The U.S. auto industry is of interest to many in Congress because of its large employment, economic impact, and geographic reach. Around the world, there are many automakers and thousands of parts suppliers, leading to intense international competition. Through the 2009 stimulus bill and financial support for General Motors, Chrysler, and their suppliers, the recovery of the domestic auto industry has been made a national priority. The federal government has also provided loans and grants for electric vehicle manufacturing operations, research and development support for new electric, fuel cell, and natural gas vehicles, and federal tax credits for purchase of hybrid and electric vehicles. In addition to steps supporting the domestic auto industry, Congress and the Office of the U.S. Trade Representative (USTR) have taken an interest in foreign trade and investment practices that adversely affect U.S. automakers. For example, the emergence of Japan's auto industry as a major global competitor in the 1980s and 1990s led to frequent conflict with the United States, as many U.S. policymakers argued that Japan's trade policies harmed U.S. domestic auto and auto parts producers at home and abroad. Trade in autos and auto parts was one of the most contentious issues in negotiating the U.S.-South Korea free trade agreement, which went into effect in 2012. The rapid rise of China's auto and auto parts industries in recent years has raised similar concerns and led to questions about some of the trade practices employed by the Chinese government. Some in Congress have called on the Obama Administration to take a tougher stand against China's industrial policies and other measures that may be distorting trade, including by making greater use of the World Trade Organization (WTO) dispute settlement process to challenge Chinese policies that may violate WTO rules. This report examines the rise of China's auto and auto parts industries, Chinese government policies to promote these industries, trends in U.S.-China trade in autos and parts, auto-related trade disputes, and implications for U.S.-China commercial relations. In the past five years, rising incomes and central government stimulus have made China into the world's largest auto market, in terms of both production and unit sales of vehicles. China's annual output of cars and light trucks increased from less than 9 million units in 2007 to more than 19 million in 2012, largely destined for domestic consumption. By comparison, in the United States, just over 10 million vehicles were produced in 2012. Sales are expected to continue rising, as China's ownership rate of 58 motor vehicles per 1,000 people is half the global average of 175 per 1,000 people and well below the U.S. rate of 797 per 1,000 people. A major project under way to build a network similar to the U.S. Interstate Highway system may also support sales growth. It has been forecast that as many as 30 million vehicles will be sold annually in China by 2020, with most of them being produced there. Chinese production capacity is expanding even faster than demand, resulting in a drop in average vehicle prices at a time when personal income is on the rise. The transformation of China's auto industry has been a central government goal since the 1980s, when American Motors Corp. signed the first joint venture agreement to produce Jeeps in China. At that time, there were a large number of local Chinese automakers, but the government reasoned that its domestic manufacturers would not reach higher quality, technology, and management standards without assistance from foreign automakers. Foreign automakers were allowed to produce vehicles in China, but only through joint ventures in which local partners have at least 50% control. Some of these partners are controlled by local or provincial governments. Thus, SAIC Motor Corp. (formerly Shanghai Automotive Industry Corp.) has joint carmaking ventures with both Volkswagen AG (VW) and General Motors Co. (GM), while GM also makes cars in China in partnership with Wuling Automobile Co. Such joint ventures between foreign companies and Chinese partners produce about 70% of new passenger cars sold in China. GM and VW are the leading non-Chinese automakers, and China is also the biggest market (in terms of number of cars sold) in their respective global portfolios. GM now sells more cars in China than in the United States. Ford Motor Co. is a more recent entrant, and has about 3% of the market. Chrysler does not currently build cars in China but reportedly plans Jeep production there in the near future. In addition to the joint ventures, Chinese firms such as Chery, FAW, and Dongfeng make vehicles for sale under their own brands. Table 1 shows the largest makes of vehicles—whether built in China or imported—by unit sales in 2012, including vehicles made in joint ventures. China became a net exporter of vehicles in 2005, when it sold