The Influence of Chinese Policy on Automobile Assembly and Parts Production

Publication Type:

Conference Paper


Gerpisa colloquium, Berlin (2010)


Chine, Europe de l'Ouest, Présentation au colloque du Gerpisa, Presentation to the Gerpisa colloquium


During China’s WTO accession talks, the auto sector received particular attention.  For example,  the U.S. bilateral agreement with China prior to China’s WTO entry noted the expectation that by 2006 the import tariff on assembled cars was to be reduced from 80 or 100% to 25%, while the average tariff on auto parts was to be reduced to 10%.  However, while China implemented auto sector tariff cuts which met the scheduled guidelines following its WTO entry in 2001,  China announced new tariff rules in 2004.  The new policies had the effect of affecting some assembly firms’ access to the now lower tariffs on imported auto parts.  While the new tariff rule applied to all firms producing cars in China regardless of ownership, press accounts at the time suggested that the policy had a disproportionate effect on foreign producers who were more likely to import a larger share of their parts, and therefore to face the tariff-increasing reclassification of their auto parts imports. 

Chinese import data reveal that tariff-reclassification following China’s new tariff policy increased production costs for many assemblers who relied on imported auto parts.  For example, in 2005 the tariff rate tariff rate applied to imported engines was 9%, while the tariff applied to assembled automobiles was 25%.  However if a firm failed to use a sufficiently high level of Chinese inputs, their engine imports faced the 25% tariff rate.  Thus, the fact that the average tariff paid on imported engines [HS 840820] in 2005 was 17% indicates that a non-trivial share of auto producers failed to meet the content requirement and thus were subjected to the 25% tariff instead.

Due to China’s change in trade rules, the U.S., Canada and European Union launched a case at the WTO in 2006 against the new Chinese regulations for automobile parts tariffs.  In February 2008, the dispute settlement panel issued a preliminary ruling that the Chinese measures were in violation of WTO rules, as they "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."  Five months later, China lost its first WTO case as the final judgment of the WTO dispute settlement panel came to the same conclusion.  As with other dispute cases, the issue is yet unresolved, as China launched an appeal in September 2008.
This paper combines data on Chinese automobile parts imports, and on the location of foreign assemblers in China to learn how the location of Chinese-based automobile production has been affected by China’s change in trade policy.  In addition, since China’s policy creates an incentive for parts suppliers to relocate to China, rather than exporting parts to their affiliates in China, the analysis also studies the information on the relocation of parts producers following the change in trade policy.  While the results from this analysis are based on cost changes brought about by trade policy, the ultimate effects can be compared with other regional policies that provide benefits to local producers over their competitors located in other regions.

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