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EU Trade Commissioner Peter Mandelson said: "Consultations will allow us to clarify the legal issues and find a mutually satisfactory solution. It remains my strong preference and intention to seek an amicable solution to this issue".

A statement from the office of the US Trade Representative (USTR) said China's taxes on imported auto parts "discourage automobile manufacturers in China from using imported auto parts in the assembly of vehicles." The USTR said this is inconsistent with China's WTO commitments.

The EU first raised the issue of its tariffs on car parts in 2004. The EU requested action to address the problem at the EU-China Joint Trade Committee in October 2005. The European Union had then urged China to eliminate trade restrictions harming companies from Arcelor SA to Volkswagen AG and threatened to bring its first World Trade Organization complaint against the communist nation.

What is the issue?

The EU believes that Chinese tariff laws for spare auto parts are WTO-incompatible. Chinese rules apply the tariffs for "whole vehicles" to the import of spare parts making up 60% or more of the value of a final vehicle. The EU believes that this may contravene China's WTO obligations not to impose obligatory "local content" rules: to avoid the "whole car" tariff rates a car-maker has to source 40% or more of the spare parts by value in China. The EU believes it may constitute an internal tax on imported goods - because the tariff is levied on a finished product constructed with imported parts and the same rates are not applied to cars produced with local spare parts.

This can be problematic for EU producers in China who are not able to import parts from their own factories in Europe without unfair tariffs. The EU has about 20-25% of the car production market in China.

What does China say?

China claims that the measures are designed to avoid circumvention (ie, the prevention of the importing whole cars as spare parts to avoid the higher tariff rates for whole cars). However the WTO has found in the past that the objective of measures does not justify their form - and in this case the measures appear to the EU to be WTO-incompatible. At the time of its WTO accession, China committed itself not to treat parts as whole cars.

What happens now?

The request for consultations has been filed with the WTO in Geneva today. China has 10 days to respond to the request and is obligated by WTO rules to enter in consultations in good faith within 30 days. If the issue cannot be resolved in consultations within 60 days then the parties have the option of requesting a WTO panel to hear and rule on the dispute.

What does this mean?

The chances are that the EU & US will win this case, thus meaning that American & European automanufacturers will be able to create a super low price car part bin, by shopping from the cheapest possible sources around world. Then, they will go to the world’s lowest paid labor hand country -China, assembling these parts into a real car....Genius

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