China and the West on brink of trade war

China and the West were on the brink of a trade war last night after Europe, the United States and Canada said they were taking the Asian tiger to a world tribunal over car parts.

The European Commission said it requested the World Trade Organisation to set up a panel - an adjudication tribunal - to rule on the two-year-long row over the €3bn market. Washington and Ottawa later issued the same request.

Unless a deal can be struck behind the scenes, it would be the first time that China has been dragged into the WTO legal process since it signed up to its rulebook in November 2001.

The arbitrator on the panel has the power to impose a solution that is legally enforceable.

Chinese rules on tariffs for the import of auto parts impose a duty for "complete vehicles" on specific combinations of imported parts, even when those parts do not in any way constitute a completed automobile.

These rules raise the duty on the import of many auto parts to China from the 10 per cent levied on auto parts to the 25 per cent rate charged for whole vehicles.

The rules oblige EU car makers who wish to avoid higher duties to source car parts in China. The EU believes this contravenes WTO rules that do not permit the imposition of obligations to use "local content". EU car manufacturers account for about a quarter of the automobile production in China.

Peter Mandelson, the EU Trade Commissioner said: "We have tried again and again to find an acceptable negotiated solution to this issue and without Chinese engagement we have no alternative but to take this course of action."

At the time of its WTO accession, China committed not to treat parts as complete vehicles, to limit the duty on most auto parts to 10 per cent maximum, to refrain from discriminatory taxes and not to apply measures which impose the obligatory use of locally produced parts or materials.

The EU has successfully challenged similar local content measures at various occasions at the WTO.

China claims the measures are designed for consumer protection and to avoid import tariff circumvention by preventing whole vehicles being imported as auto parts to avoid the higher tariff.

The request for a panel will be discussed in the meeting of the Dispute Settlement Body on 28 September. A proceeding before a panel takes an average of 12 months.

Brussels and Beijing are already locked in a dispute over cheap footwear. The EU is currently debating plans to impose a 16 per cent tariff but the 25 member states appear split over the proposal.