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Growing Concern Over Chinese Auto Part and Material Export Policies

Aftermarket Business...April 2012

     Concern about the impact of imported Chinese auto parts on U.S. parts manufacturers was at the heart of a letter sent almost exclusively by congressional Democrats to President Obama in March. The letter argues: "An unfortunate result of China's predatory and protectionist policies in the auto parts sector has been to begin to sever the traditional link between auto assemblers, parts producers, and aftermarket producers."
      The concern about China is two-fold. First, the Chinese are undercutting U.S. parts manufacturers by subsidizing the price of cheap Chinese auto parts sold here. Second, they are restricting exports to the U.S. of what are called rare earths which are used in the manufacture of auto parts. Both policies stem from a single goal: to develop an indigenous Chinese auto parts manufacturing distribution chain, an objective which essentially depends, in one way or another, on hobbling the U.S. parts industry so the Chinese can step in and build a launch pad which can then be used to transfer market share back home, to China. Rare earths are a group of concentrates, intermediate compounds, and individual oxides based on the minerals bastnasite, monazite, and loparite and the lateritic ion-adsorption clays. Rare-earths are used in automotive catalytic converters and many metals which in turn find their way into auto parts.
      Congressional pressure on China probably had a lot to do with U.S. Trade Representative Ron Kirk announcing in March that he was undertaking consultations with the People’s Republic of China at the World Trade Organization (WTO) in March concerning China’s unfair export restraints on rare earths, as well as tungsten and molybdenum. The last two are often used in auto electronics. Scott Paul, Executive Director of the Alliance of American Manufacturing, says rare earths are used in a relatively narrow band of auto parts, but where they are used they have "an enormous impact" on the final part. 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.
     With regard to the flood of imported Chinese auto parts, well, in a political sense, not much is happening there. However, that deluge is probably playing a role in the energizing of U.S. parts "remanufacturers." So to the extent, for example, that the Chinese hold back on supplying virgin material, be it rare earths or something else, to U.S. manufacturers of aftermarket auto starters, that creates an opportunity for "remanufactured" starters, which, according to Robert McKenna, President and CEO of the Motor & Equipment Manufacturers Association, require nine times less virgin materials.
     Remanufactured parts offer two advantages to aftermarket retailers and their customers. Parts remanufactured in the U.S., be they starters, alternators, engines, turbo chargers or whatever, typically cost 20-50 percent less than a new part. In addition, those parts can be marketed as "green" products. They typically save 80 percent of the energy and material used to manufacture equivalent new parts.
     The benefits of remanufacturing were on display at a hearing in the U.S. International Trade Commission in late February. The ITC will produce a "Remanufactured Goods Study" this summer, and it will go to Congress. Remanufacturers want the federal government to give their industry new, formal status through a series of measures which would allow them to compete better, not only in U.S. markets, but in export markets, too. For example, there is no NAICS code for remanufactured goods, much less for remanufactured auto parts.      
      Of course, aftermarket customers sometimes have a bias against remanufactured parts, be it justified or not. However, in some instances, retail shoppers--and the stores they visit--may actually want Chinese auto parts because they are lower cost. But in the current political climate, Chinese auto parts sold in the U.S. aftermarket--or Chinese auto part materials withheld from U.S. parts manufacturers--are equated with lost American jobs. “China is not penetrating our market the old-fashioned way, by outcompeting us," says Paul of the AAM. "Instead, Beijing has pumped $27 billion of subsidies into its auto parts sector, with an additional $10 billion planned."
     Asked whether aftermarket retailers and their customers might in some instances prefer less expensive Chinese auto parts, he answers, "It is not fair for U.S. companies to compete against state subsidized Chinese companies."