China Revises 2004 Auto Policy

Background to revision of the 2004 Policy

The 2009 revision (via China Law & Practice, subscription required) to the 2004 Automotive Industry Development Policy ("2004 Auto Policy," available in Chinese on the National Development and Reform Commission Web site) was the second change to the auto policy since China joined the WTO in December 2001, when the 1994 auto policy was in effect. (For a discussion of the first revision, see pages 18-19 of the 2006 Congressional Research Service report, "China's Impact on the U.S. Automotive Industry." For a discussion of both revisions, see the China legal update by PRC law firm, Jade & Fountain, "Customs Duty Policy Changed on Automobile Parts imported for Assembly in China.") Under Paragraph 204 of the Working Party Report on the Accession of China to the WTO, China was required to amend the 1994 policy to make it compatible with WTO principles and rules. China promulgated the 2004 Policy in part to meet this commitment. However, certain provisions of the 2004 Policy, most notably provisions concerning tariff rates applicable to the import of auto parts and assemblies, were not compliant with the WTO. The United States, European Union, and Canada challenged these provisions and their implementing legislation in DS339, DS340 and DS342 at the WTO. As reported in U.S. Trade Representative's 2009 National Trade Estimate Report on Foreign Trade Barriers, the WTO dispute panel found that the provisions discriminated against imported auto parts and thus were inconsistent with WTO requirements. China appealed the panel's ruling, which subsequently was upheld by the WTO Appellate Body. Accordingly, the WTO Dispute Settlement Body requested that China bring the relevant provisions of the 2004 Policy, as well as legislation passed to implement those provisions, into conformity with China's WTO obligations. Therefore, on August 5, 2009, the Ministry of Industry and Information Technology and the National Development and Reform Commission issued Order Number 10 revising the 2004 Policy to delete the offending provisions applicable to tariffs on imported auto parts and assemblies.

Scope of the 2004 Policy, as revised

The only significant revision Order Number 10 made to the 2004 Policy was the deletion of the offending provisions, which were directed toward the localization of production of auto parts. The following discussion concerns the remainder of the 2004 Policy, which, except for the renumbering, is unchanged. Notwithstanding Order Number 10's limited revision, the 2004 Policy was, and continues to be, a comprehensive roadmap for development of a robust auto sector in China, covering a wide range of issues from development of technical standards to criteria and procedures for government approval of investment projects. The policy's goals, as stated in the introductory paragraph, are "to promote the adjustment and upgrading of the structure of the automotive industry, comprehensively enhance the international competitiveness of the automotive industry, satisfy the ever-increasing consumer demand for automobile products, and promote the healthy development of the automotive industry." The 2004 Policy decreed that by 2010 China would be one of the major auto manufacturing countries in the world, with the capability to produce enough cars for domestic consumption and to export cars. This is further elaborated in the Auto Stimulus Program, as discussed in the accompanying CECC analysis by that name. Key parts of the policy (as renumbered to reflect the revision) are as follows:

• Envisions the development of automotive technology, both through indigenous innovation and by studying international cutting-edge technology (Articles 7 to 12). The policy refers to support for technology to lower emissions, raise fuel-efficiency, produce hybrid and electric vehicles, use new vehicle materials, and use alternative fuels.
• Lays out a framework for the structural adjustment of the auto sector. This is done through the creation of large auto enterprise groups and alliances, and international cooperation to broaden the scope of operations and cope with globalization (Articles 13 to 16). Provides for "an exit mechanism" for companies that cannot compete (Article 17).
• Lays out detailed investment approval procedures and requirements (Articles 40 to 51). These cover government approval of various categories of auto or auto parts companies, establishment of automotive research and development centers, and foreign shareholding ratio restrictions applicable to foreign investment in the sector.
• Encourages the growth of private automobile consumption, and sets standards (Articles 56 to 69). These standards include a range of regulations to facilitate and encourage auto purchases, such as regulations on types of vehicles, toll road charges, fees, auto finance, the second-hand market, insurance premiums, and construction of parking lots.
• Additional miscellaneous provisions. These include, for example, provisions on technical standards, trademarks and branding, sales and service networks, import restrictions, and support from other industries, such as metallurgy and electronics.

Additional Developments in Auto Industrial Policy

In March 2009, the Chinese government issued the Auto Stimulus Program, which enhanced and expanded the auto policy. The implementation of these two has set the stage for a continued rapid development of China's auto sector, which has flourished in 2009. According to a December 9, 2009, Wall Street Journal report, Dong Yang, the executive vice president and secretary general of the China Association of Automobile Manufacturers, expects vehicle sales to exceed 13 million in 2009, about a 40 percent increase from 2008. China is now the largest auto market in the world