Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
China − Measures affecting imports of automobile parts WT/DS 339
First written submission by the European Communities
Geneva 13 March 2007
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
i
TABLE OF CONTENTS
I. INTRODUCTION.................................................................................................. 1
II. BACKGROUND .......................................................................................................... 3
A. Overview of Chinese Automotive Market ..................................................... 4
1. Vehicle production and sales............................................................ 4 2. Auto parts production and sales ....................................................... 6
B. Summary of Chinese Measures Favouring Domestic Content in the Automotive Industry prior to WTO Accession.............................................. 7
C. China’s Commitments in Relation to Auto Parts and Vehicles upon Accession to the WTO................................................................................... 8
D. Introduction of New Measures ..................................................................... 9
1. The Measures ................................................................................... 9 2. Automotive Policy Order ............................................................... 10 3. Decree 125 and Announcement 4................................................... 11
E. Substantive Criteria for Determining the Imposition of Internal Charges at the “Whole Vehicle” Rate .......................................................................... 12
1. Determining whether Imported Parts are Deemed Whole Vehicles........................................................................................................ 12
2. Determining whether Assemblies are Deemed Imported............... 14
F. Additional Administrative Burden Imposed on Vehicle and Auto Parts Manufacturers under the Measures ........................................................... 15
1. Registration of vehicle models ....................................................... 16 2. Customs clearance and bonding requirements ............................... 17 3. Verification procedures .................................................................. 18 4. Payment of charges......................................................................... 19 5. Additional procedural requirements in case of changes to the
vehicle model or options fitted on the vehicle model .................... 20 6. Burden on auto parts manufacturers............................................... 20
G. Example of Application of the Measures.................................................... 21
H. Impact of the Measures .............................................................................. 26
III. LEGAL ARGUMENT ......................................................................................... 28
A. Preliminary considerations ........................................................................ 28
B. The Measures are inconsistent with the agreement on Trade Related Investment Measures ("TRIMs") and the terms and conditions of China's accession to the WTO on TRIMs ................................................................ 29
1. Introduction .................................................................................... 29
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
ii
2. The Measures are inconsistent with Article 2 of the TRIMs Agreement in conjunction with paragraph 1 (a) of the Illustrative List annexed thereto ....................................................................... 30 (a) Introduction ........................................................................ 30 (b) The Measures are "investment measures".......................... 31 (c) The Measures are "trade-related" ....................................... 33 (d) The Illustrative List ............................................................ 34
i) Local content requirements ................................................................34 ii) "Compliance with which is necessary to obtain an advantage" ..........36
♦ Lower charges as an advantage ...........................................37 ♦ Procedural advantages.........................................................38
(e) Conclusion.......................................................................... 40 3. The Measures are inconsistent with Article 2 of the TRIMs
Agreement in conjunction with paragraph 2 (a) of the Illustrative List annexed thereto ....................................................................... 40 (a) Introduction ........................................................................ 40 (b) The Measures fall squarely within the description in
paragraph 2 (a) of the Illustrative List................................ 40 4. The Measures are inconsistent with China's obligations under the
WTO Agreement, as set out in the Protocol of Accession of the People's Republic of China to the WTO ........................................ 42 (a) The terms of China's accession to the WTO ...................... 42 (b) The Measures are inconsistent with the Accession Protocol
............................................................................................ 43
C. The Measures are inconsistent with Article III of GATT 1994 .................. 44
1. Introduction .................................................................................... 44 2. The Measures are inconsistent with Article III:4 GATT 1994 ...... 45
(a) Introduction ........................................................................ 45 (b) The products are "like"....................................................... 46 (c) The measures at issue are laws, regulations, or requirements
affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of the imported products............................................................................................ 46
(d) Treatment no less favourable ............................................. 48 3. The Measures are inconsistent with Article III:2 of the GATT 1994
........................................................................................................ 50 (a) Article III:2, first sentence of the GATT 1994.................... 50
i) The products are "like" .......................................................................51 ii) The internal charges applied to imported products are "in excess of"
those applied to like domestic products..............................................52 iii) Conclusion..........................................................................................52
(b) Article III:2, second sentence of the GATT 1994 ............... 52 i) The imported and the domestic products are "directly competitive or
substitutable" ......................................................................................53 ii) The directly competitive or substitutable imported and domestic
products are "not similarly taxed" ......................................................54 iii) The dissimilar taxation of the directly competitive or substitutable
imported domestic products is "applied ... so as to afford protection to domestic production"..........................................................................55
iv) Conclusion..........................................................................................55 4. The Measures are inconsistent with Article III:5 of the GATT 1994
........................................................................................................ 56
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
iii
(a) Article III:5, first sentence of GATT 1994 ......................... 56 i) The Measures are an "internal … regulation".....................................57 ii) The Measures are "quantitative … relating to the mixture, processing
or use of products in specified amounts or proportions" ....................57 iii) The Measures "requir[e], directly or indirectly, that any specified
amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources"..........................58
iv) Conclusion..........................................................................................59 (b) Article III:5, second sentence of GATT 1994..................... 60
5. The Measures are inconsistent with the WTO Agreement, as set out in the Protocol of Accession of the People's Republic of China to the WTO, in particular Part I, paragraph 7.2 of the protocol of Accession of China......................................................................... 60
D. Alternatively: The Measures are inconsistent with Article II:1 (a) and (b) of the GATT 1994 ........................................................................................... 61
1. Introduction .................................................................................... 61 2. Description of the Chinese tariff schedule and the relevant bound
rates of duty .................................................................................... 63 (a) General considerations ....................................................... 63 (b) Complete vehicles .............................................................. 64 (c) Intermediate products ......................................................... 66 (d) Parts .................................................................................... 67 (e) Conclusion.......................................................................... 68
3. The inconsistency of the Measures with Chinese tariff commitments and Article II GATT 1994............................................................... 68 (a) Preliminary considerations ................................................. 68 (b) The ordinary meaning of the Chinese tariff schedule ........ 69 (c) Contextual analysis............................................................. 71
i) Article 21(2)(b) and (c) of Decree 125 ...............................................72 ii) Article 21(2)(a) of Decree 125 ...........................................................74 iii) Article 21(1) of Decree 125................................................................75 iv) Article 21(3) of Decree 125................................................................78
(d) Object and purpose............................................................. 78 (e) Conclusion.......................................................................... 79
E. The Measures are inconsistent with Article 3 of the Agreement on Subsidies and Countervailing Measures .................................................................... 79
1. Introduction .................................................................................... 79 2. The Measures constitute a subsidy within the meaning of Article 1
of the SCM Agreement................................................................... 80 (a) Financial contribution......................................................... 81 (b) Benefit ................................................................................ 82
3. The subsidy is contingent upon the use of domestic over imported goods .............................................................................................. 82
4. Conclusion...................................................................................... 84
IV. CONCLUSION.......................................................................................................... 84
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
iv
TABLE OF CASES REFERRED TO IN THIS SUBMISSION
WTO DISPUTE SETTLEMENT REPORTS AND ARBITRATION AWARDS
Short Title Full Case Title and Citation
Canada – Aircraft Appellate Body Report, Canada – Measures Affecting the Export of Civilian Aircraft, WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377
Canada – Autos Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry, WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2985
Canada – Periodicals Appellate Body Report, Canada – Certain Measures Concerning Periodicals, WT/DS31/AB/R, adopted 30 July 1997, DSR 1997:I, 449
EC – Asbestos Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos-Containing Products, WT/DS135/AB/R, adopted 5 April 2001, DSR 2001:VII, 3243
EC – Bananas III Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591
EC – Chicken Cuts Appellate Body Report, European Communities – Customs Classification of Frozen Boneless Chicken Cuts, WT/DS269/AB/R, WT/DS286/AB/R, and Corr.1, adopted 27 September 2005
India – Autos Panel Report, India – Measures Affecting the Automotive Sector, WT/DS146/R, WT/DS175/R and Corr.1, adopted 5 April 2002, DSR 2002:V, 1827
Indonesia – Autos Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1, 2, 3, and 4, adopted 23 July 1998, DSR 1998:VI, 2201
Japan – Alcoholic Beverages II Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97
Korea – Various Measures on Beef
Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, DSR 2001:I, 5
US – FSC Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations", WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619
GATT DISPUTE SETTLEMENT
Short Title Full Case Title and Citation
EEC – Parts and Components GATT Panel Report, European Economic Community – Regulation on Imports of Parts and Components, L/6657, adopted 16 May 1990, BISD 37S/132
Italy – Agricultural Machinery
GATT Panel Report, Italian Discrimination Against Imported Agricultural Machinery, L/833, adopted 23 October 1958, BISD 7S/60
US – Section 337 Tariff Act GATT Panel Report, United States Section 337 of the Tariff Act of 1930, L/6439, adopted 7 November 1989, BISD 36S/345
US – Tobacco GATT Panel Report, United States Measures Affecting the Importation, Internal Sale and Use of Tobacco, DS44/R, adopted 4 October 1994, BISD 41S/131
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
v
TABLE OF ABBREVIATIONS USED IN THIS SUBMISSION
Abbreviation Definition Accession Protocol WTO, Accession of the People’s Republic of China, Decision of 10 November
2001, WT/L/432, November 23, 2001 Accession Schedule Schedule CLII to the Accession of the People’s Republic of China, WT/L/432,
November 23, 2001 Announcement 4 Public Announcement No. 4, “Regarding Regulations on the Ratification of
Imported Automotive Parts and Components Fulfilling the Characteristics of a Whole Vehicle”, issued March 28, 2005 by China’s General Administration of Customs in accordance with Decree 125.
Auto News 2005 Automotive News/Automotive News Europe (Supplement), Guide to China’s Auto Market, May 2, 2005
Auto News 2006 Automotive News/Automotive News Europe (Supplement), 2006 Guide to China’s Auto Market, May 1, 2006
Automotive Policy Order 1994
Formal Policy on Development of Automotive Industry, February 19, 1994
Automotive Policy Order Policy on Development of the Automotive Industry, Order of the National Development and Reform Commission (No.8), May 21, 2004
Bonded Warehouses Order Order No. 105 of the Customs, “Provisions of the Customs of the People’s Republic of China on the Administration of Bonded Warehouses and the Goods Stored Therein”, dated December 5, 2003 and effective February 1, 2004.
Bonding Procedures Procedures on Customs Control over Bonded Areas, promulgated by Customs on August 1, 1997, and effective on that date
CKD Completely Knocked-Down kit (of auto parts to be assembled into a whole vehicle)
Customs General Administration of Customs of the People’s Republic of China Customs Joint Bulletin 38 Customs General Administration Joint Bulletin No. 38, July 5, 2006 Decree 125 Decree No. 125, “Administrative Measures for the Import of Automobile
Components Fulfilling the Characteristics of a Whole Vehicle”, issued February 28, 2005 jointly by China’s General Administration of Customs, NDRC, Ministry of Finance and Ministry of Commerce in accordance with the Automotive Policy Order, effective April 1, 2005
E&Y Report Ernst and Young Report, “China’s Automotive Section – at the crossroads” (undated)
GATT General Agreement on Tariffs and Trade Global Insight Report Global Insight Report: China (Automotive), January 31, 2007 Harmonized System Harmonized Commodity Description and Coding System KPMG Asia Report KPMG Report, Automotive and Components Market in Asia – Advisory, March
2005 KPMG China Report KPMG Report, “China Automotive and Components Market 2005 – Industrial
Markets”, November 2005 NDRC National Development and Reform Commission of the People’s Republic of
China SCM Agreement Agreement on Subsidies and Countervailing Measures SKD Semi-Knocked Down kit (of auto parts to be assembled into a whole vehicle) TRIMs Agreement Agreement on Trade-Related Investment Measures Warehouse Order Provisions of the Customs of the People’s Republic of China on the
Administration of Bonded Warehouses and the Goods Stored Therein, issued as Order No. 105 by Customs on December 5, 2003 and coming into force on February 1, 2004
Working Party Report Report of the Working Party on the Accession of China, WT/ACC/CHN/49, October 1, 2001
Working Party Report – Border Tax Adjustments
WTO, Report of the Working Party on Border Tax Adjustments, L/3464 – BISD 18S/97, adopted December 2, 1970
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
vi
Abbreviation Definition WTO Agreement Marrakesh Agreement Establishing the World Trade Organization
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
1
I. INTRODUCTION
1. China, as a WTO Member, has undertaken to comply with the obligations set out
in the Marrakesh Agreement Establishing the World Trade Organization (WTO
Agreement). It has undertaken to open its markets, in part through the reduction of
tariffs on auto parts1 and by eliminating its domestic-content requirements. Despite
commitments made during WTO accession2, China has re-erected old barriers in
the form of various measures (“Measures”).3 These Measures inhibit the import of
auto parts by making them “equivalent” to imported vehicles, a completely distinct
category of products. China once again treats domestic and imported auto parts as
different, applying internal charges to imported auto parts without any equivalent
charges applied to "like" domestic parts. Through the Measures, China:
i) imposes different internal charges on vehicles manufactured in China depending on their domestic content;
ii) imposes those internal charges on imported auto parts, but not on domestic auto parts; and
iii) imposes additional administrative requirements with respect to imported auto parts that are not imposed on domestic auto parts.
2. There can be no illusion about the objective of these Measures. They are intended
to make imported auto parts – parts that are in every way like domestic auto parts
– more expensive and consequently less competitive than the domestic equivalent,
and to encourage investment in local part manufacture.
3. The Measures impose internally what China cannot do externally. They render it
more costly to import auto parts into China, through the imposition of internal
charges. This serves to discourage the use of imported auto parts inside the
Chinese market than should be the case under China’s WTO commitments. To
give effect to the Measures, China has established various reporting requirements
1 In this submission, except where the Measures specifically provide for other categories of goods,
“parts” includes all auto parts and components associated with the production of whole vehicles or individual assemblies.
2 Accession Protocol (Exhibit JE-1). 3 The Measures are described in detail in section D1.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
2
that burden only those vehicle and auto parts manufacturers operating in China
that use imported auto parts. Moreover, the Measures adversely affect those
manufacturers by virtue of denying them the certainty of the rates set out in
China’s Schedule of Commitments4. Instead, those manufacturers that wish to
avoid these Chinese surcharges must re-align their investment decisions, to reflect
the additional costs and regulatory burdens imposed at all levels of the supply
chain.
4. Given that the objective and effect of the Measures is to encourage investors to
increase their investment in China’s domestic auto parts market instead of
importing auto parts, they are trade-related investment measures that violate
Article 2 of the Agreement on Trade Related Investment Measures (TRIMs
Agreement). Further, since Chinese and imported auto parts are like products, as
we demonstrate below, the Chinese measures violate Article III of the General
Agreement on Tariffs and Trade (GATT 1994) on the requirement to provide
national treatment to imports.
5. Even if the Chinese measures in question are properly considered border charges,
they violate China’s commitments under Article II of the GATT 1994: a given part
is not assessed based upon its HS code at presentation at the border, but is deemed
to be a whole vehicle, and generally charged a tariff at least 2 ½ times more than
the rate to which China committed in its Accession Protocol. In addition, this
treatment runs counter to China’s specific commitment in its Accession Protocol
that even if all parts necessary to assemble a vehicle were shipped together, they
would be charged at the (lower) parts rate.
6. China has also violated Article 3.1(b) of the Agreement on Subsidies and
Countervailing Measures (SCM Agreement) by providing a subsidy contingent
upon the use of domestic over imported auto parts. Vehicle manufacturers benefit
from lower internal charges on imported auto parts only if they satisfy local
content requirements.
4 Accession Schedule (Exhibit JE-2)
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
3
7. The European Communities first sets out the background for this dispute,
describing the Measures in the context of the Chinese market for auto parts both
before and after accession to the WTO (Section II).5 We then examine the legal
consequences of the Measures, considering how the Measures are trade-related
investment measures, and inconsistent with the TRIMs Agreement (Section III.B).
We then demonstrate that imported auto parts are like domestic auto parts, and
how the less-favourable treatment offered to imported auto parts is inconsistent
with the various elements of Article III of the GATT 1994 (Section III.C). We then
address how the Measures can also be found to violate Article II of the GATT 1994
(Section III.D) before turning to the inconsistency of the Measures with Article 3.1
of the SCM Agreement (Section III.E).
II. BACKGROUND6
8. The net effect of the Measures is to discriminate between imported and domestic
auto parts so as to provide unfair advantage to domestic production, raising the
cost of foreign inputs and reducing the competitiveness of those vehicle
manufacturers that use them. The Complainants set out in detail how this
discrimination occurs. We begin by considering in general terms the auto parts and
vehicle manufacturing industry in China, together with the general regulatory
framework applicable to the imports of vehicles and auto parts. We will then
consider the Measures at issue and the WTO-inconsistent requirements that they
impose.
5 For the procedural background, the European Communities respectfully refers the Panel to the First
Written Submission of the United States. 6 The complaining Parties are submitting a common background section, which is reproduced
separately in the submission of each of the complaining Parties, and common exhibits, delivered with the submissions.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
4
A. Overview of Chinese Automotive Market
1. Vehicle production and sales
9. Vehicle production in China is, for all intents and purposes, like vehicle
production anywhere else in the world. It is a highly technical process, involving a
constant inflow of parts to manufacturing facilities in accordance with strict timing
requirements, so as to ensure that there is no delay in production chains. The
industry demands considerable logistical sophistication, particularly when
production of both parts and vehicles relies on long supply chains and the
integration of complex technologies across many countries and production
facilities.
10. The great majority of vehicles sold in China are produced by vehicle
manufacturers located in China. There are approximately 1,500 manufacturers
registered in China, of which fewer than 100 sell more than 10,000 vehicles a year.
