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WTO Rules Against China In Car Parts Dispute

World Trade Organization agreed with the U.S., EU and Canada that China was breaking trade rules by taxing auto parts imports at the same rate as foreign-made finished cars.

GENEVA (AP) -- The World Trade Organization made public its first official condemnation of Chinese commercial practices on Friday, releasing a February ruling that sided with the United States, the European Union and Canada in a dispute over car parts.

The verdict -- findings of which were obtained by The Associated Press five months ago -- found that China was breaking trade rules by taxing imports of auto parts at the same rate as foreign-made finished cars.

In the sweeping decision, the three-member WTO panel ruled against China on nearly every point of contention with the U.S., the 27-nation EU and Canada. The panel found that Chinese measures "accord imported auto parts less favorable treatment than like domestic auto parts" or "subject imported auto parts to an internal charge in excess of that applied to like domestic auto parts."

Its final message to Beijing: "The dispute settlement body requests China to bring these inconsistent measures as listed above into conformity with its obligations."

The three trade powers argued that the tariff was discouraging automakers from using imported car parts for the vehicles they assemble in China. As a result, car parts companies had an incentive to shift production to China, costing Americans, Canadians and Europeans their jobs, they said.

The dispute has likely been closely watched by makers of everything from batteries and brakes to seats and spark plugs on both sides of the Atlantic, including U.S.-based Delphi Corp., General Motors' former parts supplier, and Robert Bosch GmbH in Germany.

China, which can still appeal, claims the tariffs are intended to stop whole cars being imported in large chunks, allowing companies to avoid the higher tariff rates for finished cars. It argues that all measures are fully consistent with WTO rules and do not discriminate against foreign auto parts.

But the U.S. and the EU say that China promised not to treat parts as whole cars when it joined the WTO in 2001.

"In all major respects, the panel has agreed with the United States that China has acted inconsistently with its WTO commitments," the Office of the U.S. Trade Representative said in February.

Some key officials believe the case has ramifications beyond the auto industry.

"It will be instructive to see how China responds," U.S. Trade Representative Susan Schwab told The AP in an interview earlier this year. "If, as we hope and expect, China will be found in contravention of its WTO obligations, hopefully that will help those forces within China that have been advocating reform."

WTO cases tend to take years before retaliatory sanctions can be authorized. If China forgoes an appeal, it will be given a "reasonable period of time" to make legislative changes. A separate panel would then have to find that Beijing was still breaking the rules.

China's trade boom has caused friction with Europe and the United States as their trade deficits with the Asian country have grown. This dispute, launched in 2006, marked the first time Western allies teamed up to seek a formal WTO investigation of China's trade practices.

Democratic critics of the Bush administration's trade policies charge the imbalance with contributing to millions of lost American manufacturing jobs. Since the Democratic Party takeover of the U.S. Congress in 2007, the Bush administration has initiated cases against China over product piracy and restrictions on the sale of American books, CDs and DVDs. Another dispute over Chinese government subsidies in manufacturing was settled out of court.

China's car-making market has grown rapidly and it is now third in auto sales after the U.S. and Japan. However, manufacturers have to source 40 percent of parts by value in China to avoid the tax, and foreign makers of parts have only recently started to keep pace with the overall growth in the Chinese market.

The United States exported auto parts worth $840 million to China in the first nine months of 2007, up 38 percent from the same period a year earlier, according to the U.S. Commerce Department.

European carmakers have about 25 percent of the car production market in China. Figures provided in 2006 put its auto parts exports to China at about 3 billion euros ($4.75 billion) annually.

China's full-year vehicle sales in 2007 rose 22 percent to 8.8 million units, according to the government-sanctioned China Association of Automobile Manufacturers.