Feb. 13 (Bloomberg) -- Chinese duties on imported car parts are illegal, the World Trade Organization said, backing the U.S. and the European Union in China's first defeat at the WTO, a person familiar with the matter said.

The Chinese government forces General Motors Corp., Renault SA, Volkswagen AG and other automakers operating in China to buy a certain quantity of their components from local suppliers. China also applies a 25 percent import duty on parts, compared with a 10 percent duty on complete cars. The EU, the U.S. and Canada lodged a complaint in 2006, saying the policies violate pledges China made when it joined the WTO in 2001.

China faces increasing pressure from trade partners to live up to its WTO membership commitments to protect copyrights and open its borders to foreign investors. The EU and the U.S. have been pressing China to let its currency rise, making its exports more expensive and cutting record trade surpluses.

``Hopefully, it'll bring about change in the practices that China has been applying,'' Canadian Trade Minister David Emerson said of today's decision.

While Canadian car-parts exports are only ``in the hundreds of millions, it's a market that's growing, and with our companies in tough shape right now, a growing market is critically important to restoring health to our own auto-parts industry. It's removing a barrier,'' he told reporters in Ottawa.

The request for a WTO ruling on the legality of the duties on car parts came after the failure to resolve the dispute during months of talks.

Economic Boom

The three WTO judges ruled against China on almost all points in the complaint, said the person, who spoke on the condition of anonymity because the judgment is confidential. The ruling will be officially released in March.

China's $19 billion vehicle market is the world's third largest as annual economic expansion of more than 9.5 percent over the past five years has spurred incomes and spending on cars and homes.

Vehicle imports in the first eight months of last year surged 72 percent to $4.84 billion, the official Xinhua news agency reported on Oct. 11. About 88 percent of the imported vehicles came from the EU, South Korea and the U.S., Xinhua said, citing the General Administration of Customs.

A spokesman at China's mission to the WTO in Geneva, who declined to be identified by name, said he had seen the decision and wouldn't comment on it.

European Carmakers

Following the preliminary joint complaint, China's Ministry of Commerce said it ``regretted'' the move and that the government was ``earnestly studying'' the matter.

European automakers such as Daimler AG, PSA Peugeot Citroen and Bayerische Motoren Werke AG produced as much as a quarter of all the cars made in China in 2004, EU statistics show. The EU shipped 1.6 billion euros ($2.3 billion) of vehicle parts to China in 2004. U.S. exports of auto parts to China were $681 million in 2005.

In April of that year, China began a system of levying tariffs on auto parts based on the amount of imports in the complete vehicle. Automakers must register with the Chinese authorities and provide detailed information on the quantity and value of foreign parts used in their vehicles. If a threshold of foreign parts is reached, those parts are subject to the 25 percent tariff that applies to complete vehicles instead of the 10 percent tariff applied to parts.

To contact the reporter on this story: Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net

By Jennifer M. Freedman

Last Updated: February 13, 2008 16:36 EST

Source: bloomberg