In keeping with the Chinese Year of the Mouse, the auto industry has found itself running in a maze of wheeling, dealing and regulations.

China is currently facing defeat at the World Trade Organization over its tax policies on imported auto parts.

The World Trade Organization on Thursday issued a preliminary ruling in favor of the United States, European Union and Canada saying China's tariffs on imported auto parts breaks its commitments to the trade organization.

China has defended its policy saying it prevents car makers evade tax by importing finished cars as spare parts to avoid high tariffs.

Should China lose an appeal, it would be China's first loss at the WTO since it joined in the global organization in 2001.

The WTO manoeuvring is being widely seen as an accelerated trade conflict between China, as an emerging and fast developing auto country, and overseas auto giants.

However, it is also being viewed as an illustration of foreign car makers' attempts to win advantages during aggressive expansion in China.

Even if China bows to the pressure and WTO principals and makes legislative changes, most analysts agree that increasing sourcing from China and leveraging efforts to use more Chinese-made auto parts remains a key trend in the industry as all car makers battle with heated competition and declining car prices in the world's second largest auto market.

The crux of the complaint by the three western parties is that China charges tax on some imported auto parts at the same rate as a foreign-made finished vehicle.

They argued that such commercial practices would prevent foreign car makers using imported spare parts for assembly in China and force them to shift production to China, hurting their own auto parts industry.

China taxes 25 percent on imported auto parts, the same tariff rate on finished imported autos, if they account for 60 percent or more of the value of a whole vehicle.

Other imported auto parts are taxed at 10 percent.

''The measure is not only intended to avoid tax evasion but also to encourage Chinese auto parts makers to increase its own innovation capability and competitiveness,'' said Zhou Shijian, standing director of China Society for World Trade Organization Studies.

''If we didn't pose limitation on imported auto parts, Chinese joint ventures would be purely spare parts importers and then the assembly plants for overseas car makers.

''This would seriously sabotage the development of China's auto industry.''

Zhang Boshun, secretary-general of China Auto Industry Association Market Trade Commission, said there were similar regulations posed on machinery and auto industries in developing countries.

''It didn't break the WTO principles,'' Zhang said.

''China must improve the competitiveness of its own auto parts industry before realizing its target to make the auto industry stronger.''

The dispute began in 2005 when China's new regulation on imported auto parts took effect, changing previous local content requirements.

The new rules were originally intended to encourage foreign car makers to locally produce car components in China.

However, the US and the EU complained.

In 2006, the EU and US filed the case with the WTO and were later joined by Canada.

Amid negotiation, a key detailed standard was postponed by two years to be effective starting from July this year.

Luxury car makers like BMW, Mercedes-Benz, Cadillac and Chrysler suffered most under the regulation as their small-production scale forced them to rely more on imported auto parts rather than investment heavily in local plants.

General Motors Corp last year restarted the imports of some Cadillac models instead of locally producing them due to the high production cost brought on by importing spare parts.

According to statistics from China Customs, US$7.2 billion in auto parts were imported in the first half of last year.

The import value of engines rose 16.43 percent to US$697 million and imported transmissions soared 66 percent to US$1.4 billion.

The ongoing dispute has caused concerns that if China backs away from its tough stance on the issue, more car makers would prefer to import auto parts in large chunks rather than sourcing in China.

''This is not going to happen in the long term because Chinese auto parts makers have made progressive achievement in improving their technology,'' said the auto association's Zhang.

''For most overseas car makers, it would be a short cut to use more price-competitive and good quality Chinese-made auto parts as they seek a cushion to maintain profit margin amid declining car prices and furious competition.''

An official from Zhejiang Wangxiang Holdings Group, one of China's largest auto parts makers, said there would not be a significant impact if China were forced to change the rule.

''Although we still have some technology shortage for supplying advanced auto parts, there is a growing trend to shift the production of core car components to China because of the low production cost and improving technology,'' the official said.

While most car makers including BMW, Mercedes-Benz and Chrysler have kept their eyes on the issues, they have also added local suppliers and enlarged their procurement in China over the past few years to keep pace with their rapidly expanding production.

Other auto parts giants, including Delphi, Visteon and Bosch, have followed car makers to start making low-cost auto parts in China.

(Shanghai Daily February 20, 2008)