Stewart and Stewart: Chinese Government Support of Chinese Auto and Parts Makers Violates Trade Rules Threatening U.S. Job

February 2, 2012

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WASHINGTON--(BUSINESS WIRE)-- Stewart and Stewart's new report says by end of decade that market distortions and discriminatory practices of the Chinese government could allow China to seize 50 percent or more of the U.S. auto parts market – at a cost of hundreds of thousands of American jobs. That’s the conclusion of a 251-page report, China’s Support Programs for Automobiles and Auto Parts Under the 12th Five-Year Plan.

“China designates new-energy automobiles and their components as one of the seven strategic and emerging industries in which it aims to become a world leader by 2030,” said trade law attorney Terry Stewart, Stewart and Stewart’s managing partner and one of the authors of the report. “China will reach this goal by growing production of vehicles and parts by 35% per year – a staggering surge.

“The Chinese government will invest $1.5 trillion in these seven industries over the next five years,” Stewart said. “Auto parts targeted in these plans include batteries, electric motors, electronic control systems, and fuel cells – critical components to the next generation of motor vehicles.”

Chinese auto and parts producers benefit from an array of government policies, including export restraints, domestic content rules, technology transfer requirements, export requirements, and massive domestic and export subsidies, the Stewart and Stewart report shows. The law firm has been involved in international trade disputes and policy making for more than 50 years.

“A number of these policies directly violate China’s WTO commitments,” Stewart said.

The report says the Chinese government has created:

Restraints on exports of key raw materials, including those for light-weight composites, special alloys, fuel cells, batteries, and electronics, which increase supplies and lower prices for Chinese auto parts producers;
Requirements that investors in finished auto production in China also produce their engine sets there;
Subsidies for new purchases of energy-efficient cars of up to $18,000 per vehicle which are funneled through domestic manufacturers so that imported vehicles do not qualify – every one of the car models eligible for the subsidy is produced in China;
Waivers of sales tax on locally made electric vehicles, likely violating WTO obligations of national treatment;
Prohibitions on foreign investors producing complete automobiles in China unless done through a joint venture majority-owned by the Chinese partner, a rule recently extended to producers of new-energy vehicle components. The rule gives Chinese partners leverage to force technology transfers, examples of which are documented in the report;
Discounted export credits and export credit insurance for auto parts exports. Both programs appear to be prohibited export subsidies under WTO rules. One major Chinese auto producer, Chery Auto, for example, received export credits in 2005 and in 2008 equivalent to billions of dollars.

The report explains these policies are already increasing Chinese exports. Today, China exports 25 percent of the automotive parts it produces. Exports are to increase to 30 percent by 2015. The U.S. absorbs nearly one quarter of China’s auto parts exports, and those U.S. imports have grown at a rate of more than 25% per year since 2003.

“The Obama Administration did an admirable job bringing the auto industry out of crisis in 2009 and preserving hundreds of thousands of U.S. jobs. There is still time to prevent China’s state capitalism from toppling a pillar of our economy," Stewart said.