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New Stewart and Stewart Report Details Rising Government Support for Chinese Auto and Auto Parts Producers

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Reposted from Trade Flows from Stewart and Stewart

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New Stewart and Stewart Report Details Rising Government Support for Chinese Auto and Auto Parts Producers

Terence B. Stewart and Elizabeth Drake  |   January 31, 2012  |  Trade Flows from Stewart and Stewart

In its 12th Five-Year Plan, adopted in March of last year, China designates “new-energy” automobiles and their components as one of the seven “strategic and emerging industries” targeted for massive increases in government support. The Chinese government will invest $1.5 trillion in these seven industries over the next five years.China will dedicate more than $18 billion in the new-energy automotive sector through 2020, and it aims to become the world’s leading producer of electric and hybrid vehicles and their key components by 2030.

In a new reportChina’s Support Programs for Automobiles and Auto Parts under the 12th Five-Year Plan, the Law Offices of Stewart and Stewart details the support policies the Government of China is deploying to move up the value chain of auto parts production, increase its exports of completed autos and parts, and promote its indigenous automotive brands and intellectual property around the world. The report was released on January 31, 2012 as part of a broader coalition effort seeking U.S. government actions to address the growing threat these support programs and various discriminatory trade policies in China pose to American jobs and the U.S. industrial base.

The new report demonstrates how Chinese auto and parts producers benefit from an array of government policies, including export restraints, domestic content rules, technology transfer requirements, export requirements, and massive domestic and export subsidies. Auto parts targeted in these plans include batteries, electric motors, electronic control systems, and fuel cells. By focusing its support on the newest high-tech areas in the automotive market, China hopes to overcome its historic disadvantages by leapfrogging to the next level of development with significant government support. The report also explains how a number of these policies directly violate China’s WTO commitments.

  • China imposes restraints on exports of key raw materials, including critical materials for lightweight composites, special alloys, fuel cells, batteries, and electronics, in order to increase supplies and lower prices for Chinese auto parts producers. Many of these export restraints, which include export duties, quotas, and licensing requirements, are a direct violation of China’s WTO commitments.
  • Investors in finished auto production in China are required to also produce engine sets in China. In September of 2011, for example, the report reveals that a major European producer announced it would move toward localized engine production as part of a joint venture agreement with one of China’s state-owned auto makers to produce trucks in China.
  • Subsidies for new purchases of energy-efficient cars of up to $18,000 per vehicle are funneled through domestic manufacturers so that imported vehicles do not qualify – every one of the car models eligible for the subsidy is produced in China. At the end of 2011, China also exempted a list of 49 electric and fuel cell cars from sales taxes; no imported cars are eligible for the exemption.
  • Foreign investors cannot produce complete automobiles in China unless they do so through a joint venture majority-owned by the Chinese partner. A similar rule only encourages foreign investment in the production of batteries for new-energy vehicles if conducted through similar joint ventures. The rule gives Chinese partners leverage to force technology transfers, examples of which are documented in the new report.
  • China provides discounted export credits and export credit insurance to promote auto parts exports. Chery Auto, for example, received export credits of RMB 5 billion in 2005 and another RMB 10 billion in 2008 – that’s billions of U.S. dollars to one Chinese producer. Recent policies urge Chinese firms to make even greater use of these government support programs.
  • Producers of complete automobiles are exempted from joint venture and performance requirements if they locate in export processing zones, creating a powerful incentive to export finished autos from China. Other policies direct the government to provide priority support to export-oriented automotive and parts producers, either by emphasizing firms that achieve integration into global procurement systems or setting minimum levels of export performance as eligibility requirements for awards or other incentives.

These support programs have given Chinese producers large volumes of low-cost credit and state funding, exclusive eligibility for consumer and tax subsidies, privileged access to critical inputs at artificially depressed prices, and the leverage to force technology transfers from foreign investors. China’s policies also discriminate against imports and foreign producers, and they demand local production, technology transfer, and other concessions in return for limited access to China’s market. Finally, these policies have propelled rapid growth in China’s auto parts exports – growth that is likely to intensify under China’s newest policies.

Today, China exports 25 percent of the automotive parts it produces, and that proportion is expected to increase to 30 percent by 2015. In 2010, China exported $48 billion in auto parts, more than four-and-a-half times the value of the auto parts it exported in 2004. In the first eleven months of 2011, China’s global auto parts exports have jumped by 27 percent compared to the same period last year.

The U.S. absorbs nearly a quarter of China’s auto parts exports, and those imports have grown sharply since the depths of the crisis in the domestic sector in 2009. If current growth rates continue, U.S. imports of auto parts from China in 2020 could exceed our total auto parts imports from the world in 2010, and account for over half of U.S. consumption. The Stewart and Stewart report highlights import surges in products such as aluminum wheels, radiators, laminated safety glass windshields, mounted brake linings, and engine ignition coils to name just a few of the products being imported.

China has committed an unprecedented level of fiscal and political support to its automotive industry under the 12th Five-Year Plan, and it seeks to use an intensified focus on new-energy vehicles to make its industry a world leader in the next generation of automotive technology. The Stewart and Stewart report is a timely examination of the scope and scale of these expanding government policies. As China ramps up its support programs for the sector, the effects will be felt not only in China, but throughout the automotive industry around the world.

2 Responses to “New Stewart and Stewart Report Details Rising Government Support for Chinese Auto and Auto Parts Producers”

  1. David Albano says:

    I can only hope that some day we will come to our senses and think of what they are doing to us the citizens of this country.

    Do they realize if they keep up sending jobs out of the USA local economy wil dry up. Our states and local government are out of money now so send more jobs out of the country.

    Is there something wrong with this picture?

    • Tom T. says:

      There is a lot wrong with the current picture. Gross incompetence by politicians and a media that refuses to focus on this incompetence.

      We simply have the best political system money can buy and it is being bought.

      That leaves good public policy for 99% no room.

      As long as we continue to quote economists who insist “efficiency” is the only goal, even those who should know better will be lead astray. It is easy for the plutocracy to buy off a small group of politicians whose IQ is only surpassed by their self interests of another election cycle instead of debating the causes and effects of their policy on the public.

      They still haven’t undone the repeal of Roosevelt’s Glass-Steagal Act after all we have been through. Instead they devise another complex bill that can continually be sold piece by piece to those financing their campaigns and paying think groups to mislead the public on what is really happening.

      Tom T.

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