Many small manufacturers sell only 300 to 500 vehicles a year.7
11. The top three producers of passenger vehicles in 2006 consisted of Sino-foreign
joint-ventures. Shanghai GM is the largest, selling 413,400 vehicles,8 followed by
Shanghai Volkswagen and FAW-Volkswagen selling 352,000 and 350,000
vehicles respectively. Chery, a Chinese-owned manufacturer of China’s top-
selling domestic brand has sales of 300,000 vehicles and is in fourth place.9
12. China’s focus on rationalisation has increased concentration in the industry, with
over 13 major producers responsible for 60% of current production. The
government's target for the domestic industry is to have just three or four major
producers by the year 2010.10
7 Asia Pulse, “Sino-foreign joint ventures top Chinese auto sales in 2006”, January 9, 2007 (Exhibit JE-
3). 8 Ibid. 9 See generally Global Insight Report (Exhibit JE-4) and Auto News 2006 for profiles of the major
joint-venture and domestic vehicle manufacturers (Exhibit JE-5). 10 Global Insight Report, at pp. 7 and 16 (Exhibit JE-4).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
5
13. There has been a boom in the sales of vehicles in China. In 2006, 7.22 million
vehicles were sold in China,11 up from approximately 2.5 million in 2001.12
Vehicle production in China has increased along with demand to 7.28 million
vehicles in 2006 (allowing China to displace Germany as the world’s third-largest
vehicle producer),13 from approximately 2.4 million vehicles in 2001.14
14. Chinese-owned vehicle manufacturers have been increasing their market share
over joint ventures with foreign manufacturers.15 Chinese-owned manufacturers
now have a 30% market share, as compared with 25% in 2005.16 Joint ventures
between foreign manufacturers and domestic Chinese companies account for the
vast majority of the remaining market share. Imported vehicles account for less
than 5% of the Chinese market.17
15. The growth in market share of Chinese-owned vehicle manufacturers is taking
place in an environment of increased sales and exports. Vehicle exports hit a
record high of 340,000 units in 2006, almost seven times more than 2004, with the
majority of them low-priced trucks and buses bound for developing markets in
Asia, Africa and Latin America. This focus on exports is part of the Chinese
government’s plan to increase automobile and auto parts exports to US $120
billion, or 10% of the world’s total vehicle trading volume, in the next ten years.18
11 Agence France Presse, “China auto sales seen spreading to smaller cities in 2007”, January 29, 2007
(Exhibit JE-6); BBC News, “Chinese car market is world No 2”, January 11, 2007, online: http://news.bbc.co.uk/2/hi/business/6252215.stm (Exhibit JE-7).
12 Global Insight Report, at p. 13 (Exhibit JE-4). 13 Asia Pulse, “China becomes world’s third largest auto producer in 2006”, January 17, 2007 (Exhibit
JE-8). 14 Global Insight Report, at pp. 13-15 (Exhibit JE-4). 15 People’s Daily Online, “China stands as world’s 2nd largest auto market”, January 13, 2006, online:
http://english.peopledaily.com.cn/200601/13/eng20060113_235259.html (Exhibit JE-9). 16 The Economist, “Carmaking in China: The fast and the furious”, November 25, 2006 (Exhibit JE-10);
Shanghai Daily, “China’s car industry on fast track”, December 27, 2006, “Market share of Chinese car brands such as Geely, Chery and Brilliance rose from 25 percent in 2005 to 30 percent this year, amid intensified competition from overseas giants”, online: http://en.ce.cn/Industries/Auto/200612/27/t20061227_9907488.shtml (Exhibit JE-11).
17 Asia Pulse, “Chinese auto makers race to the bottom”, February 8, 2007, (Exhibit JE-12), says 4% for 2006; Embassy of the People’s Republic of China in the United States, citing the People’s Daily’s Jan. 16, 2006 article, online http://www.china-embassy.org/eng/gyzg/t231212.htm ), says it is 160,000 out of almost 6 million, which is about 2.6% for 2006 (Exhibit JE-13).
18 Reuters, “China to introduce permits for auto exports”, January 3, 2007 (Exhibit JE-15); Industry News, November 2006, “China Plans To Up Auto Parts Exports By Ten Fold” Agence France Press, online: http://www.industryweek.com/ReadArticle.aspx?ArticleID=13111 (Exhibit JE-16).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
6
16. Pressure on pricing in China is intense, with automobile prices falling on average
by approximately 10,000 yuan (approximately US $1,250) per automobile each
year over the past several years.19 Heavy competition is continuing to lead to price
reductions in vehicle prices in China, with both existing and new models being
discounted.20 The industry’s average margin on sales fell to 4% percent in 2006.21
This pressure on prices (and on profits) is expected to continue over the short
term.22
17. As noted above in paragraphs 11 and 14, the top three vehicle manufacturers in
China are joint ventures, and overall joint ventures account for approximately 65%
of all vehicle sales in China. Foreign vehicle manufacturers are required to operate
entirely through joint ventures with a variety of restrictions, including minimum
investment, a maximum interest of 50% (except for joint ventures where the
production is destined for export) and a maximum number of joint ventures per
vehicle type.23
2. Auto parts production and sales
18. The auto parts market is highly fragmented, with the top ten manufacturers
accounting for only 20% of the total parts market in China of US $9.1 billion.
There are estimated to be 10,000 auto parts manufacturers in China,24 450 of
19 Agence France Presse, “Auto defects up in China amid price war”, November 20, 2006 (Exhibit JE-
17). 20 Auto News 2006, at p. 5 (Exhibit JE-5); Asia Times Online, “Chinese auto makers race to the bottom”,
February 9, 2007, online: http://www.atimes.com/atimes/China/GA07Ad01.html (Exhibit JE-12). 21 Auto News 2006, at p. 30 (Exhibit JE-5). 22 However, part of this expected drop in prices is based on an assumed reduction in tariffs for imported
parts, which will be limited if the Measures remain in place. See, for example, pp. 3 and 9 of the E&Y Report (Exhibit JE-14).
Page 3: “The [Economist Intelligence Unit] research suggests that fierce competition will drive down prices of Chinese-made vehicles, while the prices of imported cars will also fall sharply from 2006 as import tariffs are cut.”
Page 9: “Moreover, the price of these more technologically advanced cars should fall along with the phasing out of tariffs on imported components underpinning strong sales growth.”
23 Automotive Policy Order, Chapter X (Exhibit JE-18); KPMG China Report, at p. 6 (Exhibit JE-19); Global Insight Report, at p. 11 (Exhibit JE-4); Morgan Stanley report, “Chinese Auto Market: Reading the Tea Leaves”, February 17, 2004, at p. 24 online: www.uscc.gov/hearings/2004hearings/written_testimonies/04_09_23wrts/stephen_girsky.pdf (Exhibit JE-21).
24 Global Insight Report, at p. 19 (Exhibit JE-4).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
7
which are foreign-owned.25 Auto parts are produced in China both for use in
domestic manufacturing and for export. Chinese auto parts exports are substantial,
at over US $8 billion in 2004.26
19. [Deleted for confidentiality reasons]
20. Lower average prices have also led to pricing pressure on auto parts
manufacturers,27 particularly since parts constitute 80% of the vehicle cost in
China.28 This resulted in a drop in profit for parts manufacturers of [Deleted for
confidentiality reasons] in 2004 compared with 2003.29 Against this background,
China introduced the Measures challenged in these proceedings, providing
advantages to its domestic auto parts industry by discriminating against imported
auto parts – advantages that had existed in a similar form before China’s accession
to the WTO, but which were required to be removed.
B. Summary of Chinese Measures Favouring Domestic Content30 in the Automotive Industry prior to WTO Accession
21. Prior to China’s accession to the WTO, China imposed charges on imported auto
parts under its 1994 Automotive Industry Policy31 depending on the amount of
25 KPMG Asia Report, at p. 21 (Exhibit JE-20). 26 E&Y Report, at p. 11 (Exhibit JE-14). 27 KPMG China Report, at p. 15 (Exhibit JE-19). 28 Booz Allen Hamilton report, “The Road Ahead: China’s Passenger Vehicle Market in 2015”, March
2006, at p.4, online: http://www.boozallen.com/publications/article/1672938 (Exhibit JE-22). 29 Auto News 2005, at p. 25 (Exhibit JE-23). 30 The terms “domestic content” and “local content” are used interchangeably throughout this
submission. 31 Automotive Policy Order 1994, Articles 42-44 (Exhibit JE-24): Article 42 After introduction of a manufacturing technology from overseas, an automobile enterprise
must start its effort to localize the products therewith. The State takes the progress of localization of the import technology products as one of the conditions to support the enterprise to develop the second model.
Article 43 An automobile enterprise shall not engage in assembly through import of semi-knock-downs (SKD) or completely knock-downs (CKD).
Article 44 The State formulates preferential import tariff rates in accordance with the localization rate of automobile products. Those firms that reach the following localization standards may enjoy the different preferential tariff rates.
1. The localization rate reaches 40 percent, 60 percent or 80 percent in the products manufactured with the import technology for complete automobiles in Class M;
2. The localization rate reaches 50 percent, 70 percent or 90 percent in the products manufactured with the import technology for complete automobiles and motorcycles in Classes N and L; and
3. The localization rate reaches 50 percent, 70 percent or 90 percent in the products manufactured with import technology for unit assemblages or key parts and components.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
8
domestic content in assembled vehicles to promote local production of vehicles
and auto parts in China. China imposed higher charges on imported auto parts used
in the domestic production of parts or vehicles if the manufacturer importing those
auto parts did not meet certain domestic content in the final vehicle or auto part
that it produced.
22. There were four levels of charges. The lowest tariff was charged for manufacturers
that met very high levels of domestic content in their final production (more than
80% domestic content for M class vehicle, more than 90% for N and L class
vehicles or auto parts (assemblies and key components)). The highest charge was
imposed for manufacturers that had less than 40% domestic content (for
manufacturers of M class vehicles), or less than 50% domestic content (for
manufacturers of N and L class vehicles or auto parts).32
C. China’s Commitments in Relation to Auto Parts and Vehicles upon Accession to the WTO
23. China removed the Auto Policy 1994 as part of its Accession Protocol and
commitment to removing discriminatory charges on imported vehicles by the year
2000.33 China also committed to a Schedule of Concessions that, by July 1, 2006,
imposed a bound tariff rate on most auto parts at 10% or lower, and on most
vehicles at 25%.34
24. At the time it joined the WTO, China did not have a separate tariff line for auto
parts that were either fully or partly unassembled and that were shipped together
for assembly and further processing into a whole vehicle within China. Parts
shipped in this form are generally separated into two categories:
• “Completely knocked-down kits” (“CKDs”), are parts imported together in unassembled condition that provide the necessary parts in order to manufacture a whole vehicle. The kit may include not only parts, but also
32 Accession Protocol, Annexes 5A (pp. 71-72) and 5B (p. 92) (Exhibit JE-1); Dic Lo, Market and
Institutional Regulation in Chinese Industrialization, 1978-94 (New York: St. Martin’s Press, 1997), at p. 189 (Exhibit JE-25).
33 Accession Protocol, 10.1 to 10.3 (p. 7), Annexes 5A (pp. 70-72) and 5B (p. 92) (Exhibit JE-1). 34 Ibid., Part II, p. 11. The relevant HS codes, at the four-digit level, are: 84.09, 84.13, 84.14, 84.81,
84.82, 84.83, 85.11, 87.02, 87.03, 87.04, 87.06, 87.07, 87.08 and 90.32. A more detailed description of the Chinese tariff schedule is provided under section III.D.2.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
9
sub-assemblies and assemblies such as engine, transmission, axle assemblies, chassis and body assemblies.
• “Semi knocked-down kits” (“SKDs”) refers to partially assembled combinations of parts that can be used to manufacture a whole vehicle after manufacturing.
25. Prior to joining the WTO, China imposed substantially lower tariff rates on CKDs
and SKDs than on imported whole vehicles.35 China agreed that if it did introduce
a separate tariff line for CKDs or SKDs, the tariff rate would be no more than
10%.36
D. Introduction of New Measures
1. The Measures
26. In 2004-2005, China introduced a series of measures affecting imported auto parts
(“the Measures”). The overall effect of the Measures is to impose additional
internal charges on imported auto parts that are incorporated into vehicles for sale
in the domestic Chinese market when those parts are not combined with a
sufficient value or volume of domestic parts.
27. These Measures are:
a. The Policy on Development of the Automotive Industry, issued on May 21, 2004, by China’s National Development and Reform Commission (“NDRC”) as Order No. 8. (“Automotive Policy Order 2004”)
b. “Administrative Measures on Importation of Automotive Parts Deemed Whole Vehicles”, issued as Decree 125 on February 28, 2005 by China’s General Administration of Customs (“Customs”), NDRC, Ministry of Finance, and Ministry of Commerce in accordance with the Automotive Policy Order (“Decree 125”).
35 Dic Lo, Market and Institutional Regulation in Chinese Industrialization, 1978-94 (New York: St.
Martin’s Press, 1997), at p. 189 (Exhibit JE-25). 36 See, for commitment regarding CKDs and SKDs, the Working Party Report, at paras. 93 and 342
(Exhibit JE-26), and the Accession Protocol, Part I:1.2 (Exhibit JE-1).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
10
c. “Rules for Verifying whether Imported Automotive Parts are Deemed Whole Vehicles”, issued as Public Announcement No. 4 by Customs on March 28, 2005, in accordance with Decree 125 (“Announcement 4”).
2. Automotive Policy Order
28. Despite China’s commitment to a reduction in the tariff for imported auto parts in
its Accession Protocol, the NDRC issued the Automotive Policy Order on May 21,
2004. This returns China to its earlier practice of providing preferential treatment
for vehicle and auto parts manufacturers that favour domestic over imported
content in their production.
29. China issued the Automotive Policy Order with a view to achieving specific
objectives. Among those objectives, it is formulated to “meet … the new
circumstances for the development of the automotive industry at home and abroad
following accession to the World Trade Organization; in order to promote the
structural adjustment and upgrading of the automotive industry, and
comprehensively improve the international competitiveness of the automotive
industry”, and “… to develop [the country’s automotive industry] into a pillar
industry of the national economy by 2010”.37 The Automotive Policy Order also
provides that “[b]y 2010, our country is to become a major global automotive
manufacturing country, with automotive products that are able to satisfy most of
the domestic market’s demand and that have entered the international market in
large volumes”.38
30. With respect to the development of the auto parts industry, Article 4 of the Auto
Policy Order provides that an objective is to foster parts enterprises so that they
can “participate in the global auto parts supply chain as well as be internationally
competitive”. The nature of that “fostering” is specified in Article 31, which
provides that China will provide “priority support” for auto parts production and in
Article 52 which confirms that “[t]he State supports the efforts of vehicle
manufacturers to increase their domestic production capacity, giving impetus to
37 Automotive Policy Order, Preamble (Exhibit JE-18). 38 Ibid., Article 2.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
11
the technological progress of auto parts manufacturers and to the development
of the automotive manufacturing industry.”39
31. The method that China has chosen to ensure the localization of automotive and
auto parts production is set out in Chapter XI.40 Imported auto parts are charged
internally at the imported vehicle rate (which is generally at least 2 ½ times greater
than the parts rate)41 if the final vehicle in which they are used does not have
enough domestic content. This higher charge applies to imported auto parts
provided they are “Deemed Whole Vehicles”, despite China’s agreement to be
bound by the lower rate for auto parts in its Accession Protocol.
3. Decree 125 and Announcement 4
32. To implement and administer aspects of the Automotive Policy Order, China
promulgated Decree 125 and Announcement 4.
33. Decree 125 and Announcement 4, both made effective on April 1, 2005, are
legally binding instruments designed to implement and administer the Automotive
Policy Order. Decree 125, issued jointly by NDRC, Customs, the Ministry of
Finance and the Ministry of Commerce, governs when imported auto parts will be
Deemed Whole Vehicles and therefore assessed higher internal charges. They
apply directly to and affect choices of vehicle manufacturers importing parts to
produce vehicles for sale in the Chinese Market.42 They also indirectly affect auto
parts manufacturers through either Customs involvement or contractual
arrangements. This is because the manufacturers must record and track the value
and number of imported parts used in parts produced in China.43
39 Ibid., Article 52. 40 Ibid., Articles 53 to 57 and 60. 41 The final bound tariff rate for auto parts is generally 10%, while it is generally 25% for whole
vehicles. The 25% internal charge is effectively a payment of the 10% bound parts rate plus an additional 15%. In certain cases the amount may be as much as 12 ½ times more, such as for HS code 84099991 (parts for engines with an output of greater than 180 hp), where the Schedule commits China to a bound rate of 2%, but where a 25% charge could be imposed if the Measures apply (Exhibit JE-2).
42 Decree 125, Articles 2, 7 (Exhibit JE-27). 43 Ibid., Article 2; Announcement 4, Article 20 (Exhibit JE-28).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
12
34. Decree 125 effectively regulates the criteria used to determine when imported auto
parts are Deemed Whole Vehicles and are assessed an additional charge. It also
regulates the administrative procedures to which vehicle manufacturers are subject
under the Measures (both matters are explained below). Announcement 4 was
promulgated together with Decree 125, providing additional details on the
substantive criteria and administrative procedures that apply to vehicle and auto
parts manufacturers. Accordingly, the Measures work in conjunction with one
another.
35. There are no comparable internal charges that apply to domestic auto parts to
equalize the amount charged against imported auto parts under the Measures.
E. Substantive Criteria for Determining the Imposition of Internal Charges at the “Whole Vehicle” Rate
1. Determining whether Imported Parts are Deemed Whole Vehicles
36. The Measures apply to imported auto parts that are used in vehicles manufactured
for sale in the Chinese market.44 Vehicle manufacturers are required to file
information about the quantity or value of imported parts that they plan to use in a
particular vehicle model in order for Customs to determine whether the quantity or
value of imported parts used to manufacture a vehicle attains or exceeds certain
thresholds.45 If a vehicle model is found to have a certain quantity or value of
imported parts, as set out in detail in Decree 125 and Announcement 4, imported
auto parts are considered a “Deemed Whole Vehicle” and assessed at the higher
tariff rate for whole vehicles. This charge is not levied upon the importation of the
goods, but at a later date, after the vehicle has been manufactured.
37. A key concept in the Measures is that of “Assemblies” - which correspond roughly
to major parts of a vehicle. The Measures differentiate between two “main
Assemblies” and six other “Assemblies”:
44 Decree 125, Article 7, first sentence (Exhibit JE-27).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
13
Main Assemblies
1) the vehicle body (including driver’s cabin) Assembly; and 2) the engine Assembly.
Other Assemblies
1) the transmission Assembly; 2) the drive-axle Assembly; 3) the non-drive axle Assembly; 4) the chassis Assembly; 5) the brake Assembly; 6) the steering Assembly.46
38. Under the Measures, all imported parts will be Deemed Whole Vehicles and
therefore subject to internal charges that are generally at least 2 ½ times greater
than the bound rate for that part, if any of these three tests are met:
a. As of April 1, 2005, when complete CKD or SKD kits are imported to assemble a vehicle.47
b. As of April 1, 2005, if a sufficient number of Deemed Imported Assemblies48 are used in manufacturing the vehicle.49 Imported parts will be Deemed Whole Vehicles if the following combinations of Assemblies are “Deemed Imported”:
i) the two main Assemblies (the vehicle body and engine);
ii) either of the two main Assemblies as well as three or more other Assemblies; or
iii) five or more Assemblies, other than the main Assemblies.
c. As of July 1, 2006, when the aggregate price of imported parts reaches 60% or more of the price of the whole vehicle.50 However, this aspect of the Measures was suspended by Customs Joint Bulletin 38, dated July 5, 2006, until July 1, 2008.51
39. Under the Measures, then, imported parts can become Deemed Whole Vehicles on
the basis of the number of Assemblies built from imported parts or the value of
those imported parts.
