffs applicable to entire automobiles.

China Could Launch First WTO Dispute Over Shoes

China may initiate WTO dispute settlement proceedings against the EU following the imposition of a 16.5 percent anti-dumping (AD) duty on Chinese leather shoes as of 7 October 2006. The new duty replaces a temporary 19.4 percent duty in force since April 2006.

A spokesperson for the Chinese Ministry of Commerce said on 5 October that both the dumping investigation and the duty determination were inconsistent with the EU’s own anti-dumping regulations, as well as WTO rules. He added that China would “closely watch this issue and see how it develops and will maintain the right to take corresponding measures.”

The new duty, which will be applied for two years, was approved by a 13 to 12 majority of EU member states after weeks of standoff between countries with leather footwear industries, such as Italy and Portugal, and those more inclined toward the interests of retailers – and the lure of affordable shoes. The 16.5 percent duty will be additional the 7.5 percent mostfavoured- nation tariff the EU imposes on leather shoes from WTO Members.

Vietnam, which is nearing the completion of its WTO accession negotiations, will face a 10- percent AD duty, down from the 16.8 percent temporary tariff imposed in April 2006.

With regard to textiles, China’s WTO accession schedule allows trading partners to impose safeguard measures until the end of 2008 despite the general elimination of textile quotas in 2005. To avoid safeguard action, China has concluded bilateral agreements with the US, the EU, Brazil and South Africa, under which it voluntarily restrains exports of several textiles and apparel categories.

The special safeguard only applies to textiles, however. China can thus challenge at the WTO both the ‘injury to domestic industry’ that the EU’s claims has resulted from Chinese shoe exports and the level of the anti-dumping duty.

The European Commission claims that the trade remedy action is justified since Chinese leather shoe exports to the EU increased ten-fold between 2001 and 2005, while leather footwear produced in Europe decreased by about 30 percent and 40,000 jobs in the sector were lost. In 2005, China exported 1.2 billion pairs of shoes to EU countries, 145 million of which were subject to the 19.4 percent provisional AD duty. Vietnamese shoe exports amounted to 265 million pairs, and industry sources there are predicting up to 70,000 job losses, as well as bankruptcies of some small-scale manufacturers.