In a bit of good news to U.S. auto parts suppliers who are dreading the ripple effect of a possible Detroit Three downfall, the WTO has determined that China’s auto parts tariffs to be in breach of international trade rules.

The World Trade Organization (WTO) this week rejected China’s appeal over a ruling that favored the United States, European Union and Canada regarding a dispute over car parts, the Associated Press reports. The ruling requires China to make the legislative changes necessary to bring its tariff laws on foreign auto parts into compliance with international trade rules. If it does not comply after a “reasonable period of time,” as judged by a separate WTO panel, case sanctions can be imposed.

China should “bring its measures into conformity with its obligations,” appellate judges said yesterday in a 123-page report.

“China now has a reasonable period of time to bring its measures into compliance with WTO law,” the European Commission said in a statement. “After which, if China has not remedied the breach of WTO law, the EC may adopt trade sanctions.”

The U.S. echoed the sentiment saying that it “will not hesitate to use all available tools to ensure that China complies with the rules of the international trading system.”

Under current rules, cars made in China must contain at least 40 percent Chinese-made parts or they are taxed at the rate of imported finished cars. The WTO originally ruled against this practice (third item) in July; Beijing appealed, arguing that the taxes were needed to stop whole cars being imported in large chunks — enabling companies to avoid higher taxes for finished cars.

According to Bloomberg News, the U.S., EU and Canada disputed the argument saying that the difference in duty rates forced automakers operating in China to use more local components and unfairly discriminated against foreign auto parts. Once the threshold of foreign parts is reached, those components are subjected to the 25 percent tax on completed vehicles instead of the 10 percent tariff on parts.

They also argued that “the tariffs made it cheaper for car parts companies to shift production to China, costing Americans, Canadians and Europeans their jobs,” AP says.

“Especially in light of the current problems faced by the U.S. auto industry, I expect China to comply promptly with its WTO obligations by removing an unlawful and unfair trade barrier that is harming U.S. workers and manufacturers,” U.S. Trade Representative Susan Schwab said in a statement.

Indeed, this decision has been a singular bright spot for auto parts suppliers who have been struggling with rising commodity bills and automakers’ demands for lower prices, Reuters adds.

Auto parts makers are also contending with the fact that despite this ruling, China is still a major force to contend with. While their supply is stock piling in the U.S. with auto demand going through the floor, the Chinese car market is growing. “General Motors Corp., for example, sells more Buicks in China than in the U.S.,” the Los Angeles Times notes. Vehicle sales in China rose 22 percent last year with nearly 8.8 million vehicles being sold. That’s almost half the size of the U.S. market.

According to AP, foreign automakers such as General Motors Corp. and Toyota Motor Corp. have invested more than $20 billion in China’s auto market.

Additionally, Chinese manufacturers have gained exposure to Western technology due to joint operating agreements required of U.S. and European companies selling cars to China, which could be “a significant leg up,” explains the L.A. Times.

At least for now, thanks in large part to the economic crisis, Chinese suppliers have halted plans for coming stateside to try to get a foothold in the U.S. auto market, Reuters reports.

Earlier

WTO Rules Against China in Auto-Parts Dispute (3rd item)

China Trade Disputes Loom Large

Resources

China – Measures Affecting Imports of Automobile Parts (AB-2008-10)
World Trade Organization, Dec. 15, 2008

WTO Rejects China Appeal against Auto Parts Ruling
The Associated Press, Dec. 15, 2008

China Loses Appeal of WTO Ruling on Car-Parts Duties
by Jennifer M. Freedman
Bloomberg News, Dec. 15, 2008

Uncertainty in U.S. Auto Industry Puts Pressure on Suppliers
by Jui Chakravorty Das
Reuters, Sept. 17, 2008

China Seeks Inroads into U.S. Car Market
by Ken Bensinger
Los Angeles Times, Jan. 15, 2008