China can use rules of origin to evade trade risks in auto parts

At the same time that China and the United States reached a resolution on textile trade tensions, a new dispute has emerged in the automotive parts sector between China and the European Union. According to recent reports, the conflict stems from a new regulation issued by several Chinese government agencies, including the General Administration of Customs, the National Development and Reform Commission, the Ministry of Finance, and the Ministry of Commerce. The regulation, titled "Measures for the Administration of Imports of Auto Parts and Components That Constitute the Characteristics of Complete Vehicles," aims to boost domestic production capacity by reclassifying certain imported auto parts as complete vehicles for customs purposes. As a result, these components will be subject to the same high tariffs as fully assembled cars, along with additional value-added taxes. This policy clearly threatens the interests of major European automakers, such as Volkswagen, Peugeot, and Fiat, which have established joint ventures in China. These companies have traditionally relied on low-tariff imports of spare parts to operate under the CKD (Completely Knocked Down) model, allowing them to maintain high profit margins. The EU argues that this new rule unfairly restricts their trade and creates an uneven playing field. In fact, the EU’s concerns are not entirely new. Similar criticisms were raised last year when China released its automotive industry development policy. Now, the EU has formally raised the issue at the China-EU Joint Committee on Trade and Economic Cooperation. The reasons behind this move are both short-term and long-term. On the immediate side, European automakers like Volkswagen benefit from low import tariffs on spare parts, which help them maintain profitability through CKD operations. On the other hand, the EU is also concerned about the long-term implications: it fears that Chinese-made cars could soon flood the European market, much like how Chinese textiles did years ago. While the EU's concerns may be exaggerated, they are understandable. In recent years, China’s auto exports have surged, with the country now making a strong presence in the European market. According to customs data, China’s auto exports reached $8.16 billion this year, a 73% increase compared to the previous year. The export volume from January to September was already close to last year’s total, indicating a steady upward trend. An industry analyst pointed out that labor costs in China remain significantly lower than in Europe or the U.S. For instance, an assembly line worker in China earns just $1.5 per hour, compared to $30 in Germany and $55 in the U.S. Even if wages in China were to rise tenfold, the cost advantage would still be substantial. This cost disparity makes it likely that China will become a global leader in car manufacturing and exporting in the coming years. However, while China hopes to grow its auto industry in terms of production and exports, it also aims to strengthen its independent R&D capabilities. Policies like the "Automotive Industry Development Policy" and the new import regulations are designed to support this goal. While the intentions are positive, the challenge lies in ensuring that these policies are practical and do not give others a reason to oppose them. One potential solution is to adopt "rules of origin" similar to those used in the North American Free Trade Area. Under these rules, a product is considered locally made only if a certain percentage of its value is added domestically. For example, in NAFTA, a vehicle must achieve a 62.5% value-added rate to be classified as a North American product. If China were to implement a similar standard, only vehicles meeting a specific value threshold would be considered domestic, while others would still face import duties. This approach could allow CKD production to continue without violating WTO rules, and the EU would have little grounds for complaint. Overall, there is significant room for improvement in China’s auto industry policy. By adopting more strategic and transparent measures, China can protect its interests while maintaining good relations with its trading partners. Deputy Secretary General of the China WTO Research Association, Liu Li

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