China on Monday lost its first major trade dispute at the World Trade Organization's highest appeals court, the Appellate Body, over its additional duty of 25 per cent on imported auto parts.
In a comprehensive ruling, the AB dismissed China's challenge on several counts, pronouncing that Beijing's measures violated global trade rules.
The United States, the European Union and Canada had challenged Beijing's decision to impose 25 per cent charge on imported auto parts, or what are called semi-knocked down and completely-knocked down sets.
These three members said the duty was inconsistent with Beijing's tariff scheduled commitments as well as national treatment provisions.
While China imposed 10 per cent duty on imported cars, it levied 25 per cent duty on imported auto parts because of their 'essential character' close to a complete vehicle.
China imposed this duty on manufacturers who imported these parts and subsequently assembled them into complete vehicles.
In the face of the legal challenge, a dispute settlement panel had earlier ruled against the Chinese charge saying it amounted to an internal charge and was not an ordinary Customs duty as argued by Beijing.
The panel said the duty violated national treatment provisions under which WTO members are expected to treat domestic and foreign like products on the same footing.
It said even if the duty was not considered ordinary Customs duty, it was not consistent with the manner in which China had scheduled its tariff commitments at the time of joining the WTO in 2001.
Beijing was dissatisfied with the panel's ruling and challenged it before the Appellate Body, the highest legal limb of the global trade body to resolve trade disputes.
China asked the AB to rule against the alleged erroneous conclusions reached by the panel on the nature of the duty as well as on other grounds.
Today, the AB largely upheld the panel's ruling in favour of the US, the EU and Canada.
It argued that the Chinese measure amounted to an internal charge and was not an ordinary Customs duty as pointed by the panel.
The highest legal court also disagreed with China that the harmonised system of tariff classification could be used to judge whether a duty was an internal duty or a Customs duty.
The AB said the panel did not err, as alleged by China, in its analytical approach to the threshold issue in determining SKD and CKD imports.
Further, the highest legal court said China's duty was wrong under Article III:2 because the charge was not applicable to like domestic parts. Also, China violated the rules under III:4 since the duty did not provide equal treatment to foreign imported items.
However, China won on one count in its challenge.
The AB upheld China's claim that the panel was wrong in ruling that Beijing's measure was inconsistent with paragraph 93 of its Accession Working Party Report, which allowed China to apply a tariff of not more than 10 per cent on SKDs and CKDs.
Once the ruling is adopted by the WTO's dispute settlement body after 30 days, China will be asked to rectify its measures, according to trade analysts.