45 The process of registering a model and related procedural steps under the Measures are set out in
more detail under the heading “Registration of vehicle models”, starting at para. 46. 46 See Decree 125, Articles 4, 21(2) and Annexes 1 and 2 (Exhibit JE-27); Announcement 4, Article 13
and Annex 2 (Exhibit JE-28). 47 Decree 125, Article 21(1) (Exhibit JE-27); Announcement 4, Article 13(1) (Exhibit JE-28). 48 The notion of Deemed Imported Assemblies is explained in Section 2 below. 49 Decree 125, Article 21(2) (Exhibit JE-27); Announcement 4, Article 13(2) (Exhibit JE-28).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
14
2. Determining whether Assemblies are Deemed Imported
40. An Assembly need not be imported in its entirety, or even manufactured in China
from exclusively imported parts to be “Deemed Imported” and thus to count
against the thresholds set out in the measures. Article 22 of Decree 125 specifies
that if any of the following configurations of imported auto parts are used in an
Assembly, it shall be Deemed Imported:
i) a complete set of parts is imported to assemble the Assembly;
ii) key parts are imported to assemble the Assembly, and these imported key parts attain and/or exceed the stipulated quantity criteria identified in Annex 1 of Decree 125.52 Further, as of July 1, 2008, lower quantity thresholds will apply to those key parts identified as of class A in Annex 1, and if exceeded, will make the Assembly Deemed Imported;53 or
iii) the aggregate price of imported parts is 60% or more of the total price of the Assembly in question.
41. Accordingly, an Assembly will be Deemed Imported under the Measures if any of
these three thresholds are met, which will then count towards calculating the
number of imported Assemblies listed in Article 21(2) of Decree 125. For
example, for a class M1 vehicle,54 the import of five key parts of the vehicle body
and six key parts of the engine will be sufficient to make both Deemed Imported
Assemblies and all imported parts Deemed Whole Vehicles. Further, from July 1,
2008 and the entry into force of the class A/B distinction, the imports of, e.g., two
doors, one engine block and one cylinder head will be sufficient to make the
vehicle body and the engine Deemed Imported Assemblies. This means that the
import of a relatively limited quantity or value of parts will be sufficient to treat
those parts as Deemed Whole Vehicles.
50 Decree 125, Article 21(3) (Exhibit JE-27), and Announcement 4, Article 13(3) (Exhibit JE-28). 51 Customs Joint Bulletin 38, July 5, 2006 (Exhibit JE-29). 52 See Decree 125, Article 22 and Annex 1 (Exhibit JE-27); Announcement 4, Article 19 and Annex 2
for this calculation (Exhibit JE-28). Further, Public Announcement 4, Article 20, specifies that if the price of the imported part of a key component or sub-assembly exceeds 60% of the price of the key component or sub-assembly then that key part or sub-assembly is deemed to be imported.
53 The entry into force of the class A/B distinction was initially foreseen on July 1, 2006 (Decree 125, Note 5 to Annex 1 (Exhibit JE-27), Announcement 4, Article 19 (Exhibit JE-28), but was suspended until July 1, 2008 by Customs Joint Bulletin 38 (Exhibit JE-29).
54 Vehicles used for transporting passengers and comprising no more than nine seats including the driver’s seat, Classification of Power-Driven Vehicles and Trailers (National Standard GB/T 15089-2001) (Exhibit JE-30).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
15
42. The only way to avoid imported parts becoming Deemed Whole Vehicles when
the import content thresholds under Articles 21 and 22 of Decree 125 are met
would be to engage in “substantial processing” in China.55 This results in the
imported parts being deemed domestic, and occurs in one of three ways:56
i) if there is an alteration of the tariff classification that results in a change to the four-digit tariff classification of the good pursuant to the PRC Import Tariff;
ii) if the price of the finished part is at least 30% higher than the price of the imported parts and raw material in the finished product; and
iii) if the manufacturing or processing performed in China is deemed to have created the basic properties of the finished product.
43. The principle of substantial processing applies to both parts directly imported by
vehicle manufacturers and to imported parts purchased by a manufacturer from a
domestic auto parts supplier. However, substantial processing alone of Assemblies
or key parts listed in Annex 1 of Decree 125 would not allow a vehicle
manufacturer to consider the imported parts or Assemblies as domestic, leaving
them no other option than to limit their imports.57
44. If the vehicle manufacturer produces a vehicle that uses imported parts which are
Deemed Whole Vehicles, then the manufacturer will be required to pay a charge
on all imported parts incorporated into the vehicle. That charge will be based on
the whole vehicle rate of 25%, and as noted above, will (together with the
appropriate tariff rate for the parts in question) result generally in internal charges
at least 2 ½ times the bound tariff rate for the imported parts.58
F. Additional Administrative Burden Imposed on Vehicle and Auto Parts Manufacturers under the Measures
55 Decree 125, Article 24 (Exhibit JE-27). 56 Announcement 4, Article 18 (Exhibit JE-28). 57 Decree 125, Article 24. The complainants understand that the principle of substantial processing
applies to imported parts incorporated into assemblies and key parts but does not apply to the processing of the assemblies or key parts themselves (Exhibit JE-27).
58 From 10% to 25%. In certain cases the amount may be as much as 12 ½ times more, such as for HS code 8409.99.91 (parts for engines with an output of greater than 180 hp), where China’s Schedule commits it to a bound rate of 2%, but where a 25% charge could be imposed if the Measures apply (Exhibit JE-2).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
16
45. In addition to the increased internal charges imposed when specified thresholds of
imported parts are used in automotive manufacturing, there are certain
administrative requirements imposed on manufacturers that use imported auto
parts. These administrative requirements are not applied with respect to domestic
auto parts and are considered in turn below.
1. Registration of vehicle models
46. Chapter II of Decree 125 sets out the required registration procedures to which
vehicle manufacturers are subject before they can obtain an automatic import
licence for auto parts.
47. Vehicle manufacturers must first perform a self-verification on proposed vehicle
models to determine whether the imported parts used in the vehicle models are
Deemed Whole Vehicles.59 Every vehicle model containing imported parts that are
Deemed Whole Vehicles after self-verification must then be reported to
Customs.60 Customs then registers the vehicle manufacturer and the vehicle
model.61
48. If the self-verification of a vehicle model is negative, then the vehicle
manufacturer is obliged to request a review of that model, which is carried out by
the National Centre for Verifying Deemed Whole Vehicles (the “Centre”) under
the authority of Customs. If the review shows that the vehicle model uses imported
parts that are Deemed Whole Vehicles, the vehicle model must be reported to and
registered with Customs (at the local Customs office).62
49. When applying to the NDRC for an “On-Road Motor Vehicle Manufacturer and
Product Announcement” and the Ministry of Commerce for a licence to import
auto parts, the vehicle manufacturer must provide its self-verification and the
review report from Customs if the imported auto parts are not Deemed Whole
59 Decree 125, Article 7 (Exhibit JE-27), and Announcement 4, Article 6 (Exhibit JE-28). 60 Decree 125, Article 9 specifies the information that a vehicle manufacturer must file, e.g., annual
production plans for the registered vehicle model, list of parts categories, price ratios of parts in the vehicle model being registered, item-by-item prices of domestic and imported parts, list of domestic and foreign suppliers (Exhibit JE-27).
61 Ibid., Articles 10 and 11.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
17
Vehicles. Licences granted for imported parts that are Deemed Whole Vehicles on
self-verification or review are marked with the words “Deemed Whole Vehicle”.63
50. Prior to the importation of auto parts, a vehicle manufacturer must provide the
local Customs office with a general duty guarantee (e.g., a letter of credit or
guarantee issued by a Chinese bank) where a vehicle model uses parts that are
Deemed Whole Vehicles. This guarantee cannot be lower than the average total
monthly duties payable on the quantity of parts to be imported by the
manufacturer.64 This amount is not based on actual imports but on the
manufacturer’s forecasted import plans. The general duty guarantee must be
adjusted if the manufacturer changes its import plans.65
2. Customs clearance and bonding requirements
51. Chapter III of Decree 125 sets out the customs procedures for importing auto parts
that are Deemed Whole Vehicles. Vehicle manufacturers must handle all customs
clearance procedures through the local Customs office and pay internal charges to
that office, even if the parts were imported through other ports of entry.66 Auto
parts imported through other ports of entry must apply to the local Customs office
for a “Customs to Customs transfer”.67
52. The Measures also establish that imported auto parts are subject to supervision by
Customs “as for bonded goods”, in effect deeming such imports as “in bond”.68
Bonding requirements would impose significant additional difficulties on auto part
and whole vehicle manufacturers, because Chinese law69 mandates that bonded
areas:
• may be established only with special permission;70
62 Ibid., Article 7. 63 Ibid., Article 7. 64 Ibid., Article 12. 65 Ibid. 66 Ibid., Article 13. 67 Ibid. 68 Ibid., Article 27. 69 Bonding Procedures (Exhibit JE-31); Warehouses Order (Exhibit JE-32). 70 Warehouses Order, Articles 7-13 (Exhibit JE-32).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
18
• have restrictions on the entry and exit, including special passes for personnel;71
• have special record-keeping requirements;72
• have a customs checking system installed, including computers connected to Customs;73 and
• restrict the movement of products, including treating movement out of the bonded area as an import, and requiring Customs approval for movement of products out of the area.74
53. In addition, in order for a company to operate a bonded warehouse, it must meet a
variety of requirements, including having a minimum amount of registered
capital.75
54. In practice, and despite the language of the Measures, the Chinese government has
not actually treated imported parts as bonded goods. Imported auto parts are used
freely at the manufacturing sites of vehicle and auto parts manufacturers with no
restrictions. Thus, to date, this deeming under the Measures is a fiction. However,
the risk remains that the Measures could be applied so as to impose significant
additional requirements, ostensibly linked to bonding requirements, and that
uncertainty provides a disincentive to use imported parts.
3. Verification procedures
55. Within ten days of the manufacture of the first batch of whole vehicles of a
registered model, the manufacturer must file specified documents with Customs.76
Then, within seven days of this filing, Customs must instruct the Centre to carry
out the verification.77 The verification must be done within one month of the
71 Bonding Procedures, Articles 3, 25 (Exhibit JE-31); Warehouses Order (Exhibit JE-32). 72 Bonding Procedures, Articles 5, 26 (Exhibit JE-31). 73 Ibid., Article 6; Warehouses Order, Articles 9(3), 15 (Exhibit JE-32). 74 Bonding Procedures, Articles 13, 27 (Exhibit JE-31); Warehouses Order, Articles 26-27 (Exhibit JE-
32). 75 Warehouses Order, Article 8(2) (Exhibit JE-32). 76 Decree 125, Article 19 (Exhibit JE-27); Announcement 4, Article 7 (Exhibit JE-28). The documents
which must be provided are: 1) application form for verification; 2) report of self-verification; 3) procurement list of parts; 4) document list for verifying Deemed Whole Vehicles; and 5) other documents as required.
77 Announcement 4, Article 8 (Exhibit JE-28).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
19
Centre receiving these instructions.78 Accordingly, a manufacturer may again incur
significant administrative delay in the final assessment of a charge as it could take
up to 48 days from submission of the application after the first batch of vehicles is
complete until the verification is actually carried out.
56. If a vehicle manufacturer objects to the results of the verification, a meeting is held
between the manufacturer, government officials and technical experts to determine
whether the Centre must perform a re-verification of the registered model.79
4. Payment of charges
57. One month after receiving the Verification Report, the vehicle manufacturer has
ten days to make a declaration for payment to the local Customs office.80 The local
Customs office then calculates the charges payable and levies them on the parts,
including any value-added tax payable, based on the Verification Report. Imported
auto parts are then assessed at the bound tariff rate (an import duty of generally
10% or less) plus a 15% internal charge if they are Deemed Whole Vehicles.81 If
the import duty has already been paid for a part, provided proof of payment is
supplied by the vehicle manufacturer, that amount will be deducted from the total
amount payable.82
58. If a subsequent verification report shows that a registered vehicle model no longer
uses imported parts that are Deemed Whole Vehicles, the manufacturer will no
longer be subject to the Measures’ cumbersome administrative procedures for that
particular model.83 Moreover, if a subsequent verification report shows that all
registered models no longer use imported parts that are Deemed Whole Vehicles,
the administrative measures will not apply to any vehicles produced by that
manufacturer and the general duty guarantee will be cancelled.84
78 Decree 125, Article 19 (Exhibit JE-27); Announcement 4, Article 9 (Exhibit JE-28). 79 Announcement 4, Article 12 (Exhibit JE-28). The re-verification must occur within one month of
instruction to the Centre to conduct it. 80 Decree 125, Article 31 (Exhibit JE-27). 81 Ibid., Article 28. 82 Ibid., Article 29. 83 Ibid., Article 32. 84 Ibid., Article 33.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
20
5. Additional procedural requirements in case of changes to the vehicle model or options fitted on the vehicle model
59. In addition to the general registration, self-verification and review procedures,
various additional procedural requirements are applicable if imported parts are
used instead of domestic parts.
60. The manufacturer must inform Customs and the Centre when a basic model
vehicle can be fitted with imported optional parts, and when such optional parts
are actually fitted to the vehicle.85
61. Equally, if the manufacturer wishes to introduce changes to the composition of the
basic model vehicle by increasing the number or proportion of imported parts, a
new verification process is due. Such changes may require the manufacturer to
register a new vehicle model and go through the entire process of self-verification,
review and verification by Customs.86
62. If domestic parts are used for the changes, it may not be necessary to register a
new vehicle model but only to go through a new verification, which may lead to
the vehicle model falling outside the scope of the Measures.87
6. Burden on auto parts manufacturers
63. As a result of Article 22 of Decree 125 and Article 20 of Announcement 4, the
level of imported content will have to be tracked down the chain of supply to
determine whether individual Assemblies and key parts are to be treated as
imported for purposes of the Measures. Such tracking will be made first at the
level of the Assembly to determine if the Assembly is Deemed Imported, and
subsequently at the level of “second-tier” suppliers for key parts.88
64. As a result, parts manufacturers and suppliers that use imported parts have to
maintain records of the quantity, type and cost of imported parts used in any parts
incorporated into a manufactured vehicle. They do this in order to meet their
85 Ibid., Article 20. 86 Announcement 4, Article 6 (Exhibit JE-28). 87 Decree 125, Articles 20 and 32 (Exhibit JE-27).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
21
contractual obligations to vehicle manufacturers and guarantee to them that they
meet the domestic content requirements of the Measures. They may also be
required to provide details to Customs about the purpose for which the imported
product will be used. This information may be provided directly to Customs or
indirectly by providing the information to the vehicle manufacturer.
65. These administrative requirements impose a significant logistical burden on all
users of imported parts and add the risk of financial penalties. Those penalties
could include:
• a fine for a violation of the Measures, or indirect penalties for making statements to Customs that are not properly substantiated;89
• financial loss resulting from internal charges under the Measures where records are insufficient to establish for Customs the requisite level of domestic content; and
• contractual penalties imposed by vehicle manufacturers to protect
themselves from the possibility of having to pay internal charges under the
Measures.
G. Example of Application of the Measures
66. We now consider how the Measures impose internal charges on identical parts
based on the use of the parts in China. To do so, we describe six hypothetical
imports into China of an identical product: brake master cylinders (hereafter
“brake cylinders”) for a light truck (HS 8708.39.40). The brake cylinders are
imported after July 1, 2006 – after the first two elements of the Measures came
into place, and after China’s tariff on that item dropped to 10% in accordance with
its Schedule. Those six separate imports, based upon the language in Decree 125
and Announcement 4, would have different treatment and internal charges under
the Measures. These hypothetical cases with additional variants are set out in
Table 1 below.
88 Announcement 4, Article 20 (Exhibit JE-28). 89 Decree 125, Article 36 (Exhibit JE-27); Order 63 (Exhibit JE-33).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
22
1. The first brake cylinder is destined for a retail store where it will be sold as a spare part for repairs. It is therefore not subject to the Measures and is charged the 10% tariff at the border.
2. The second brake cylinder is imported by an auto parts manufacturer, and is used in manufacturing a brake system Assembly. Also used in the manufacture of that brake system Assembly is an imported booster assembly, an imported front brake assembly and an imported rear brake assembly. Four “key parts” used in the manufacture of the brake system Assembly are imported, making it a Deemed Imported Assembly.90 The vehicle manufacturer performs a self-verification for a vehicle that it plans to produce, as required by the Measures.91 This shows that the brake system Assembly, engine Assembly and transmission Assembly would be Deemed Imported Assemblies within the meaning of the Measures. However, other Assemblies are largely sourced domestically. Since the vehicle contains only an engine Assembly and two other Assemblies that are deemed imported, imported parts will not fulfill the criteria for imposing the whole vehicle duty.92 Therefore, parts used in the Deemed Imported Assemblies, including the brake cylinder, are not charged additional amounts under the Measures. The brake cylinder has been charged a 10% tariff at the border, paid by the auto parts manufacturer, but the vehicle manufacturer is not required to make any additional payments.
3. The third brake cylinder is imported and incorporated into a vehicle in exactly the same situation as the second. However, as a result of sourcing difficulties, the vehicle in question is manufactured with an imported, rather than domestic, axle shaft. Another four parts of the drive-axle Assembly are imported, which, with the imported axle shaft, puts the imported content at the threshold of five “key parts”,93 meaning that the drive-axle Assembly becomes a Deemed Imported Assembly. Since the vehicle now contains an engine and three other Deemed Imported Assemblies, the imported auto parts are considered Deemed Whole Vehicles.94 The auto parts manufacturer therefore pays the 10% tariff for the brake cylinder at the border, but the vehicle manufacturer is then required to register a revised plan for the vehicles.95 This results in an
90 See Decree 125, Article 22(2), Annex 1 (Exhibit JE-27); Announcement 4, Article 14(2) and Annex
2, items 63-67 (Exhibit JE-28). 91 Decree 125, Article 7 (Exhibit JE-27). 92 Decree 125, Article 21(2)(b) (Exhibit JE-27); Announcement No. 4, Article 13(2)(ii) (Exhibit JE-28). 93 Decree 125, Article 22(2) and Annex 1 (Exhibit JE-27); Announcement 4, Article 14(2) and Annex 2,
items 44-53 (Exhibit JE-28). Note that pursuant to the Annex of Decree 125 the number of key parts for a drive axle for M1 vehicles is six, for other vehicles (M, M2, N) it is five. Light trucks are N vehicles (see Classification of Power-Driven Vehicles and Trailers – National Standard GB/T 15089-2001 (Exhibit JE-30)), and thus the key part threshold is five.
