The U.S. and the EU announced that they filed a complaint against China under the WTO dispute settlement system over China’s alleged unfair treatment of foreign auto parts. http://www.ustr.gov/Document_Library/Press_Releases/2006/March/United_States_Files_WTO_Case_Against_China_Over_Treatment_of_US_Auto_Parts.html
The U.S. and the EU claim that China’s "complex" tariff system functions as "local content rules" which run afoul of the WTO norms.
This complaint seems to have been driven, or at least influenced, by heavy political considerations. First, in general the fervor of protectionism/mercantilism has recently been rising both in the U.S. and the EU, often clad with "economic patriotism" and "national security." Second, the Bush Administration has diligently been responding to the mounting anti-China sentiments in the Congress concerning the record-high bilateral trade deficits with China as well as the Congress’ frustration over the slow pace of revaluation of renminbi. Last month, the USTR announced a comprehensive action plan to deal with China’s trade policies and hinted that it would use more aggressive options such as the WTO complaint. (See my blog below "Readjusting the U.S. Trade Policy on China") Perhaps, the Bush Administration wanted to appease the Congress by going tough on China. Third, considering the imminent China’s president Hu Jintao’s very first state visit to the U.S., this WTO complaint may seem embarrassing or even offensive to China. On the other hand, this awkward timing itself may attest the Bush Administration’s seriousness in responding to the Congress.
Legally, it does not seem to be a hard case. Although China has every right to schedule its own tariff schedule, local content rules would violate both GATT Article III:4 and TRIMs Article 2, subject to justifications under GATT Article XX and TRIMs Article 3, respectively.
Politically, this case might have devastating ramifications. China might retaliate by suing the U.S. and the EU over their recent treatment of China’s textiles and shoes imports. Regardless of legal merits of these politically-driven complaints, they would certainly be huge disservice to the WTO’s dispute settlement system, threatening its integrity. Any trade war among major economic superpowers would also cast dark clouds over the already fragile WTO Doha round talks. Granted, the U.S. and China might be able to defuse this tension during Hu Jintao’s visit to Washington in the dimension of "political theater." They have already settled away the first WTO complaint over semiconductors. However, if they fail to do so, this WTO dispute might be escalated into a full-blown political battle.
Economically, this complaint might make little sense. Most of car makers in China are joint ventures, and foreign car makers having factories in China are increasingly keen to use cheaper domestic parts to cut the manufacturing cost, rather than importing more expensive foreign parts.
Even if the U.S. and the EU prevail in the WTO and impose trade sanction against Chinese imports, such sanction would hurt their own economies immensely considering that so many staples are made in China.