In 2023, the China Association of Automobile Manufacturers reported that Audi sold 54,579 domestic vehicles, while BMW managed only 17,582 units. Cadillac and Mercedes-Benz fared even worse, with just 1,698 and 773 units sold respectively. These figures highlight a growing challenge for foreign automakers in the Chinese market.
Zhang Wei, deputy director of the Department of Electrical and Mechanical Services at the Ministry of Commerce, recently clarified that China has not violated WTO rules. He emphasized that the purpose of the new auto parts import regulations is to combat tax evasion, not to restrict trade unfairly.
A source familiar with the situation revealed that the EU’s opposition to China’s policies stems from an imbalance in investment and returns among European luxury carmakers like Mercedes-Benz, BMW, and Volvo. These companies have established joint ventures or CKD (Completely Knocked Down) assembly operations in China. However, poor sales performance has led them to push back against the new tariff rules.
The dispute began when the European Commission announced on March 30 that it had joined the U.S. in requesting bilateral consultations with China over the auto parts tariffs under WTO guidelines. The EU argues that China’s policy—imposing the same tariffs on components as on complete vehicles if they exceed 60% of the car’s value—is inconsistent with WTO rules. It claims this practice disguises the “localization ratio†of parts, effectively creating a barrier to trade.
China, however, maintains that the regulation aims to prevent foreign automakers from evading taxes by disassembling vehicles into parts and importing them separately. According to Wu Jiahuang, vice chairman of the China World Trade Organization Research Association, China has already revised its investment policies post-WTO accession and no longer mandates localization requirements for vehicle production.
The core of the debate lies in the tariff structure: if imported parts exceed 60% of a vehicle’s value, a 25% tariff applies, matching the rate for full vehicles. If below 60%, the tariff drops to 10%. This difference has sparked significant controversy, as it directly impacts the cost and competitiveness of foreign automakers in China.
The measures also target CKD production, where vehicles are imported in pieces and reassembled locally. This method was once used to bypass high import duties. After the policy change, manufacturers have shifted toward using local parts or adjusting their production lines, which has caused friction with foreign suppliers.
The U.S. also has a stake in the dispute, as its trade deficit with China reached $21 billion in 2005. Auto parts played a key role in this imbalance, with U.S. exports to China rising sharply while imports fell significantly. Experts suggest that both the EU and the U.S. are leveraging the issue to pressure China on broader trade policies.
Meanwhile, Japan and South Korea have taken a different approach. Companies like Honda are expanding their local manufacturing capabilities in China, producing powertrain components and other critical parts domestically. This strategy helps them avoid the new tariff rules and strengthens their position in the market.
Analysts note that Japanese and South Korean automakers benefit from close supplier relationships and geographic proximity, allowing faster and more efficient supply chains. Unlike Western companies, they have adapted well to the new regulations without major disruptions.
Despite the ongoing dispute, the Chinese government remains firm in its stance. Officials have stated that even if the WTO rules against China, the country will continue to implement stricter controls on CKD assembly. Future policies may include higher approval thresholds for joint venture projects to discourage low-value production models.
Experts believe that while the outcome of the dispute is uncertain, China’s long-term goal is clear: to promote domestic automotive development and reduce reliance on foreign components. As Jia Xinguang, chief analyst at China Automotive Industry Development Consulting, noted, without a strong local supply chain, the industry would remain vulnerable.
With the May 31 deadline approaching, the Chinese government has made it clear that its policies will not be easily reversed. The focus remains on fostering self-reliance and ensuring sustainable growth in the auto sector.
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