94 Decree 125, Article 21(2)(b) (Exhibit JE-27); Announcement 4, Article 13(2)(ii) (Exhibit JE-28). 95 Decree 125, Article 28 (Exhibit JE-27); Announcement 4, Articles 6 and 25 (Exhibit JE-28).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
23
additional internal charge of generally 15%96 on all imported parts used in the vehicle. 97
4. The fourth brake cylinder is imported in the reverse situation of the third: the plan registered by the vehicle manufacturer calls for the axle shaft to be imported, but a domestic supplier is found. Thus, the drive-axle Assembly, with only four key parts imported, is no longer deemed imported. The result is that the vehicle is no longer manufactured with enough Deemed Imported Assemblies to make the imported parts used in its manufacture Deemed Whole Vehicles. The vehicle manufacturer applies to Customs for re-verification of the vehicle. Assuming that the verification confirms that the drive axle is no longer a Deemed Imported Assembly,98, no additional internal charges are imposed. The charge on the brake cylinder is 10% payable by the auto parts manufacturer based on presentation at the border. The additional internal charge of 15% that would have been charged to the vehicle manufacturer based upon the registered plan is no longer required.99
5. The fifth brake cylinder is imported by an auto parts manufacturer who assembles an entire brake Assembly. On importation, the auto parts manufacturer pays a tariff of 10% of the value of the brake cylinder. The auto parts manufacturer has a contract with a vehicle manufacturer to provide brake Assemblies, with the requirement that the Assemblies have enough domestic content to avoid classification as Deemed Imported Assemblies. The auto parts manufacturer incorporates into the brake Assembly only three imported “key parts” (including the brake cylinder). It then calculates that the value of imported parts is 58% of the total value and concludes that the Assembly is not a Deemed Imported Assembly. The brake Assembly is shipped to a vehicle manufacturer which uses it to manufacture a vehicle together with an engine, transmission and axle that are Deemed Imported Assemblies. On the strength of the information from the auto parts manufacturer, the vehicle manufacturer conducts a self-verification and determines that the vehicle is not using imported parts that are Deemed Whole Vehicles. However, on verification, the Centre determines that the value of imported parts incorporated into the brake Assembly is actually 61%.100 The vehicle manufacturer is required to pay an additional internal charge of 15% on all imported auto parts used in the vehicle (including those used in the engine, transmission, axle and brake
96 As noted earlier, in fn. 41, the final rate bound in China’s schedule is 10% for most auto parts, but is
lower for certain parts, going as low as 2%. 97 Decree 125, Article 28 (Exhibit JE-27). Note that it is possible that the whole 25% is paid after
verification, as suggested in Article 29, which allows for the deduction of duties already paid, but suggests that it will not always have occurred.
98 Decree 125, Article 20, second paragraph (Exhibit JE-27). 99 Ibid., Article 28. 100 There are myriad ways that there could be differences in calculation, but, to take one example, there
could be a different interpretation about whether certain domestically sourced oils and liquids should be included in the calculation of domestic content (see Announcement 4, Article 24, which speaks of which oils and liquids can be included in the calculation (Exhibit JE-28)).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
24
Assemblies).101 Depending on the wording of the contract between the auto parts manufacturer and the vehicle manufacturer, the former may be required to reimburse the latter for some or all of those internal charges.
6. The sixth brake cylinder is imported as part of a CKD. This is done because the vehicle in question has a very limited market in China, so it is not economical to have a production line established solely for that model. The parts are assembled in China at a facility that also manufactures wholly domestic vehicles. The imported parts are Deemed Whole Vehicles, and the vehicle manufacturer is required to pay a total of 25% of their value.102
101 Decree 125, Articles 21(2)(b) and 28 (Exhibit JE-27); Announcement 4, Article 13(2)(ii) (Exhibit JE-
28). 102 Decree 125, Article 21(1) (Exhibit JE-27).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
25
Table 1 – Illustration of application of the Measures to imported brake cylinders for a light truck
This chart sets out the six scenarios set out in the text above, as well as variations of those scenarios.
Scenario Final use of imported
brake cylinder Used in an Assembly?
Brake Assembly Deemed Imported?
Number of main Assemblies Deemed Imported in the final vehicle
Number of other Assemblies Deemed Imported in the final vehicle*
Imported parts Deemed Whole Vehicles?
Duty charged on import
Additional internal charges paid after import
1 Retail Sale No N/A N/A N/A N/A 10% None 2 In vehicle self-
verified by manufacturer as not using parts Deemed Whole Vehicles
Yes Yes 1 2 No 10% None
2 (variant)
The body is also a Deemed Imported Assembly –everything else is the same
Yes Yes 2 2 Yes 10% 15%
2 (variant)
The body is also a Deemed Imported Assembly – brake Assembly has less imported parts and therefore not a Deemed Imported Assembly
Yes No 2 1 Yes 10% 15%
3 In vehicle whose model is self-verified by manufacturer as not using imported parts Deemed Whole Vehicles, but in which the drive-axle assembly becomes Deemed Imported following problems of supplies
Yes Yes 1 3 Yes 10% 15%
3 (variant)
Engine is not Deemed Imported – everything else is the same
Yes Yes 0 3 No 10% None
3 (variant)
Engine is not Deemed Imported, but two other Assemblies are
Yes Yes 0 5 Yes 10% 15%
4 In vehicle found on verification not to use imported parts Deemed Whole Vehicles
Yes Yes 1 2 No 10% None
4 (variant)
The Centre finds that the axle Assembly is still a Deemed Imported Assembly
Yes Yes 1 3 Yes 10% 15%
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
26
Scenario Final use of imported brake cylinder
Used in an Assembly?
Brake Assembly Deemed Imported?
Number of main Assemblies Deemed Imported in the final vehicle
Number of other Assemblies Deemed Imported in the final vehicle*
Imported parts Deemed Whole Vehicles?
Duty charged on import
Additional internal charges paid after import
4 (variant)
Verification determines that another Assembly (e.g., the vehicle chassis) has 61% foreign content
Yes Yes 1 3 Yes 10% 15%
5 In vehicle found on verification to use imported parts Deemed Whole Vehicles
Yes Yes 1 3 Yes 10% 15%
5 (variant)
On re-verification (Announcement 4, Article 12), foreign content of brake Assembly found to be 59%
Yes No 1 2 No 10% None (or refund of 15% paid)
6 In a shipment together with all parts for a whole vehicle (a CKD) – all parts are assembled into a whole vehicle by the vehicle manufacturer
Yes Yes 2 5 Yes 25% None
6 (variant)
All parts for a whole vehicle are imported by a vehicle manufacturer, but are sourced from different suppliers and shipped in at different times
Yes Yes 2 5 Yes 10% 15%
* Including the Brake Assembly, if it is Deemed Imported.
67. As these examples demonstrate, the key factor in determining the amount charged
on an imported auto part is the use to which it is put in China.
H. Impact of the Measures
68. The Chinese vehicle and auto parts market is changing rapidly as a result of a
variety of factors, including increasing vehicle sales, changing consumer
preferences, concerns regarding overcapacity in vehicle production in China, and
corporate strategy of foreign and domestic manufacturers. In the context of these
factors, a review of the present market situation shows that the Measures skew the
choice of manufacturers towards the use of domestic auto parts.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
27
69. On April 1, 2006, a new tax was imposed on cars with engines of 2.0-litre or
larger. The new tax structure imposes charges of between 9 and 20 percent of the
purchase price, while simultaneously cutting the existing tax on cars with engines
smaller than 2.0 litres. This tax added further pricing pressure, forcing
manufacturers to determine whether they could pass along the increased cost to
consumers, or whether to suffer a further diminution in margins. [deleted for
confidentiality reasons]
70. Due to the price-sensitivity of the Chinese market, vehicle and auto part
manufacturers (both foreign and domestic) in many cases would be “priced out” of
the Chinese marketplace in cases where the Measures force them to pass on the
additional 15% internal charges on imported parts to their customers. Due to low
profit margins on vehicle and parts manufacturing in the Chinese automotive
market, neither vehicle nor auto parts manufacturers can absorb the additional
15% internal charge.
71. As a result of the heavy pricing pressures in the existing Chinese market,
manufacturers are forced to maximize domestic content in their parts and vehicles
so as to avoid a finding that a vehicle uses imported parts that are Deemed Whole
Vehicles.
72. In addition, foreign vehicle manufacturers invested in the Chinese marketplace on
the premise that they would be able to import parts as required at the rates to
which China bound itself in its Schedule. Accordingly, the addition of an internal
charge of 15% of the value of imported parts, and the consequent commercial
uncertainty, significantly devalues their investment in China.
73. Even where an imported auto part is commercially superior, a vehicle
manufacturer must secure a minimum amount of domestic substitutes of higher
price or lower quality, in order to avoid the internal charges imposed by the
Measures. If not, it risks significant losses or devaluation of its investment in the
automotive industry.
74. The requirements of vehicle manufacturers imposed in order to avoid additional
internal charges under the Measures introduce difficulties for the auto parts
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
28
manufacturer that must locate a domestic source for such parts. These
requirements also make it less attractive to use imported product otherwise equal
to or better than domestic product, since use of that imported product may cause
the manufacturer to exceed contractual thresholds for domestic content, resulting
in financial penalty.
III. LEGAL ARGUMENT
A. Preliminary considerations
75. In this section the European Communities develops its legal argument in detail.
The European Communities considers that the Measures are inconsistent with a
number of obligations under the agreements on the basis of which the European
Communities has requested the establishment of the Panel.
76. The arguments are presented in the light of the Appellate Body report in EC –
Bananas III, where it considered that the agreements that are more specific to the
matter before the Panel should be considered first. 103 Therefore the claims and
arguments will be presented in the following order:
- the TRIMs Agreement (section B) - Article III of the GATT 1994 (section C) - Article II of the GATT 1994 (section D). - the SCM Agreement (section E).
103 Appellate Body Report, EC – Bananas III, paras 202-204.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
29
B. The Measures are inconsistent with the agreement on Trade Related Investment Measures ("TRIMs") and the terms and conditions of China's accession to the WTO on TRIMs
1. Introduction
77. According to Article 1 of the TRIMs Agreement, the agreement applies to
investment measures related to trade in goods only (referred to in the Agreement
and hereafter as "TRIMs").
78. Article 2 of the TRIMs Agreement is entitled "national treatment and quantitative
restrictions". According to paragraph 1 of Article 2
Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994.
79. Paragraph 2 of Article 2 in turn states that
An illustrative list of TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 is contained in the Annex to this Agreement.
80. Although in Indonesia – Autos the panel considered that "on its face the TRIMs
Agreement is a fully fledged agreement in the WTO system" it is clear that it also
interprets and clarifies the provisions of Article III and Article XI of GATT 1994
where trade-related investment measures are concerned.104 Furthermore, by
concluding the TRIMs Agreement and attaching to it the Illustrative List, the
Members have defined certain trade related investment measures that are per se
inconsistent with Article III:4 or Article XI:1 GATT.
81. In the following sections the European Communities will demonstrate that the
Measures are inconsistent with Article 2 of the TRIMs Agreement in conjunction
with paragraph 1(a) and 2(a) of the Illustrative List. As China has also specifically
undertaken to comply with the TRIMs Agreement in its Protocol of Accession to
104 Panel Report, Indonesia – Autos paras 14.61 and 14.62.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
30
the WTO, the Measures are consequently also inconsistent with its obligations
under the WTO Agreement.
2. The Measures are inconsistent with Article 2 of the TRIMs Agreement in conjunction with paragraph 1 (a) of the Illustrative List annexed thereto
(a) Introduction
82. In Indonesia – Autos, the panel considered that Article 2.1 of the TRIMs
Agreement requires two elements to be shown to establish a violation thereof: first,
the existence of a TRIM; second, that the TRIM is inconsistent with Article III or
Article XI of GATT. The first part of the test requires the fulfilment of two
conditions, namely that the measures are "investment measures" and that they are
"trade-related".105
83. As regards the second element of the test, paragraph 1(a) of the Illustrative List in
the annex to the TRIMs Agreement states that
TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require:
(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.
…..
84. Consequently, it will first be shown that the Measures are "investment measures"
followed by a demonstration that the Measures are "trade-related". Third, the
European Communities will show that the Measures fall squarely within the scope
105 Panel Report, Indonesia – Autos paras 14.67, 14.71 and 14.72. It had been argued before the panel
that any measure that falls within the description of Item 1(a) of the Illustrative List of the TRIMs Agreement constitutes per se a TRIM inconsistent with Article 2 of the TRIMs Agreement. The panel declined to answer this basic question and decided rather to use the general two stage test described above.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
31
of paragraph 1 (a) of the Illustrative List as they require compliance with local
content thresholds to obtain a number of advantages.
(b) The Measures are "investment measures"
85. It should first be demonstrated that the Measures constitute (a) TRIM(s) under
Article 1 of the TRIMs Agreement.106
86. The Automotive Policy Order107 is, as a whole, a measure that aims at encouraging
the development of a local manufacturing capability for finished motor vehicles
and parts and components in China. Throughout the text of this measure reference
is made to the development of the local automotive industry both as regards
complete vehicles and automotive parts. Thus, it is a measure that can generally
affect investment.
87. The following are just illustrative examples of general investment related
provisions in the Automotive Policy Order:
Article 2, last sentence
By 2010, our country is to become a major global automotive manufacturing country, with automotive products that are able to satisfy most of the domestic market's demand and that have entered the international market in large volumes.
Article 4, first and last sentences
Promote structural adjustments and restructuring in the automotive industry, increase enterprises' economies of scale, improve industrial concentration, avoid a dispersed, chaotic, low-grade and redundancy-prone build-up.
….
Nurture a group of relatively strong auto-parts manufacturers to achieve large-scale production such that they are able to participate in the global auto parts supply chain as well as be internationally competitive.
106 Panel Report, Indonesia – Autos, paragraph 14.72. 107 Exhibit JE – 18.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
32
Article 5
The State directs the formulation of the industry’s development planning in accordance with the Policy on Development of the Automotive Industry. The development planning includes medium- and long-term development planning for the industry and development planning for large vehicle manufacturers. Medium- and long-term development planning for the industry are drawn up by the National Development and Reform Commission ("NDRC") jointly with other relevant departments on the basis of widely solicited opinions, and submitted to the State Council for approval and implementation. Large vehicle manufacturers are to formulate the corporation’s proper development planning in conformity with the medium- and long-term development planning for the industry.
Article 6
A corporation with characteristics including unified planning, autonomously developed products, an independent product trademark and brand and an integrated sales and services system management, and of which, moreover, the automotive products produced by its core enterprise and/or wholly-owned subsidiaries, holding companies and Sino-foreign joint venture enterprises have a domestic market share of 15% or more, or whose annual sales revenue from whole vehicles accounts for 15% or more of the entire industry’s annual whole vehicles sales revenue, is entitled, as a “large automotive enterprise corporation”, to draw up and submit the corporation’s development planning independently, for implementation after validation and approval by NDRC.
Article 14
Manufacturers of whole vehicles should in the process of structural adjustment increase their level of specialized production, and gradually transform parts-producing units supplying in-house needs into open market-oriented, independent specialized parts-manufacturers. (Emphasis added)
88. Chapter VIII (Articles 30 to 32) provides for more detailed principles on
automotive parts and related industries whereas Chapter X of the Automotive
Policy Order is specifically entitled "Investment Management".
89. Chapter XI (Article 52 to 60) deals specifically with import management.
According to Article 52
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
33
The State supports the efforts of vehicle manufacturers to increase their domestic production capacity, giving impetus to the technological progress of auto parts manufacturers and to the development of the automotive manufacturing industry. (Emphasis added)
90. Decree 125108 is, according to its preamble an implementing measure under and
adopted in accordance with the Automotive Policy Order. It provides for more
detailed rules in particular for the implementation of the import management
provisions of the Automotive Policy Order. Its contents have already been
described in detail in sections II D.3, E and F above.
91. Announcement 4109 provides for the rules to regulate the procedures for verifying
whether imported automotive parts are Deemed Whole Vehicles. According to its
introductory paragraph, it constitutes a complement to the Administrative
Measures on Importation of Automotive Parts that are Deemed Whole Vehicles.
Its contents have also been described in detail under sections II D.3, E and F
above.
92. The European Communities is of the view that already the brief description of
some of the provisions of the Measures above demonstrates that they are aimed at
encouraging the development of a local manufacturing capability for finished
motor vehicles and parts for motor vehicles in China. Inherent to this objective is
that these Measures necessarily have a significant impact on investment in these
sectors. The whole investment strategy of both local and foreign vehicle and part
manufacturers is governed by the constraints laid down by these Measures. The
European Communities therefore considers that the Measures are "investment
measures" within the meaning of the TRIMs Agreement.
(c) The Measures are "trade-related"
93. The Measures apply and relate only to imported parts. This necessarily means that
they are trade-related.
108 Exhibit JE – 27. 109 Exhibit JE – 28.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
34
94. Furthermore, in Indonesia - Autos, the panel considered that local content
requirements are necessarily "trade-related" because such requirements, by
definition, always favour the use of domestic products over imported products, and
therefore affect trade.110
(d) The Illustrative List
95. An examination of whether the Measures are covered by paragraph 1 (a) of the
Illustrative List, which refers inter alia to measures with local content
requirements, will not only indicate whether they are trade-related but also
whether they are inconsistent with Article III:4 of the GATT and thus in violation
of Article 2.1 of the TRIMs Agreement.111
i) Local content requirements
96. Pursuant to paragraph 1 (a) of the Illustrative List annexed to the TRIMs
Agreement a local content requirement will necessarily be inconsistent with the
obligation of national treatment provided for in paragraph 4 of Article III of GATT
1994. Measures with such requirements will consequently also be inconsistent
with Article 2.1 of the TRIMs Agreement.
97. The precise text of paragraph 1 (a) of the Illustrative List refers to
the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production.
98. The Measures fall squarely within this description. First, the only way not to be
constrained by the procedural and substantive requirements of the Measures is to
ensure that all the parts that make up the complete vehicle model are locally made
in China. A vehicle model 100 % made of Chinese parts will never be subject to
the Measures.
110 Panel Report, Indonesia – Autos, para 14.82. 111 Panel Report, Indonesia – Autos, para 14.83.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
35
99. Second, once parts are imported for the production of a given model and the
measures apply, the imported parts may be "Deemed Whole Vehicles" on the basis
of the substantive criteria laid down in particular under Chapter XI (Articles 52 to
60) of the Automotive Policy Order, Articles 21 to 24 of Decree 125 and Chapter 3
(Articles 13 to 24) of Announcement 4. These criteria have been described in
detail in section II E above.
100. If imported parts are Deemed Whole Vehicles, the Measures impose on them an
additional internal charge of generally 15 %. The automobile manufacturers will
also be subject to additional procedural requirements. The qualification of
"Deemed Whole Vehicles" is directly dependent on the value or amount of
domestic parts used in combination with the imported parts to manufacture the
vehicle.
101. Consequently, the only way to escape the imposition of the additional internal
charge of typically 15 % of the value of the imported parts and the additional
procedural constraints is to guarantee that the vehicle models concerned contain a
sufficient combination, number and/or proportion of locally manufactured parts.
