Last month, the United States Trade Representative requested dispute settlement consultations with the Chinese government at the World Trade Organization (WTO) concerning China’s auto and auto parts “export base” subsidy program.

The Trade Representative alleged that under the program, China is providing extensive subsidies to auto and auto parts producers located in designated regions, known as “export bases.” These export bases use central and local government funds to provide a variety of export-contingent subsidies such as grants, tax preferences and interest-rate subsidies, in apparent violation of Article 3.1(a) of the WTO Agreement on Subsidies and Countervailing Measures.

The Trade Representative indicated that export bases made at least $1 billion in subsidies available to auto and auto-parts exporters in China between 2009 and 2011. The Chinese government's response to the U.S. complaint was muted. However, in the past China has defended its investment in research and development, as well as other aid to Chinese industries claiming that the assistance complies with WTO rules.

The requested dispute settlement consultations are the first of three stages in the WTO dispute settlement process. Under WTO rules, if the matter is not resolved through consultations within 60 days, the United States may request the establishment of a WTO dispute settlement panel and, if applicable, by the WTO Appellate Body. The third stage includes the implementation of the ruling, which includes the possibility of countermeasures in the event of failure by the losing party to implement the ruling.

Only about one third of the WTO’s cases reach the second stage panel process. Very few reach the countermeasures stage, which can include the imposition of retaliatory tariffs against the losing party. The remaining cases either settle, or remain in a prolonged consultation phase.

It is too early to predict whether the case will be settled, or will result in further dispute proceedings. However, importers of the subject merchandise are encouraged to keep abreast of developments in the case and be prepared in the event of an outcome that would be adverse to their interests, such as a reduced source of supply, or an increase in the cost of acquiring the merchandise.