China's plans of building a world-class motor industry were hit on Wednesday by a World Trade Organisation preliminary ruling that condemned the government's discriminatory use of tariffs against foreign car parts.

According to Forbes.com's Marketwatch column, the focus of contention was regulations that circumvent China's pledge under the terms of its accession to the WTO to lower import tariffs on foreign-made automotive parts to 10%, down from a range of between 13.8% and 16.4%, and to cut the rate on imported passenger cars to 25% from 28%.

The report said the government in Beijing enacted a local content regulation that requires that domestically produced cars contain at least 60% Chinese parts - if cars contain less than that, the imported parts are slapped with a surcharge of 25%, the tariff rate on foreign-made vehicles.

Similar tactics by the Vietnamese government a few years ago almost forced the closure of that country's CKD car assembly industry and eventually prompted a tariff reduction on imported parts.

Forbes.com said the WTO ruled against the Chinese practice on Wednesday, following an investigation initiated in October 2006 in response to complaints filed by the United States, the European Union and Canada.

The report noted that China has defended its local content measure as a way to deter foreign automakers from shipping vehicles into China in large chunks [ie almost complete vehicles requiring only a small amount of local assembly/finishing] in order to obtain the low 10% tariff rate applied on parts import.

Parts makers in North America and Europe are likely to benefit from the final ruling, due later this year, to the detriment of tens of thousands of small Chinese companies, the Forbes report said, adding that the WTO panels have never changed their mind between interim and final rulings and that China has the right to appeal.

According to the report, Canada's trade minister David Emerson said the Chinese practice had cost Canadian auto parts companies hundreds of millions of dollars in lost revenue. The complainants said that the tariffs encouraged western auto companies to shift production to China and eliminate jobs at home.

The tariffs regime has likely played a role, but many global automakers have also been attracted to China due to its relatively low labour costs, Forbes said.

General Motors and Ford have announced big local purchasing plans as part of their expansion into China, now the world's second-largest auto-consuming country and the third-largest auto-producing country, Forbes.com said, adding that Valeo has also made aggressive moves to turn China into a major supplier since opening its Asia purchasing office in Shanghai in 2001, with a long-term plan to source as much as 70% of its global purchasing contracts from China by the year 2010.