Because of the uncertainties relating to the valuation of the products under the
Measures112, the cumbersome procedures and the complex substantive criteria for
assessing whether the vehicle models contain imported parts that are "Deemed
Whole Vehicles", automobile manufacturers will have to ensure that there is
always a sufficient safety margin between the level of domestic parts incorporated
in the vehicle models and the required level of local content. However, already on
the face of the measures, imported parts must not make up more than 60 % of the
price of the whole vehicle in order not to be subject to the imposition of the
additional internal charge.
102. The automobile manufacturers must therefore ensure that they use domestically
made products in a sufficient combination, number and/or proportion of the parts
that make up the complete vehicle. In reality most, if not all, automobile
manufacturers that use imported parts in the first place will try to ensure that their
112 For instance, there could be a different interpretation about whether certain domestically sourced oils
and liquids should be included in the calculation of domestic content (see Announcement 4, Article 24, which speaks of which oils and liquids can be included in the calculation).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
36
vehicle models are manufactured in a way that in all cases the imposition of the
additional internal charge of typically 15 % is avoided. Otherwise they will simply
not be competitive on the market.
103. Third, the Measures restrict the operational flexibility of the manufacturer in many
ways, which provides further incentives to use local parts instead of imported
parts.
104. Under Article 6 of Announcement 4, an automobile manufacturer that has already
complied with the Measures, but needs subsequently to change the percentage
make-up of imported parts so that they become "Deemed Whole Vehicles", will
have to register the vehicle model as a new model with the attached consequence
of becoming subject to the additional internal charge. Equally, should it be
possible to fit imported optional parts on the basic-model vehicle, such optional
parts will trigger a declaration obligation and re-verification by Customs (Article
20 of Decree 125). All such changes may lead to the imposition of the additional
internal charge.
105. All this has the necessary consequence that the automobile manufacturers will try
to avoid making changes to their models using imported parts.
106. The European Communities is therefore of the view that the Measures require "the
purchase or use by an enterprise of products of domestic origin or from any
domestic source, whether specified in terms of particular products, in terms of
volume or value of products, or in terms of a proportion of volume or value of its
local production" within the meaning of paragraph 1 (a) of the Illustrative List to
the TRIMs Agreement to obtain the advantages described in detail below.
ii) "Compliance with which is necessary to obtain an advantage"
107. The European Communities considers that the Measures fulfil the second criterion
"compliance with which is necessary to obtain an advantage" in the chapeau of
paragraph 1 of the Illustrative List. The Measures provide for a number of
advantages on condition that local parts are used instead of imported parts. These
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
37
advantages can be separated into two categorises namely lower charges on the one
hand and procedural advantages on the other hand.
108. As stated by the Panel in Indonesia – Autos, "the wording of the Illustrative List of
the TRIMs Agreement makes it clear that a simple advantage conditional on the
use of domestic goods is considered to be a violation of Article 2 of the TRIMs
Agreement even if the local content requirement is not binding as such"113.
♦ Lower charges as an advantage
109. As described in detail under section II F.4, if an insufficient amount or value of
domestic parts are used in the assembly and manufacture of the vehicle model,
imported automotive parts will be subject, in addition to the import duty applicable
to the part in question (typically 10 % or less) under the bound tariff rates of
China, to an internal charge equal to the difference between the whole vehicle
import duty (typically 25 %) and the duty applicable to the part or accessory in
question. In the most typical situation, this additional charge amounts to 15 % of
the value of the imported parts.
110. If the manufacturer imports parts for the manufacture of a given vehicle model, the
only way to avoid the imposition of this additional internal charge is to comply
with the local content rules examined above.
111. As already stated by the Panel in Indonesia – Autos, lower tax and duty rates are
clearly "advantages" in the meaning of the chapeau of paragraph 1 of the
Illustrative List.114
112. The European Communities therefore considers that the possibility to avoid the
additional internal charge is clearly an "advantage" within the meaning of the
chapeau of paragraph 1 of the Illustrative List to the TRIMs Agreement.
113 Panel Report, Indonesia – Autos, para 14.90. 114 Panel Report, Indonesia – Autos, para 14.89.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
38
♦ Procedural advantages
113. The Measures provide for three levels of procedural advantages depending on how
the manufacturer complies with them.
114. First, one way of complying with the local content requirements contained in the
Measures would be to only use domestic parts in the manufacture of vehicles. In
addition to the advantage of definitely escaping the additional internal charge, the
cumbersome administrative procedures under the Measures will not be applicable
if only Chinese made parts are used in the manufacture of the vehicle model.
These procedures have been described in detail in the Background section above
(see section II F above).
115. Second, for automobile manufacturers subject to the Measures, the respect of the
local content requirements will entail the advantage of escaping part of the
administrative burden. Indeed, part of the administrative requirements will apply
only when the local content requirements are not fulfilled and the imported parts
are Deemed Whole Vehicles. In such a case, and after self-verification, the
automobile manufacturer will need to register the vehicle model using parts being
Deemed Whole Vehicles (Article 7 of Decree 125) and establish a Customs duty
guarantee (Article 12 of Decree 125) prior to any import and apply for and
undergo verification of the first batch of vehicles produced (Article 19 of Decree
125). Failure to comply with these procedural obligations will lead to the
revocation of the On-Road Motor Vehicle Manufacturer and Product
Announcement for the vehicle model concerned until the manufacturer has
rectified the situation (Article 37 of Decree 125).
116. Third, the Measures impose, in addition to the general registration, self-
verification and review procedures, various additional procedural requirements
that will become applicable if imported parts are used instead of locally made
parts. Indeed, pursuant to Article 20 of Decree 125, if imported parts can
optionally be fitted on the basic model vehicle, the manufacturer must provide the
Customs and the Center with information on the type of optional modifications
and report when optional imported parts are fitted on. There is no such obligation
if the optionally fitted part is domestic. Equally, if the manufacturer wishes to
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
39
introduce changes to the composition of the basic model vehicle by increasing the
number/proportion of imported parts, a new verification process is due. According
to Article 6 of Announcement 4, such changes may require the manufacturer to
register a new vehicle model and go through the entire process of self-verification,
review and verification by Customs etc. If locally made parts are used for the
changes, it may not be necessary to file a new vehicle model but only go through a
new verification. These procedures have been described more in detail above in
section II F.5 above.
117. Such constraints influence in a considerable manner the investment strategy of the
manufacturers and put their operations under a very strict "straight-jacket". This
puts the imported parts in a clear disadvantage as they cannot be used freely in the
development of vehicle models. Furthermore, the manufacturers cannot have
flexible contingency plans in case of shortage of or difficulties with supplies, and
cannot respond to customers' demands to have imported options fitted on the basic
model without considerable administrative and potentially fiscal consequences that
threatens their whole investment strategy in China. By using locally made parts for
any changes to the vehicle model or fitting locally sourced options on the basic
model vehicle, car manufacturers may regain some flexibility in the development
of their models.
118. Such an increased flexibility to modify the composition of the vehicle model and
the possibility to offer customers the choice of fitted options on the basic model
without additional administrative and procedural consequences is a considerable
advantage.
119. Consequently, the European Communities considers that the Measures provide for
various ways to obtain procedural advantages all of which require the purchase or
use by the manufacturer of parts of Chinese origin or from Chinese source within
the meaning of paragraph 1 of the Illustrative List to the TRIMs Agreement. Such
advantages range from the avoidance of all the procedural requirements to various
flexibilities at different stages of the application of the Measures as described
above.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
40
(e) Conclusion
120. The European Communities has demonstrated above that all the elements to find
an inconsistency between the Measures and Article 2 of the TRIMs Agreement, in
conjunction with paragraph 1 (a) of the Illustrative List annexed thereto, are
fulfilled.
3. The Measures are inconsistent with Article 2 of the TRIMs Agreement in conjunction with paragraph 2 (a) of the Illustrative List annexed thereto
(a) Introduction
121. It has been demonstrated above that the Measures are inconsistent with Article 2
of the TRIMs Agreement in conjunction with paragraph 1 (a) of the Illustrative List
annexed thereto.
122. However, the Measures are also inconsistent with Article 2 of the TRIMs
Agreement in conjunction with paragraph 2 (a) of the Illustrative List annexed
thereto.
123. In such an analysis the measures are examined from the point of view of their
impact at the border. In other words, the measures are examined for the purposes
of whether they introduce quantitative restrictions on imports.
(b) The Measures fall squarely within the description in paragraph 2 (a) of the Illustrative List
124. Paragraph 2(a) of the Illustrative List in the annex to the TRIMs Agreement states
that
TRIMs that are inconsistent with the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which restrict:
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
41
(a) the importation by an enterprise of products used in or related to its local production, generally or to an amount related to the volume or value of local production that it exports;
--------.
125. As was already described above in paragraphs 107-119, the effect of the Measures
is to require companies to use automotive parts manufactured in China in order
either to avoid the threat of being subject to the various procedural requirements
under the Measures or, as the case may be, to avoid the imposition of the typically
15 % internal charge and the threat of additional procedural requirements.
126. Such local content requirements have, by definition, considerable effects on the
importation of products used or related to its local production. An automobile
manufacturer that wishes to avoid the stringent administrative procedures of the
Measures, including the loss of flexibility in the development and marketing of the
vehicles it produces, will seek to avoid importing any automotive parts at all.
127. Equally, even if the enterprise wishes or, for technical and/or logistical reasons,
needs to import parts for the assembly and manufacture of vehicles, the Measures
compel it to minimise such imports under the threat of additional charges being
imposed on the imported parts that make up the complete vehicle. The only way to
obtain the advantages of not being subject to additional burdensome procedural
constraints and/or not being subject to an additional internal charge is to generally
restrict the imports of parts used in or related to the manufacturing of vehicles in
China.
128. It has also been demonstrated above (see paras. 85-94) that the Measures are
"investment measures" and that they are also "trade related". In the view of the
European Communities, the Measures fall consequently also within the definition
contained in paragraph 2(a) of the Illustrative List annexed to the TRIMs
Agreement and are therefore inconsistent with paragraph 1 of Article XI GATT
1994. Consequently, they are inconsistent with Article 2 of the TRIMs Agreement
in conjunction with paragraph 2 (a) of the Illustrative List annexed thereto.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
42
4. The Measures are inconsistent with China's obligations under the WTO Agreement, as set out in the Protocol of Accession of the People's Republic of China to the WTO
(a) The terms of China's accession to the WTO
129. According to Article XII:1 of the WTO agreement
Any State or separate customs territory possessing full autonomy in the conduct of its external commercial relations and of the other matters provided for in this Agreement and the Multilateral Trade Agreements may accede to this Agreement, on terms to be agreed between it and the WTO. Such accession shall apply to this Agreement and the Multilateral Trade Agreements annexed thereto. (emphasis added)
130. The terms and conditions of the accession of the People's Republic of China to the
WTO Agreement are set out in the Protocol on the Accession of the People's
Republic of China (hereafter Accession Protocol).115
131. According to Part I, paragraph 1.2 of the Accession Protocol
The WTO Agreement to which China accedes shall be the WTO Agreement as rectified, amended or otherwise modified by such legal instruments as may have entered into force before the date of accession. This Protocol, which shall include the commitments referred to in paragraph 342 of the Working Party Report, shall be an integral part of the WTO Agreement. (emphasis added)
132. According to Part I, paragraph 7.3 of the Accession Protocol
115 Exhibit JE – 1.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
43
China shall, upon accession, comply with the TRIMs Agreement, without recourse to the provisions of Article 5 of the TRIMs Agreement. China shall eliminate and cease to enforce trade and foreign exchange balancing requirements, local content and export or performance requirements made effective through laws, regulations or other measures. Moreover, China will not enforce provisions of contracts imposing such requirements. Without prejudice to the relevant provisions of this Protocol, China shall ensure that the distribution of import licences, quotas, tariff-rate quotas, or any other means of approval for importation, the right of importation or investment by national and sub-national authorities, is not conditioned on: whether competing domestic suppliers of such products exist; or performance requirements of any kind, such as local content, offsets, the transfer of technology, export performance or the conduct of research and development in China. (emphasis added)
133. Paragraph 342 of the Working Party report116 identifies those paragraphs of the
Working Party Report that are incorporated in paragraph 1.2 of the Accession
Protocol. These include paragraph 203, according to which
The representative of China confirmed that upon accession, as set forth in the Draft Protocol, China would comply fully with the TRIMs Agreement, without recourse to Article 5 thereof, and would eliminate foreign-exchange balancing and trade balancing requirements, local content requirements and export performance requirements. Chinese authorities would not enforce the terms of contracts containing such requirements. The allocation, permission or rights for importation and investment would not be conditional upon performance requirements set by national or sub-national authorities, or subject to secondary conditions covering, for example, the conduct of research, the provision of offsets or other forms of industrial compensation including specified types or volumes of business opportunities, the use of local inputs or the transfer of technology. Permission to invest, import licences, quotas and tariff rate quotas would be granted without regard to the existence of competing Chinese domestic suppliers. Consistent with its obligations under the WTO Agreement and the Draft Protocol, the freedom of contract of enterprises would be respected by China. The Working Party took note of this commitment. (emphasis added)
(b) The Measures are inconsistent with the Accession Protocol
134. It has been demonstrated above that the Measures are inconsistent with the TRIMs
Agreement.
116 Exhibit JE – 26.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
44
135. One of the specific conditions of China's accession to the WTO under Article XII
of the WTO agreement was that China complies fully with the TRIMs Agreement,
and that it eliminates and ceases to enforce local content requirements made
effective through laws, regulations or other measures, upon accession.
136. As the European Communities has demonstrated above that the Measures are
inconsistent with the TRIMs Agreement and in particular with Article 2 thereof in
conjunction with paragraphs 1 (a) and 2 (a) of the Illustrative List annexed thereto,
it follows necessarily that the Measures are inconsistent with China's obligations
under the WTO Agreement, as set out in the Accession Protocol, in particular Part
I, paragraph 7.3 of the Accession Protocol, and paragraph 203 of the Working
Party Report on the Accession of China in conjunction with Part I, paragraph 1.2
of the Accession Protocol, and paragraph 342 of the Working Party Report on the
Accession of China.
C. The Measures are inconsistent with Article III of GATT 1994
1. Introduction
137. The European Communities considers that the Measures are inconsistent with
Article III, paragraphs 2, 4 and 5 of the GATT 1994.
138. Although China might present the Measures as aiming to enforce its tariff
schedules, a more detailed examination demonstrates that this is not true. Indeed,
the application of the Measures is triggered by the actual manufacturing process
taking place in China.
139. As explained more in detail above (see sections II D.3 to F.6 and G), whether
imported parts will be subject to the Measures (and the treatment that will
subsequently be applicable) depends on the use to which the parts are put in China.
The Measures apply to imported parts only if they are used "to produce
automobiles for sale on the domestic market" (Article 7 of Decree 125). Also, it is
only once the imported parts have been assembled and processed into a complete
vehicle that the internal charge is imposed if the domestic content is insufficient.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
45
140. If the processing and manufacturing of the products after importation into the
territory of a Member could be generally accepted as an intermediate step before
tariff classification, the whole system of tariff classification would lose its
meaning. Such a conclusion would compromise the object and purpose of the
WTO Agreement, generally, as well as of the GATT 1994 that is, "the security and
predictability of the reciprocal and mutually advantageous arrangements directed
to the substantial reduction of tariffs and other barriers to trade".117 Therefore, the
European Communities considers that in truth the Measures are internal measures.
2. The Measures are inconsistent with Article III:4 GATT 1994
(a) Introduction
141. According to Article III:4 GATT 1994, in relevant part
The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.
142. On the basis of established case law, this provision sets out a three stage test for
assessing the consistency of measures there under. In Korea – Various Measures
on Beef, the Appellate Body considered as follows:
For a violation of Article III:4 to be established, three elements must be satisfied: that the imported and domestic products at issue are "like products"; that the measure at issue is a "law, regulation, or requirement affecting their internal sale, offering for sale, purchase, transportation, distribution, or use"; and that the imported products are accorded "less favourable" treatment than that accorded to like domestic products.118
143. Article III:1 sets out the context of Article III:4. Although the Appellate Body has
considered that a determination of whether there has been a violation of Article
III:4 does not require a separate consideration of whether a measure "afford[s]
117 Appellate Body Report, EC- Chicken cuts, at para 243. 118 Appellate Body Report, Korea – Various Measures on Beef, at para. 133.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
46
protection to domestic production" it lays down the general principle pursued by
that provision.119
144. In the following sections the European Communities will demonstrate that the
Measures are inconsistent with Article III:4 of the GATT 1994. This will be done
following the three staged test established by the Appellate Body in Korea –
Various Measures on Beef. It will thus be demonstrated that all the three elements
are fulfilled i.e. the imported and domestic automobile parts are "like products";
the Measures constitute "laws, regulations or requirements affecting the internal
sale, offering for sale, purchase, transportation, distribution, or use" of the
imported like products and that the imported automobile parts and components are
accorded "less favourable" treatment than that accorded to like domestic products.
(b) The products are "like"
145. In EC – Asbestos, the Appellate Body provided a general framework under which
the likeness of particular products could be examined although it also emphasised
the need to take all pertinent evidence into account in the determination whether
products are "like".120 However, in the present case the Measures themselves treat
the domestic and imported parts and components as "like". The only distinction is
made on the basis of the origin of the products. Their properties, nature and quality
are deemed identical. As considered by the Panel e.g. in India- Autos, the mere
origin of the good cannot make an imported good "unlike" the domestic good.121
146. Consequently, for the purposes of Article III:4, the products in question are "like".
(c) The measures at issue are laws, regulations, or requirements affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of the imported products
147. The Measures are generally applicable laws and regulations. There is no doubt that
all automobile manufacturers that use imported parts for the assembly and
119 Appellate Body Report, EC – Bananas III, at para 216, Appellate Body Report, EC – Asbestos, at
para 93. 120 Appellate Body Report, EC – Asbestos, at para 101.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
47
manufacture of vehicles are obliged to comply with the Measures and that the
Measures influence the decision-making of the automobile manufacturers.122 The
analysis will therefore concentrate on how the Measures affect the internal sale,
offering for sale, purchase, transportation, distribution, or use of the imported
automotive parts.
148. The interpretation of the criterion of "affecting the internal sale etc." is well
established. In GATT case US – Section 337, the panel first referred back to an
early GATT panel report in Italy – Agricultural Machinery that had emphasised
that "the drafters of the Article intended to cover in paragraph 4 not only laws and
regulations, which directly governed the conditions of sale and purchase but also
any laws or regulations which might adversely modify the conditions of
competition between the domestic and imported products on the internal
market".123 Then the panel in US – Section 337 considered that
"…enforcement procedures cannot be separated from the substantive provisions they serve to enforce. If the procedural provisions of internal law were not covered by Article III:4, contracting parties could escape the national treatment standard by enforcing substantive law … through procedures less favourable to imported products than to like products of national origin."124 (emphasis added)
149. The Measures apply only if automotive parts are imported. As described in detail
above (see section F), they impose very strict procedural and administrative rules
on imported parts for the purposes of verifying if they are "Deemed Whole
Vehicles". Only if a vehicle is 100 % "made in China" the manufacturer and the
parts it uses will never be subject to the procedural constraints of the Measures.
