Foreign-made car parts are in a less favourable position, says the WTO
China has been told its tariffs on foreign car parts break World Trade Organization (WTO) rules.
At least 60% of components used in Chinese cars must be made in China or firms pay higher taxes under Beijing's current system.
The international trade body said the practice was protectionist and called on China to change its import caps.
The US, Canada and the European Union complained to the trade body that Beijing had broken the WTO's rules.
The US Trade Representative Susan Schwab said enforcing trade rules through dialogue or litigation was a critical part of the US trade agenda.
"The panel report leaves no doubt that China's discriminatory treatment of US auto parts has no place in the WTO system," she said.
Level playing field
Chinese officials had argued that the country's tariffs were aimed at preventing foreign companies importing whole cars as spare parts to avoid paying taxes.
Analysts said the row over car parts had been a hot issue in the US, because carmaking - already hit by fierce foreign competition and an economic slowdown - is an important American industry.
"We will continue our efforts to ensure that US manufacturers and workers in this and other industries enjoy the benefits of open markets and a level playing field," Ms Schwab said.
The ruling in Geneva brings the global dispute to an end.
In February, the WTO made a preliminary ruling saying foreign-made car parts were in a less favourable position than Chinese-made alternatives.