more than 172,000 units abroad. It retained that status, though, for only four years; since 2009, it has again been a net importer. In 2011, as shown in Figure 1 , it exported nearly 850,000 units, of which 56% were passenger cars and 44% commercial vehicles. About 70% of the vehicle exports are manufactured by domestic Chinese companies such as Geely and Chery, with the remainder by foreign-Chinese joint ventures. The main destinations for these vehicles are developing markets in South America, Africa, and the Middle East. Chinese vehicle exports accounted for about 4.5% of total output in 2011, a far smaller share than in some other auto-producing nations. The only Chinese-made vehicles now exported to the United States are small trucks and off-road vans such as the Wuling Minimax. Honda's Chinese-made FIT subcompact is exported to Canada, but is not sold in the United States. While there have been reports of plans to build passenger cars in China for export to the United States, none of these plans has yet come to fruition. As also shown in Figure 1 , Chinese vehicle imports have risen, too, from just under 228,000 units in 2006 to over a million in 2011; in the latter year, 58% of imports were sport utility vehicles (SUVs). Most of the imported vehicles are in the luxury segment. The major countries of origin were Germany (28% of the Chinese import market), Japan (24%), United States (12%), United Kingdom (6%), and South Korea (4%). Among luxury brands, BMW and Mercedes-Benz top the list. In addition to having a greater range of luxury vehicles in their fleets, European makers do well because the substantial Chinese consumption tax on cars with large engines falls more heavily on American-made vehicles. The United States exports many more vehicles to China than it imports from China. In 2012, China was the third largest export market (after Canada and Germany) for U.S. automotive vehicles at $5.7 billion (180,265 units). U.S. imports of automotive vehicles from China in 2012 totaled $13.1 million (3,645 units) China exported to the United States. In the first six months of 2013, China was second-largest export market for U.S. vehicles, behind Canada. With the rapid growth of the Chinese auto sector has come rising demand for the thousands of auto parts that are combined into final product motor vehicles. The Chinese parts industry is fragmented and comprises both Chinese and foreign parts makers, including many U.S.-based companies. A 2011 U.S. Commerce Department report on auto parts trade with China summarized the foreign investment trend: In 2000, the majority of indigenous Chinese [auto parts] suppliers were uncompetitive and produced low quality products. International automakers helped spur foreign supplier investment in China over the past decade which made those rising exports possible by pressuring their international suppliers to locate production there. The automakers did so in an effort to hold down costs and maintain their own competitiveness both in China and in markets like the United States. Thus, many U.S. and other international auto parts companies opened plants and expanded their Chinese production in order to supply the international automakers' Chinese joint ventures, and to use their operations in China to export to the global automotive OE [original equipment] and aftermarket, including the United States. In the process, some have also become suppliers to domestic Chinese automakers, which have [sic] helped improve the product quality of these firms. China's exports of auto parts grew from $7.4 billion in 2002 to more than $69 billion in 2011, a nine-fold increase. According to U.S. government data, about 25% of China's auto parts production is exported, including to the United States, where more than $14 billion in parts from China were imported in 2012, a 60% increase since 2008. As discussed later in this report, some U.S. producers and the U.S. government have alleged that many auto parts exports are subsidized in ways that violate WTO rules. The U.S. parts market comprises both parts destined for assembly plants and aftermarket sales, with sales to automakers the larger of the two markets. According to the U.S. Department of Commerce, about two-thirds of parts sold domestically are sourced from suppliers located in the United States. Customs import data do not break down the destination of auto parts, so it is not known how many Chinese parts flow to the automakers and how many to the aftermarket. Some analysts believe that most of the imports are for aftermarket use. One analysis, however, searched the U.S. government's Automated Manifest System (AMS) and found that in 2010 and 2011 the Detroit 3 imported not only relatively simple auto parts from China, such as knobs, lights, rearview mirrors, and exhaust manifolds, but also more sophisticated products such as transmission electro-hydraulic control modules and control resistors.