150. As described in greater detail under background section II E and the analysis under
the TRIMs Agreement (see section III B), sufficient local content must be ensured
in order to escape the internal charge of 15 % if imported parts are used in the
manufacture of vehicles.
121 Panel Report, India – Autos, at para. 7.174. 122 See e.g. Panel Report, India – Autos, at para. 7.192. 123 GATT Panel Report, Italy – Agricultural Machinery, at para. 12. 124 GATT Panel Report, US – Section 337, at para. 5.10.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
48
151. As described above (see paras. 137-140), many elements thereof apply after the
parts are already used in production and complete vehicles have been made out of
them. In the view of the European Communities, one can only conclude that such
procedures are bound to adversely modify the conditions of competition between
the domestic and imported products on the internal market.
(d) Treatment no less favourable
152. This criterion was examined in clear terms by the panel in GATT case US –
Section 337, where it interpreted "treatment no less favourable" as requiring
"effective equality of competitive opportunities".125 This test has later been
confirmed by the Appellate Body. For instance, in Korea – Various Measures on
Beef the Appellate Body stated that
A formal difference in treatment between imported and like domestic products is thus neither necessary, nor sufficient, to show a violation of Article III:4. Whether or not imported products are treated "less favourably" than like domestic products should be assessed instead by examining whether a measure modifies the conditions of competition in the relevant market to the detriment of imported products.126
153. The European Communities is of the view that the Measures fundamentally
modify the conditions of competition in the Chinese market to the detriment of
imported automotive parts.
154. First, only imported parts may be subject to the additional internal charge.
155. Second, as demonstrated above the use of imported parts will oblige the
automobile manufacturers to comply with very stringent administrative procedures
of registration and verification of the "status" of the parts under the Chinese
legislation. These Measures not only considerably complicate the start of the
manufacturing process, but they also take away most if not all flexibility the
manufacturer has for the development of the vehicle model including any
logistical changes the manufacturer might wish to make to its supplies. The
125 GATT Panel Report, US – Section 337,at para 5.11. 126 Appellate Body Report, Korea – Various Measures on Beef, at para 137.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
49
Measures also act as a considerable obstacle for offering any options on the basic
model of the vehicle if imported parts are used.
156. Therefore, and as demonstrated above under the section on the TRIMs Agreement,
(see section III B), the Measures discriminate against imported parts since
• only imported parts may become subject to the 15 % internal charge; and • only imported parts are subject to additional procedural requirements.
157. This affects drastically the conditions of competition of the imported parts. Indeed,
the investment decision of a company to enter the Chinese market is often, if not
even always, made conditional on making sure that the additional charge will not
be applied. The only way to achieve this result is to use Chinese made parts in
sufficient number, amount and/or combination. To use the words (mutatis
mutandis) of the Panel in India – Autos,
car manufacturers are thus not free to choose to purchase imported parts and components over domestic parts and components in excess of a certain proportion. In these circumstances, imported products cannot compete on an equal footing with Chinese-origin parts and components because the indigenization requirement explicitly sets out the percentage of domestic parts and components that must be used in order to obtain the advantages that complying with the local content rules entail. Such requirements clearly modify the conditions of competition of domestic and imported parts and components in the Chinese market in favour of domestic products.127
158. The European Communities is of the view that by imposing these Measures on
manufacturers that use imported parts, China has failed to accord, to products of
the territory of the European Communities imported into the territory of China,
treatment no less favourable than that accorded to like products of national origin
in respect of all laws, regulations and requirements affecting their internal sale,
offering for sale, purchase, transportation, distribution or use. Consequently, the
Measures are inconsistent with Article III:4 of the GATT 1994.
127 See Panel report, India – Autos, at para 7.201 -7.202.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
50
3. The Measures are inconsistent with Article III:2 of the GATT 1994
159. According to Article III:2,
The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.
160. The European Communities will demonstrate in the following that the Measures
violate Article III:2, first sentence or, in the alternative, Article III:2, second
sentence.
(a) Article III:2, first sentence of the GATT 1994
161. The Appellate Body in Japan – Alcoholic Beverages II spelled out a two-pronged
test for assessing the consistency of measures with Article III:2, first sentence:
Read in their context and in the light of the overall object and purpose of the WTO Agreement, the words of the first sentence require an examination of the conformity of an internal tax measure with Article III by determining, first, whether the taxed imported and domestic products are "like" and, second, whether the taxes applied to the imported products are "in excess of" those applied to the like domestic products. If the imported and domestic products are "like products", and if the taxes applied to the imported products are "in excess of" those applied to the like domestic products, then the measure is inconsistent with Article III:2, first sentence.128
162. As the first sentence of Article III:2 does not specifically invoke Article III:1, the
presence of a protective application within the meaning of Article III:1 need not be
established separately from these two specific requirements included in the first
sentence.129
163. The European Communities will demonstrate below that the Measures are
inconsistent with the first sentence of Article III:2 because imported and domestic
128 Appellate Body report in Japan – Alcoholic Beverages II, p. 18 – 19. 129 Appellate Body report in Japan – Alcoholic Beverages II, p. 18.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
51
auto parts are "like products" and internal charges applied to imported auto parts
are "in excess of" those applied to the like domestic products.
i) The products are "like"
164. As demonstrated above with regard to the determination of "like products" in
Article III:4 (see paras. 145-146), there is no need to compare actually traded
products since the only distinction made in the Measures is on the basis of the
origin of the auto parts.
165. The same considerations apply for Article III:2. The Panel in Indonesia – Autos set
out that there can be circumstances under which the determination of whether
imported and domestic products are "like" within the meaning of Article III:2 does
not require an examination of the characteristics of actually traded products. This
is the case where
[t]he distinction between the products, which results in different levels of taxation, is not based on the products per se, but rather on such factors as the nationality of the producer or the origin of the parts and components contained in the product. As such, an imported product identical in all respects to a domestic product, except for its origin or the origin of its parts and components or other factors not related to the product itself, would be subject to a different level of taxation. (…) In our view, such an origin-based distinction in respect of internal taxes suffices in itself to violate Article III:2, without the need to demonstrate the existence of actually traded like products.130
166. The Measures only apply to imported, and not to domestic auto parts. Imported
auto parts identical in all respects to domestic auto parts, except for their origin,
will – depending on the amount of local content in the assembled vehicle – be
subject to internal charges. Domestic auto parts, identical in all respects to the
imported ones except for their origin, do not fall under the Measures.
167. Consequently, imported and domestic auto parts are to be considered as "like
products" within the meaning of Article III:2, first sentence.
130 Panel in Indonesia – Autos, at paras 14.112 and 14.113.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
52
ii) The internal charges applied to imported products are "in excess of" those applied to like domestic products
168. According to the Appellate Body in Japan – Alcoholic Beverages II, subjecting
imported products to "even the smallest amount of 'excess' [in charges] is too
much" since the "in excess of" requirement is not conditional on a trade effects test
nor qualified by a de minimis standard.131
169. As described in greater detail above (see paras. 57-58), imported auto parts will
be, pursuant to Article 28 of Decree 125, subject to internal charges if they are
assembled into vehicles and qualify as Deemed Whole Vehicles because they meet
one of the three tests set out in Article 21 of Decree 125. These internal charges
typically amount to 15%. Domestic auto parts, identical in all respects to the
imported ones except for their origin, cannot be subject to such internal charges.
170. Therefore, charges applied to imported auto parts are necessarily "in excess of" the
charges applied to like domestic products.
iii) Conclusion
171. The Measures are inconsistent with the first sentence of Article III:2 because they
impose internal charges on imported auto parts in excess of those imposed on like
domestic products.
(b) Article III:2, second sentence of the GATT 1994
172. Should the Panel not find a violation of the first sentence of Article III:2, the
European Communities will, in the alternative, demonstrate below that the
Measures are inconsistent with Article III:2, second sentence which provides:
Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1.
173. Article III:2, second sentence specifically invokes Article III:1 which states in
relevant part:
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
53
The contracting parties recognize that internal taxes and other internal charges, (…), should not be applied to imported or domestic products so as to afford protection to domestic production.
174. Article III:2, second sentence, is accompanied by an Ad Article which clarifies:
A tax conforming to the requirements of the first sentence of paragraph 2 would be considered to be inconsistent with the provisions of the second sentence only in cases where competition was involved between, on the one hand, the taxed product and, on the other hand, a directly competitive or substitutable product which was not similarly taxed.
175. The Appellate Body in Japan – Alcoholic Beverages II held that Article III:2,
second sentence, and the accompanying Ad Article have equivalent legal status
because they were negotiated and agreed at the same time. Consequently, they
must be read together which yields the following three-pronged test:
Giving full meaning to the text and to its context, three separate issues must be addressed to determine whether an internal tax measure is inconsistent with Article III:2, second sentence. These three issues are whether: (1) the imported products and the domestic products are "directly competitive or substitutable products" which are in competition with each other; (2) the directly competitive or substitutable imported and domestic products are "not similarly taxed"; and (3) the dissimilar taxation of the directly competitive or substitutable imported domestic products is "applied ... so as to afford protection to domestic production".132
176. The European Communities will demonstrate below that the Measures fulfil all
three elements of Article III:2, second sentence.
i) The imported and the domestic products are "directly competitive or substitutable"
177. The Appellate Body in Japan – Alcoholic Beverages II held that the category of
"directly competitive or substitutable products" in Article III:2, second sentence is
broader than that of "like products" in the first sentence. The question whether
products are "directly competitive or substitutable" needs to be determined on a
case-by-case basis applying factors such as their physical characteristics, common
131 Appellate Body Report in Japan – Alcoholic Beverages II, p. 23.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
54
end-uses, tariff classifications, or actual examples of substitution in the relevant
markets.133
178. In the present case, however, there is no need to apply these factors to actually
traded products. As demonstrated above, the Measures discriminate between auto
parts on the basis of their origin as either imported or domestic. Any imported auto
part identical in all respects to a domestic auto part, except for its origin, will –
depending on the amount of local content in the assembled vehicle – be subject to
a different level of internal charges.
179. Imported and domestic automobile parts that are identical in all respects, except
for their origin, are necessarily "directly competitive or substitutable".
ii) The directly competitive or substitutable imported and domestic products are "not similarly taxed"
180. According to the Appellate Body in Japan – Alcoholic Beverages II, imported and
domestic products are "not similarly taxed" if the tax burden on imported products
is heavier than on "directly competitive or substitutable" domestic products and
that burden is more than de minimis in any given case.134
181. It was established above that the Measures provide for the imposition of internal
charges on imported, but not on domestic auto parts. Therefore, the burden of
internal charges on imported products is necessarily heavier than on directly
competitive and substitutable domestic products.
182. The differential is also more than de minimis. Whether any particular differential
amount of taxation is de minimis or not must be determined on a case-by-case
basis.135 As set out in further detail above (see paras. 57-58), the internal charges
imposed on imported auto parts that are assembled into vehicles and qualify as
Deemed Whole Vehicles pursuant to Article 21 of Decree 125 typically amount to
15%. Domestic auto parts, which are directly competitive or substitutable, are not
132 Appellate Body Report in Japan – Alcoholic Beverages II, p. 24. 133 Appellate Body Report in Japan – Alcoholic Beverages II, p. 25. 134 Appellate Body Report in Japan – Alcoholic Beverages II, p. 27. 135 Appellate Body Report in Japan – Alcoholic Beverages II, p. 27.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
55
charged under Article 28 of Decree 125. Such a difference in the level of charges
is clearly more than de minimis. Therefore, imported and domestic auto parts are
"not similarly taxed".
iii) The dissimilar taxation of the directly competitive or substitutable imported domestic products is "applied ... so as to afford protection to domestic production"
183. In Japan – Alcoholic Beverages II, the Appellate Body stated that protective
application of a measure can "be discerned from the design, the architecture, and
the revealing structure of a measure" and may also be evidenced by the "very
magnitude of the dissimilar taxation".136 The Panel in Indonesia – Autos concluded
that "the nature of the discrimination, which is to promote a national industry by
giving it advantages vis-à-vis imported products, is clearly designed so as to afford
protection to domestic production".137
184. These factors indicate protective application of the Measures in the present case.
First, the differential in charges between imported and directly competitive or
substitutable domestic products is so much above a de minimis level that this in
itself indicates that it is applied "so as to afford protection". Secondly, the
protective application follows from the very structure of the Measures which is
discrimination in order to promote a national industry by giving it advantages vis-
à-vis imported products. Thirdly, the protective application is even reflected in the
stated goals of the Measures which reveal the intent of the Chinese legislator to
protect domestic production.138
iv) Conclusion
185. It has been established that the Measures are inconsistent with the second sentence
of Article III:2 since they impose dissimilar charges on imported automobile parts
136 Appellate Body Report in Japan – Alcoholic Beverages II, p. 27-29. 137 Panel Report in Indonesia – Autos, at para 14.115. 138 See Article 3 of the Automotive Policy Order ("In 2010 vehicle manufacturers shall have forged a
number of well-known brands in automobile, motorcycle and parts products.") JE-18 and Article 1 of Decree 125 ("The measures are formulated pursuant to the relevant laws and regulations in order to
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
56
and their directly competitive or substitutable domestic products and are, thus,
applied so as to afford protection to domestic production.
4. The Measures are inconsistent with Article III:5 of the GATT 1994
186. Article III:5 provides:
No contracting party shall establish or maintain any internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources. Moreover, no contracting party shall otherwise apply internal quantitative regulations in a manner contrary to the principles set forth in paragraph 1.
187. The European Communities will demonstrate in the following that the Measures
violate Article III:5, first sentence or, in the alternative, Article III:5, second
sentence.
(a) Article III:5, first sentence of GATT 1994
188. Article III:5, first sentence contains three elements. The first element is the
existence of an "internal … regulation". Secondly, the internal regulation must be
"quantitative" in that it is "relating to the mixture, processing or use of products in
specified amounts or proportions". Thirdly, it needs to be established that such a
regulation "requires, directly or indirectly, that any specified amount or proportion
of any product which is the subject of the regulation must be supplied from
domestic sources".
189. As the first sentence of Article III:5 does not specifically invoke Article III:1, the
interpretative principles developed by the Appellate Body in Japan – Alcoholic
Beverages II with regard to Article III:2139 support that a protective application
within the meaning of Article III:1 need not be established separately from the
three specific elements included in the first sentence of Article III:5.
standardize and strengthen the import administration of automotive parts and to stimulate the sound development of the automotive industry.") Exhibit JE – 27.
139 Appellate Body report in Japan – Alcoholic Beverages II, p. 18.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
57
190. The European Communities will demonstrate below that the Measures fulfil all
three elements of Article III:5, first sentence.
i) The Measures are an "internal … regulation"
191. The Measures constitute a "regulation" within the meaning of Article III:5, first
sentence. The term "regulation" refers to "[a] rule prescribed for controlling some
matter, or for the regulating of conduct; an authoritative direction, a standing
rule".140 Its context in Article III:5 ("[n]o contracting party shall establish or
maintain any … regulation …") indicates that it must originate from the authorities
of a WTO Member. The Measures constitute authoritative rules controlling the
administrative and fiscal treatment of imported auto parts and they all originate
from Chinese authorities. The Automotive Policy Order was adopted by the
National Development and Reform Commission. Decree 125 was promulgated by
the General Administration of Customs, the National Development and Reform
Commission, the Ministry of Finance and the Ministry of Commerce.
Announcement 4 was formulated by the General Administration of Customs.
ii) The Measures are "quantitative … relating to the mixture, processing or use of products in specified amounts or proportions"
192. The term "quantitative" means "[p]ertaining to or concerned with quantity or its
measurement" while "quantity" refers to "the portion, amount, or number (of
something) present in a particular instance".141 The requirement "relating to the
mixture, processing and use of products in specified amounts or proportions"
narrows down the group of all possible quantitative regulations to those that
concern the quantity of products when they are mixed, processed or used.
193. The Measures are "quantitative" because they are concerned with the amounts and
portions of domestic or imported auto parts in assembled vehicles and their
assemblies. As auto parts are "products" which are processed and used during the
140 Exhibit JE – 34. 141 Exhibit JE – 34..
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
58
assembly of vehicles, the Measures also relate to the "mixture, processing or use of
products".
194. This follows from Article 21 of Decree 125 which sets out maximum amounts and
proportions of imported auto parts which must not be surpassed when using them
in the assembly of vehicles. Otherwise, the imported auto parts are classified
"Deemed Whole Vehicles". The thresholds in Article 21(2) explicitly refer to
certain amounts of imported assemblies in the vehicle. The threshold in Article
21(3) is based on the proportion of imported parts in the aggregate price of the
vehicle. Article 22 of Decree 125 contains similar quantitative criteria for the use
of imported auto parts in the manufacturing of assemblies and even explicitly
characterises them as "quantity criteria" (in Article 22(2) of Decree 125). If not
respected, these quantity criteria will lead to treat the manufactured assembly as
imported, which may, in turn, lead to imported parts being qualified as Deemed
Whole Vehicles by application of Article 21(2) of Decree 125.
195. It is worth noting that the panel in US – Tobacco characterised the US Domestic
Marketing Assessment (DMA) legislation as a "quantitative" regulation "relating
to the use of a product" because "it set a minimum specified proportion of 75 per
cent for the use of U.S. tobacco in manufacturing cigarettes".142 The Chinese
Measures are very similar to the DMA legislation but for the fact that they relate to
auto parts and vehicle manufacturing instead of tobacco and cigarettes.
iii) The Measures "requir[e], directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources"
196. The Measures also fulfil the third element of Article III:5, first sentence. They
require that specified amounts or proportions of auto parts used in the assembly of
vehicles are not imported and instead of domestic origin. Vehicle manufacturers
have to obtain domestic parts if they want to remain within the thresholds for
maximum amounts or proportions of imported parts set out in Articles 21 and 22
of Decree 125. For example, if they import the engine assembly, they will have to
142 GATT Panel Report in US – Tobacco, at para 67.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
59
use a vehicle body which is not imported or Deemed Imported under Article 22 of
Decree 125, in order to ensure that the vehicle does not contain two imported main
Assemblies (see Article 21(2)(a) of Decree 125). Otherwise, all imported parts
assembled in that vehicle are categorized "Deemed Whole Vehicles" and charged
according to the duty rate for complete vehicles pursuant to Article 28 of Decree
125.
197. The term "requires" in Article III:5, first sentence encompasses situations like in
the present case in which non-compliance with the quantitative local content
provision is not outright prohibited but entails negative financial consequences.
Such an interpretation is, firstly, indicated by the term "indirectly" in Article III:5,
first sentence. Secondly, Article III:5, first sentence would be deprived of any
useful effect if WTO Members were free to enforce their quantitative local content
provisions through the imposition of financial disadvantages. Thirdly, such an
interpretation is supported by the Panel Report in US – Tobacco. The Panel found
that the DMA "required" cigarettes manufacturers to use at least 75% domestic
tobacco because they were otherwise obliged to pay to the US Department of
Agriculture a non-refundable marketing assessment (i.e. an amount based on the
price difference between domestic and imported tobacco) and to purchase certain
amounts of domestic tobacco.143 These are negative financial consequences
comparable to the internal charges which vehicle manufacturers in China face if
they do not comply with the local content provisions of Articles 21 and 22 of
Decree 125.
iv) Conclusion
198. As demonstrated above, the Measures constitute "internal quantitative regulation
relating to the (…) use of products in specified amounts or proportions" and also
"requir[e], directly or indirectly, that any specified amount or proportion of any
product which is the subject of the regulation must be supplied from domestic
sources". Therefore, they are inconsistent with Article III:5, first sentence.
143 GATT Panel Report in US – Tobacco, at para 68.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
60
(b) Article III:5, second sentence of GATT 1994
199. Should the Panel not find a violation of the first sentence of Article III:5, the
European Communities will, in the alternative, demonstrate below that the
Measures are inconsistent with Article III:5, second sentence.
200. Article III:5, second sentence provides:
Moreover, no contracting party shall otherwise apply internal quantitative regulations in a manner contrary to the principles set forth in paragraph 1.
201. Article III:5, second sentence refers to Article III:1 which states in relevant part:
The contracting parties recognize that (…) internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.
202. It has been established above that the Measures constitute "internal quantitative
regulations requiring the mixture, processing or use of products in specified
amounts or proportions".
203. China applies the Measures "so as to afford protection to domestic production". It
was demonstrated above in the context of Article III:2, second sentence, that
China imposes internal charges "so as to afford protection" because, firstly, the
imposed differential in charges was significantly above a de minimis level,
secondly because of the very structure of the Measures which discriminate only on
the basis of the origin of products and, thirdly, for the fact that protectionist intent
is reflected in the stated goals of the Measures. These considerations also apply in
the assessment of the Measures under Article III:5, second sentence and lead to the
conclusion that the Measures are inconsistent with Article III:5, second sentence.
5. The Measures are inconsistent with the WTO Agreement, as set out in the Protocol of Accession of the People's Republic of China to the WTO, in particular Part I, paragraph 7.2 of the protocol of Accession of China
204. The terms of accession of China to the WTO have been examined generally above
under section B.3. In addition to the inconsistency under Part I, paragraph 7.3 of
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
61
the Accession Protocol established above, the European Communities considers
that the Measures are also inconsistent with Part I, paragraph 7.2 of the Accession
Protocol, which states as follows:
In implementing the provisions of Articles III and XI of the GATT 1994 and the Agreement on Agriculture, China shall eliminate and shall not introduce, re-introduce or apply non-tariff measures that cannot be justified under the provisions of the WTO Agreement. For all non-tariff measures, whether or not referred to in Annex 3, that are applied after the date of accession, consistent with the WTO Agreement or this Protocol, China shall allocate and otherwise administer such measures in strict conformity with the provisions of the WTO Agreement, including GATT 1994 and Article XIII thereof, and the Agreement on Import Licensing Procedures, including notification requirements. (emphasis added)
205. As demonstrated above, the Measures are inconsistent with Article III, paragraphs
2, 4 and 5 of the GATT 1994. By adopting the Measures China has introduced non-
tariff measures that cannot be justified under the provisions of the WTO
Agreement. Clearly, China cannot implement Article III of the GATT by
introducing measures that are inconsistent with that provision without violating the
commitments it has taken under the terms of its accession to the WTO.
206. Consequently, China has acted inconsistently with its obligations under the WTO
Agreement as set out in its Accession Protocol, in particular Part I, paragraph 7.2
of the Accession Protocol.
D. Alternatively: The Measures are inconsistent with Article II:1 (a) and (b) of the GATT 1994
1. Introduction
207. As is clear from the foregoing considerations, the European Communities is of the
view that the Measures are inconsistent with the TRIMs Agreement and Article III,
paragraphs 2, 4 and 5 of the GATT 1994, together with various specific
commitments taken by China in relation to these agreements in its Accession
Protocol to the WTO. Consequently, the European Communities considers that
there is no need to address whether the Measures would be inconsistent with
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
62
Article II of the GATT 1994 and advances this claim only for the case that the
Panel dismisses the claims under the TRIMs Agrement and Article III GATT 1994.
208. Therefore, should the Panel not agree that the Measures consist of internal
measures (quod non), the European Communities will demonstrate that the
Measures are inconsistent with Article II:1 (a) and (b) of the GATT 1994.
209. Article II:1 (a) and (b) GATT state respectively as follows:
(a) Each contracting party shall accord to the commerce of the other contracting parties treatment no less favourable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.
(b) The products described in Part I of the Schedule relating to any contracting party, which are the products of territories of other contracting parties, shall, on their importation into the territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth in that Schedule, be exempt from ordinary customs duties in excess of those set forth and provided therein. Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with the importation in excess of those imposed on the date of this Agreement or those directly and mandatorily required to be imposed thereafter by legislation in force in the importing territory on that date.
210. Measures that provide treatment less favourable to the commerce of other
contracting parties than the treatment afforded in the appropriate Schedule and that
impose duties in excess of what is provided for in the appropriate Schedule are
inconsistent with Articles II:1(a) and II:1(b) of the GATT 1994.
211. Article II:1(a) contains a general prohibition against according treatment less
favourable to imports than that provided for in a Member's Schedule. Under the
first sentence of paragraph (b) of Article II:1, the essential obligation is that
ordinary customs duties must not be applied in excess of the bound rates provided
for in a Member's Schedule.
212. It will be demonstrated below that China has failed to accord to the commerce of
the European Communities treatment no less favourable than that provided for in
the appropriate Part of the appropriate Schedule annexed to the GATT. China has
failed to exempt products, which are the products of territories of the European
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
63
Communities on their importation into China's territory, from ordinary customs
duties in excess of those set forth and provided in China's Schedule144.
213. In the alternative, China has failed to exempt such products from all other duties or
charges of any kind imposed on or in connection with the importation in excess of
those imposed on the date of China becoming a Member and bound by the
provision or those directly and mandatorily required to be imposed thereafter by
legislation in force in the importing territory on that date. In other words, even if
the Panel were to find that the additional charge is not properly classified as an
ordinary custom duty, it must necessarily be classified as "other duties or charges"
under the second sentence of Article II:1(b).
2. Description of the Chinese tariff schedule and the relevant bound rates of duty
(a) General considerations
214. China is party to the International Convention on the Harmonized Commodity
Description and Coding System, done at Brussels on 14 June 1983 (the term
Harmonized System is generally abbreviated to HS)145. The HS Convention
entered into force on 1 January 1988. More than 170 countries and customs or
economic unions use the HS nomenclature as the basis for their customs tariffs and
for the collection of international trade statistics.
215. Even if Article 9 of the HS Convention states that "[t]he Contracting Parties do not
assume by this Convention any obligation in relation to rates of Customs duty", it
is nevertheless a fact that tariff negotiations and the results thereof are related to
specific headings in the HS nomenclature. Even if each WTO member has its own
individual Schedule of tariff concessions and the tariff commitments bound for
specific products in those Schedules vary between different WTO Members, the
Appellate Body has stated that “[n]onetheless, it must be borne in mind that,
144 Exhibit JE – 2. 145 Exhibit JE – 35.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
64
during the course of the Uruguay Round, tariff commitments were negotiated on
the basis of the Harmonized System”.146
216. The annex to the Convention comprises the rules for the interpretation of the
Harmonized System (General Rules for the Interpretation of the Harmonized
System - GIR) 147 and the HS nomenclature itself. The titles of Sections, Chapters
and sub-chapters are provided for ease of reference only. What matters in
identifying the correct classification in the nomenclature is the terms of the
headings (of which there are 1221 4-digit codes) and the subheadings (of which
there are 5052 6-digit codes) as well as associated section and chapter notes. To
assist in the task of classification, HS Explanatory Notes have been created. There
are specific rules in the form of Section and Chapter notes which assist in
determining if a product is a part or an accessory or classified as a product in its
own right.
217. It is of paramount importance to underline that when goods are classified in the HS
nomenclature, it is always done on the basis of the objective characteristics of the
product at the time of importation.
218. Chapter 87 of the HS nomenclature and therefore of China's nomenclature is
entitled "Vehicles other than railway or tramway rolling-stock, and parts and
accessories thereof". The products covered by the Measures under dispute mainly
fall within chapter 87, as described below.
(b) Complete vehicles
219. Headings 87.01 to 87.05148 cover the following complete vehicles:
- 87.01 Tractors (other than tractors of heading No. 87.09)
- 87.02 Motor Vehicles for the transport of ten or more persons, including the driver
146 Appellate Body in EC- Customs Classification of Frozen Boneless Chicken Cuts, at para. 262. 147 Appellate Body in EC- Customs Classification of Frozen Boneless Chicken Cuts, at para 233.
General Rules are, by their very nature, rules for interpretation of the Harmonized System. 148 Exhibit JE-2.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
65
- 87.03 Motor Cars and other motor vehicles principally designed for the transport of persons (other than those of heading No 8702), including station wagons and racing cars
- 87.04 Motor Vehicles for the transport of goods
- 87.05 Special purpose motor vehicles, other than those principally designed for the transport of persons or goods (for example, breakdown lorries, crane lorries, fire fighting vehicles, concrete-mixer lorries, road sweeper lorries, spraying lorries etc.)
220. These headings for complete vehicles are then divided into subheadings, both at
the 6 digit HS subheading level and at the 8 digit level in the Chinese tariff
schedule, on the basis of different criteria such as the use of the vehicle, the size of
the vehicle, the type of the engine and the size of the engine.
221. The final bound rate of the Chinese tariff schedule varies, depending on the
specific type of vehicle, between
- 6 and 9 % under heading 87.01 (tractors)
- 6 and 25 % under heading 87.04 (motor vehicles for the transport of goods)
and
- between 3 and 15 % under heading 87.05 (special purpose vehicles).
222. However, with one exception (buses for transport of passengers at airport subject
to a final bound duty rate of 4%), the final bound rate of duty is 25 % for vehicles
of
- heading 87.02 (motor vehicles for the transport of ten or more persons, including the driver and
- heading 87.03 (motor cars and other motor vehicles principally designed for the transport of persons (other than those of heading 8702), including station wagons and racing cars).
223. The vehicles that fall under the Measures subject to this dispute are "motor
vehicles having at least 4 wheels and used for carrying passengers" and "motor
vehicles having at least 4 wheels and used for carrying freight", pursuant to Article
3 of decree 125. These vehicles fall under headings 87.02, 87.03 and 87.04.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
66
224. These three headings consist of 49 subheadings denoting different types of
vehicles. Of these 49 types of vehicles all but one of the types falling under
heading 87.02 (six out of seven "buses"), all falling under 87.03 (32 out of 32
"cars") and two falling under 87.04 (two out of ten "lorries") are subject to a final
bound rate of duty of 25 %. The final bound rate of duty for the remaining vehicles
varies between 4 % (subheading 8702.1020 for buses for transport of passengers at
airport) and 20 % (various lorries under heading 87.04).
225. Hence, most (40 out of 49) of the complete vehicles that fall within the scope of
the Measures are subject to a final bound rate of duty of 25 %.
(c) Intermediate products
226. Headings 87.06 and 87.07149 comprise of "intermediate products", that is, products
which are neither complete motor vehicles nor parts and accessories thereof.
227. Heading 87.06 covers
- chassis fitted with engines, for the motor vehicles of headings Nos. 87.01 to 87.05.
228. In other words, heading 87.06 describes products which combine the chassis (and
the parts that make up the chassis) with an engine (and the parts that make up the
engine). Other parts can be also be fitted on without the product falling outside the
heading. Indeed, products falling under heading 87.06 are "motor vehicles without
bodies"150. The final bound rate of duty in the Chinese tariff schedule under
heading 87.06 varies between 8 and 20 % depending on the type of the vehicle for
which the chassis and the engine is imported prior to manufacturing, assembly and
other processing. With one exception (chassis fitted with engine for manufacturing
of a bus of 30 seats or more) imports of such chassis fitted with engine are subject
to a final bound rate of duty between 8 and 10 %.
229. Similarly, heading 87.07 entitled "bodies (including cabs) for the motor vehicles of
headings Nos. 87.01 to 87.05" consists of complete bodies (including cabs) for the
149 Exhibit JE-2. 150 HS Explanatory Notes on chapter 87. Exhibit JE – 37.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
67
different types of motor vehicles and all the parts that make up the body. In all
cases, bodies are subject to a final bound rate of duty in the Chinese tariff schedule
of 10 %.
230. Consequently, most of the "intermediate products" covered by the Measures are
subject to a duty of 10%.
(d) Parts
231. Heading 87.08 is entitled "parts and accessories of the motor vehicles of headings
Nos. 87.01 to 87.05"151. This heading consists of the different parts and
accessories that make up the complete vehicles of Headings 87.01 to 87.05 with a
few exceptions, such as engines and parts thereof (HS headings 84.07, 84.08,
84.09, 85.01 and 85.03) and accumulators and parts thereof (85.06 and 85.07).152
232. The final bound rate of duty in the Chinese tariff schedule of the different types of
parts and accessories under heading 87.08 varies between 6 and 25 %. However,
in the overwhelming majority of cases for products to be used in vehicles under
headings 87.02 (vehicles for transport of more than 10 persons - buses), 87.03
(vehicles for transport of persons - cars) and 87.04 (vehicles for transport of goods
- lorries), which fall within the scope of the Measures, the final bound rates of duty
of parts and accessories are 10 % or less.
233. For those motor vehicle parts which do not fall under Chapter 87 the final bound
rate of duty in the Chinese tariff schedule (tyres, engines, accumulators and parts
thereof) varies generally between 2 and 10 %.
234. Although it artificially minimises the impact of the Measures, the figure of 10 % is
used in the following analysis as the typical bound rate of duty for vehicle parts.
However, the analysis should be read bearing in mind that in the case of many
parts and accessories, the bound rate of duty is much lower than 10 %.
151 Exhibit JE-2. 152 Ibid.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
68
(e) Conclusion
235. To sum up the structure of the nomenclature of the Chinese tariff schedule, there
are four different general categories of automotive products relevant for this case,
namely
1) complete vehicles (headings 87.01 to 87.05 of which headings 87.02 to 87.04 are most relevant in view of the scope of the Measures; 2) intermediate products such as the body and the chassis with engine (a combination of vehicle elements and/or parts fitted and/or equipped together without being complete vehicles (headings 87.06, 87.07) 3) parts and accessories of Chapter 87 (heading 87.08). 4) parts and accessories of motor vehicles classified elsewhere than Chapter 87 (tyres, engines, accumulators).
236. The difference between the bound rate of duty in the Chinese tariff schedule for
category 1 as compared with category 2, 3 and 4 is fundamentally important:
complete vehicles are generally subject to a duty of 25 % whereas intermediate
products under point 2, and parts and accessories under points 3 and 4 are
generally subject to a bound rate of duty of 10 % or less.
3. The inconsistency of the Measures with Chinese tariff commitments and Article II GATT 1994
(a) Preliminary considerations
237. As is clear from the analysis above the European Communities considers that in
reality these measures are internal measures subject to the scrutiny under the
TRIMs Agreement and Article III of the GATT 1994 and not measures for
enforcing the Chinese tariff schedules.
238. However, for the purposes of an analysis under Article II of the GATT 1994, we
must ignore many of these fundamental considerations and assume that the
Measures are to be examined from the point of view of tariff classification. The
European Communities will demonstrate in the following that even if Article II of
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
69
the GATT would be applicable (quod non), the Measures are inconsistent with that
provision.
239. The established standard for such an analysis is the test under Article 31 of the
Vienna Convention of the Law of the Treaties i.e.
A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
(b) The ordinary meaning of the Chinese tariff schedule
240. According to Article 2 of Decree 125 the Measures apply to the supervision and
administration of imported automotive "parts" that are deemed "whole vehicles".
This conceptual distinction between parts and whole or complete vehicles
corresponds in general terms with the similar distinction under the Chinese tariff
schedules.
241. As described above, the Chinese tariff schedule is based on the Harmonised
System nomenclature. Different products fall into chapters (two digit code
number), headings (four digit code number) and subheadings (six and eight digit
code number).
242. Under the Chinese tariff schedule, motor vehicles and their parts i.e. "vehicles
other than railway or tramway rolling-stock, and parts and accessories thereof" are
classified under chapter 87 of the HS code.
243. It is not disputed that the vehicles that fall under the Measures subject to this
dispute fall, pursuant to Article 3 of Decree 125, under headings 87.02, 87.03 and
87.04. These three headings are entitled
- 87.02 Motor Vehicles for the transport of ten or more persons, including the driver
- 87.03 Motor Cars and other motor vehicles principally designed for the transport of persons (other than those of heading No 8702), including station wagons and racing cars)
- 87.04 Motor Vehicles for the transport of goods
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
70
244. The common nominator under all three headings is "motor vehicle(s)", which are
divided into different headings on the basis of their principal use.
245. The general dictionary meaning of "motor vehicle" is "a road vehicle powered by
an internal-combustion engine"153. It is clear that a "motor vehicle" denotes
complete or whole vehicles. Indeed, the disputed Measures refer to "whole"
vehicles. The general dictionary meaning of "whole" is "complete, total" or
something "not divided into parts; not broken up or cut into pieces; entire"154. For
all practical purposes of this case, the words "whole", "complete" and "not divided
into parts" are therefore synonymous.
246. The general dictionary meaning of a "part" is "portion or division of a whole".155
"Part" is therefore the opposite of "whole" or "complete". For the purposes of this
case, a more specific definition is "any of the manufactured objects that are
assembled together to make a machine or instrument, especially a motor
vehicle"156.
247. A part of a vehicle by definition is a part or a portion or division of a whole or
complete vehicle. There is no logical or semantic basis for considering or
"deeming" an automotive "part" as a complete or "whole vehicle". Indeed, the
whole raison d'être of a part of a motor vehicle is that it will eventually become a
part of a complete vehicle after assembly, fitting, equipping and other processing
and manufacture. Otherwise a part would always remain a part and would not
'fulfil its natural destiny' to become a part of a whole vehicle. A part of a whole
vehicle has no use as such and its only function is to be fitted together with other
parts in order to build a whole vehicle.
248. As the Chinese tariff schedule clearly and unambiguously provides for separate
tariff lines for complete motor vehicles on the one hand, and parts and accessories
of such motor vehicles on the other hand, the classification (or "deeming") of
automotive parts as complete or whole vehicles is, already on the basis of the
ordinary meaning of the terms "whole" or "complete" motor vehicle as compared
153 Exhibit JE – 34. 154 Ibid. 155 Ibid.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
71
with "part" of motor vehicles not only a manifest error but a contradiction in
terms.
(c) Contextual analysis
249. As the contradiction is so manifest, there should in principle be no need for a
detailed examination of the Measures and the Chinese tariff commitments in their
context. i.e. under the other terms of the product description contained under the
relevant headings let alone the broader context of other headings of Chapter 87 of
the Chinese tariff schedule. As China uses the Harmonized System in its tariff
classification, the Harmonized System is also context for the purposes of
interpreting China's tariff commitments.
250. Even when the ordinary meanings of "whole or complete motor vehicles" as
compared with "part(s)" of such vehicles are examined in their context, there is
nothing that supports the view that parts or some parts for motor vehicles could be
classifiable under the relevant headings covering complete motor vehicles. As
described above, "Parts and accessories of the motor vehicles of headings Nos
87.01 to 87.05" are classified under heading 87.08 with the exception of certain
engine parts that fall under chapters 84 and 85.
251. However, there are some very exceptional situations where the general
explanatory note to Chapter 87 of the Harmonized System foresees that an
incomplete or unfinished vehicle may be classified as the corresponding complete
or finished vehicle provided it has the essential character of the latter, as for
example:
(A) A motor vehicle, not yet fitted with the wheels or tyres and battery.
(B) A motor vehicle not equipped with its engine or with its interior fittings.
(C) A bicycle without saddle and tyres.157
156 Ibid. 157 Exhibit JE – 37.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
72
252. Clearly, only the two first examples are relevant for the case. These examples
demonstrate the narrowness of the permissible exceptions. There is no doubt that
these examples refer to a product that must already visually be identifiable as an
almost complete motor vehicle where only some parts are not yet fitted on or the
vehicle is not equipped with some elements. The exceptions are not based on a
distinction between parts and complete vehicles but on how close to a final
complete vehicle a given product is. The degree of the manufacturing i.e. "fitting"
and "equipping" is important.
253. The narrowness of the possibility to classify an incomplete or unfinished vehicle
as the corresponding complete or finished vehicle is even clearer when the general
explanatory note to chapter 87 is read in light of the wording and the structure of
the various relevant headings and their more specific interpretative notes.
254. The different situations where parts can be Deemed Whole Vehicles under Article
21 of Decree 125 should be examined under the relevant tariff headings. This
analysis will begin with Article 21(2)(b) and (c) followed by Article 21(2)(a), then
Article 21(1) and finally Article 21(3).
i) Article 21(2)(b) and (c) of Decree 125
255. As described above, the structure of chapter 87 of the Chinese tariff schedules
consists also of headings 87.06 "Chassis fitted with engines for motor vehicles of
headings Nos. 87.01 to 87.05" and 87.07 "Bodies (including cabs), for the motor
vehicles of headings 87.01 to 87.05" i.e. the intermediate categories between
complete vehicles and parts thereof. These two headings are clearly dealing with
situations where some automotive parts and accessories are already fitted together
with other such parts creating a combination that is destined to be fitted together
with other parts in order to build a complete or whole vehicle.
256. The explanatory note to heading 87.06 is particularly interesting.158 It states as
follows:
158 Exhibit JE – 37.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
73
This heading covers the chassis-frames or the combined chassis-body framework (unibody or monocoque construction), for the motor vehicles of headings 87.01 to 87.05, fitted with their engines and with their transmission and steering gear and axles (with or without wheels). That is to say, goods of this heading are motor vehicles without bodies.
The chassis classified in this heading may, however, be fitted with bonnets (hoods), windscreens (windshields), mudguards, running-boards and dashboards (whether or not equipped with instruments). Chassis also remain classified here whether fitted with tyres, carburettors or batteries or other electrical equipment. However, if the article is a complete or substantially complete tractor or other vehicle it is not covered by this heading.
The heading also excludes:
(a) Chassis fitted with engines and cabs, whether or not the cab is complete (e.g., without seat) (headings 87.02 to 87.04) (see Note 3 to this Chapter).
(b) Chassis not fitted with engines, whether or not equipped with various mechanical parts (heading 87.08).
257. The product foreseen under heading 87.06 is clearly in a very advanced stage of
manufacture. Indeed, as explicitly stated by the note: "goods of this heading are
motor vehicles without bodies". Yet, such goods are explicitly not classifiable as
complete or finished vehicles.
258. "A chassis fitted with engines" falls within the scope of Article 21(2)(b) and (c) of
Decree 125. Indeed, "a chassis fitted with engines" not only consists of one of the
two "main assemblies" i.e. the "engine" but also includes or may include all the
"other assemblies" as defined under Article 4 of Decree 125 i.e. the "chassis
assembly", the "transmission assembly", the "drive-axle assembly", the "non-drive
axle assembly", the "steering system" and the "brake system". As clearly stated
under the interpretative note to heading 87.06, "goods of this heading are motor
vehicles without bodies".
259. The Chinese tariff schedule for tariff line 87.06 provides for a bound rate of duty
of between 8 to 20 % depending on the vehicle type for which the "chassis fitted
with engines" is to be used. The overwhelming majority of the vehicle types that
fall within the scope of the Measures and for which the "chassis fitted with
engines" would be used fall within tariff line 8706.0090 "other". The final bound
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
74
rate of duty for this tariff line is 10 % as of 1 July 2006. In any event, all bound
rates of duty for "chassis fitted with engines" under heading 87.06 are well below
the final bound rate of duty (normally 25 %) for whole/complete vehicles.
260. In other words, the fact that under the Measures "a chassis fitted with engines"
would be deemed a "whole vehicle" and subject to the generally 25 % duty for
complete vehicles is a manifest breach of the bound rates of duty of China under
its tariff schedule and consequently a breach of Article II of the GATT 1994.
ii) Article 21(2)(a) of Decree 125
261. Article 21(2)(a) of Decree 125 in turn covers the situation whereby the two main
assemblies, (the vehicle body and engine), are imported for the purposes of
manufacturing a complete vehicle. In other words, this category under the
contested Measures foresees a situation where the vehicle body and the engine are
imported together or separately but without being fitted together.
262. Such a situation is manifestly far away from the categories foreseen by the
Chinese tariff schedule examined in the light of the general explanatory note to
Chapter 87 whereby an incomplete or unfinished vehicle may be classified as the
corresponding complete or finished vehicle provided it has the essential character
of the latter.
263. Indeed, the Chinese tariff schedules 87.07, 84.07 and 84.08 cover respectively
- Bodies (including cabs), for the motor vehicles of headings Nos. 87.01 to 87.05
- Reciprocating piston engines of a kind used for the propulsion of vehicles of Chapter 87 (see 8407.3100, 8407.3200, 8407.3300, 8407.3410 and 8407.3420) and
- Compression-ignition internal combustion piston engines (diesel or semi-diesel engines) of a kind used for the propulsion of vehicles of Chapter 87 (see 8408.2010 and 8408.2090).159
264. There is no basis in the Chinese tariff schedules or in the notes to the Harmonized
System that would allow imposing a different tariff than specifically indicated
159 Exhibit JE – 2.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
75
under the relevant Chinese tariff lines just because the engine and the body are
imported in order to be manufactured and fitted together. These products, or
"assemblies" under Decree 125, are subject to their own very specific headings of
the Chinese tariff schedule.
265. With the exception of certain kind of diesel or semi-diesel engines, the final bound
rate of duty of bodies and relevant engines is 10 % or less as of 1 July 2006. Under
the Measures, the combined importation of the body and the engine would result in
the imposition of the whole vehicle duty of 25 % on the imported parts.
266. The fact that under the Measures the imported vehicle body and the engine would
be deemed a "whole vehicle" and subject to the generally 25 % duty for complete
vehicles under tariff lines 87.02 to 87.04 is a manifest breach of the bound rates of
duty of China under its tariff schedule and consequently a breach of Article II of
the GATT 1994.
iii) Article 21(1) of Decree 125
267. Another category of products that under the Measures is "deemed" a whole or
complete vehicle is identified under Article 21(1) of Decree 125: "imported
automotive parts are deemed whole vehicles when CKD or SKD kits are imported
to assemble vehicles". On the basis of Article 2 of Decree 125, CKD refers to
Completely Knocked-Down and SKD to Semi Knocked-Down kits. Although the
Measures do not provide for an exhaustive definition of what a CKD or an SKD
consist of, it is assumed that such kits consist of all the parts necessary to
manufacture a vehicle or an "assembly". In other words, such kits consist of all the
necessary parts of a whole product packaged and imported together. The
difference between a complete product and a knocked-down kit is that for a
complete vehicle the process of manufacturing has been completed whereas a kit
provides for the necessary parts in order to manufacture a complete vehicle. A
CKD is a completely unassembled combination of all required parts and a SKD
consists of partially assembled, fitted, equipped and/or processed combinations of
parts that together would make up the complete vehicle after the completion of the
manufacturing process.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
76
268. Under chapter 87 of the Harmonised System, "fitting" and "equipping" are
important criteria of tariff classification. This is illustrated throughout the notes
under the chapter. As cited above, the general notes for the chapter state in
relevant part that "an ….. unfinished vehicle is classified as the corresponding
finished vehicle provided it has the essential character of the latter….., as for
example
(A) A motor vehicle, not yet fitted with the wheels or tyres and battery.
(B) A motor vehicle not equipped with its engine or with its interior fittings
….."160 [emphasis added]
269. Similarly, under headings 87.06 and 87.07 of the Harmonized System "fitting" and
"equipping" are decisive notions for classification.
270. In a completely knocked-down kit nothing or very little is fitted or equipped. A
CKD consists of a complete set of parts that after fitting, equipping and other
processing would make up a complete motor vehicle. There is no basis under the
Chinese tariff schedules or chapter 87 of the Harmonised System that would allow
for a CKD to be deemed or classified a whole vehicle. Indeed, many of the parts
would fall under chapter 84 or even chapter 85. The fact that they are packaged
together with parts that fall under heading 87.08 cannot alter their essential
character and hence tariff classification. They remain parts until they are fitted and
processed together as a complete vehicle.
271. As automotive parts are generally subject to a bound rate of duty of 10 % or less,
the classification as complete vehicles and hence the imposition of the
considerably higher complete vehicle duty on CKDs is inconsistent with the
commitment of China under its tariff schedule and consequently under Article II of
the GATT 1994.
272. With regard to SKDs the situation may, in certain particular circumstances, be
slightly more complex. Assuming, arguendo, that "a chassis fitted with engine"
(subject as such to tariff line 87.06) is packaged together with the vehicle "body"
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
77
(subject as such to tariff line 87.07) for the purposes of importation, it would seem
clear that the package would still consist of two separate products, one classified
under heading 87.06 and the other under 87.07. It is only if these two products are
fitted together that the end result could be classified as a complete vehicle.161
273. SKDs will not attain the necessary degree of fitting and equipping to be classified
as complete vehicles. For instance, engines are subject to specific tariff lines under
headings 84.07 and 84.08 and bodies (including cabs) under 87.07. Even if engines
and bodies, which themselves consist of parts falling as such under tariff line
87.08, would be packaged together with all the other necessary parts for
manufacturing a complete vehicle, the engines, bodies and other parts would
remain subject to their specific tariff lines and therefore not classifiable as
complete vehicles. The reason is simple: the degree of fitting or equipping is not
sufficient to make such SKDs sufficiently similar to a complete vehicle in order to
have "the essential character" of a finished vehicle.
274. It should also be emphasised that in its Accession Protocol China made the
commitment according to which if China created tariff lines for completely
knocked-down kits or semi-knocked down kits for motor vehicles, "the tariff rates
would be no more than 10 per cent."162 This is entirely consistent with SKDs and
CKDs being subject to the relevant tariff rates on vehicle parts as demonstrated
above. For all practical purposes, China has, through the imposition of the whole
vehicle duty on SKDs and CKDs under the Measures, created a disguised tariff
line on such kits and imposed a tariff rate of 25 % i.e. well above 10 per cent.
275. By imposing generally the tariff of complete vehicles on SKDs and CKDs instead
of the lower tariff for the relevant automotive parts and components, China has
acted inconsistently with its obligations under Article II of the GATT 1994.
160 Exhibit JE – 37. 161 See point a) of the Explanatory Note to heading 87.06. Exhibit JE – 37. 162 Paragraph 93 of the Working Party Report, Exhibit JE – 26.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
78
iv) Article 21(3) of Decree 125
276. Finally, the last category of imported parts that the Measures "deem" or classify as
whole vehicles is provided for under Article 21 (3) of Decree 125, which states
that "when the aggregate price of imported parts attains 60 % or more of the
complete vehicle price for the vehicle model in question", imported parts are
deemed whole vehicles.
277. In the light of the analysis made already above, this category does not call for
much further observations. It provides for a criterion, which can not even remotely
be associated with the basic categorisation of products under chapter 87 of the
Chinese tariff schedules and the HS nomenclature. This criterion does not even
attempt to use any technical language to disguise the inconsistency between the
Measures and the Chinese tariff schedules and hence Article II GATT. Imported
parts in any random configuration will be classified as complete or whole vehicles
as long as their aggregate price attains 60 % or more of the complete vehicle price.
By definition, a criterion of 60 % of the aggregate price of the parts not only
means that the parts are not necessarily fitted and/or equipped together but also
means that fundamentally important parts may be missing. This is a manifest
breach of Article II of the GATT 1994 as the full vehicle duty is imposed on
automotive parts that under the Chinese tariff schedules are subject to a tariff of 10
% or less.
(d) Object and purpose
278. The Measures classify parts of products as complete products in a context where
its tariff schedules provide for a clear separation between the products and parts
thereof. The Measures also provide for considerable unpredictability in terms of
when a part of a product is "deemed" to be the complete product and subject to a
much higher tariff. This goes to the very heart of the WTO agreement and the
GATT 1994.
279. The European Communities considers that the Measures fundamentally undermine
the object and purpose of the WTO agreement and the GATT namely "the security
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
79
and predictability of the reciprocal and mutually advantageous arrangements
directed to the substantial reduction of tariffs and other barriers to trade".163
(e) Conclusion
280. As demonstrated above, by applying the tariffs for imported complete vehicles
(generally 25 %) on imported automotive parts (generally subject to a bound rate
of 10 % or less) China has failed to accord to the commerce of the European
Communities treatment no less favourable than that provided for in the appropriate
Part of the appropriate Schedule annexed to the GATT. China has failed to exempt
products, which are the products of territories of the European Communities, on
their importation into China's territory, from ordinary customs duties in excess of
those set forth and provided in China's Schedule. In the alternative, China has
failed to exempt such products from all other duties or charges of any kind
imposed on or in connection with the importation in excess of those imposed on
the date of China becoming a Member or those directly and mandatorily required
to be imposed thereafter by legislation in force in the importing territory on that
date.
281. Consequently, the European Communities considers that the Measures are
inconsistent with Article II:1 (a) and (b) of the GATT 1994.
E. The Measures are inconsistent with Article 3 of the Agreement on Subsidies and Countervailing Measures
1. Introduction
282. The European Communities has demonstrated above that the Chinese Measures
are internal charges. Were they alternatively seen as border charges, they would be
inconsistent with Article II of the GATT 1994. Should the Panel find that the
Measures are border charges and, secondly, that China is entitled to accord to the
imports of auto parts the treatment it provides for vehicles in its Schedule, quod
163 Appellate Body Report, EC – Chicken cuts, at para. 243.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
80
non, then the Measures would in any case be a prohibited subsidy pursuant to
Articles 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing
Measures (hereafter "SCM Agreement") which state as follows
3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within the meaning of Article 1, shall be prohibited:
(…)
(b) subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.
3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1.
283. The European Communities will establish below that the Measures constitute a
financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM
Agreement, confer a benefit within the meaning of Article 1.1(b) of the SCM
Agreement and are contingent upon the use of domestic over imported goods
within the meaning of Article 3.1(b) of the SCM Agreement. Consequently, they
are deemed to be specific pursuant to Article 2.3 of the SCM Agreement.
2. The Measures constitute a subsidy within the meaning of Article 1 of the SCM Agreement
284. Article 1.1 of the SCM Agreement provides in relevant part:
1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as "government"), i.e. where: (…)
(ii) government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits);
(…)
and
(b) a benefit is thereby conferred.
(footnote omitted).
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
81
(a) Financial contribution
285. The Measures constitute a financial contribution within the meaning of Article
1.1(a)(1)(ii) of the SCM Agreement. Article 1.1(a)(1)(ii) states that there is a
financial contribution where “government revenue that is otherwise due is
foregone or not collected (e.g., fiscal incentives such as tax credits).”
286. In United States – FSC, the Appellate Body interpreted this provision in the
following way:
In our view, the "foregoing " of revenue "otherwise due" implies that less revenue has been raised by the government than would have been raised in a different situation, or, that is, "otherwise". Moreover, the word "foregone" suggests that the government has given up an entitlement to raise revenue that it could "otherwise" have raised. This cannot, however, be an entitlement in the abstract, because governments, in theory, could tax all revenues. There must, therefore, be some defined, normative benchmark against which a comparison can be made between the revenue actually raised and the revenue that would have been raised "otherwise".164
287. Thus, the relevant analysis in assessing whether “government revenue that is
otherwise due is foregone or not collected” is to compare the revenues due under
the contested measure and the revenues that would have been raised otherwise
taking into account a normative benchmark governing such comparison.
288. In the present case, the appropriate benchmark for comparison is the revenue that
China raises through duties on imports of auto parts that are Deemed Whole
Vehicles within the meaning of Article 21 of Decree 125. China has established a
duty rate which typically amounts to 25% of the value of the parts. If the local
content requirements of Article 21 of Decree 125 are not satisfied, this duty would
be paid on imports of auto parts. If the imports, on the other hand, satisfy the local
content requirements of Article 21 of Decree 125, China has, in the words of
United States – FSC, "given up an entitlement to raise revenue that it could
'otherwise' have raised"165. More specifically, by charging this second category of
parts imports with duties of generally only 10%, China has ignored the "definitive,
164 Appellate Body report in United States – FSC, at para. 90. 165 Appellate Body report in United States – FSC, at para. 90.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
82
normative benchmark" that it established for the first category of parts imports
and, thus, has forgone "government revenue that is otherwise due".
(b) Benefit
289. The Measures also confer a benefit within the meaning of Article 1.1(b) of the
SCM Agreement.
290. According to the Appellate Body in Canada – Measures Affecting the Export of
Civilian Aircraft, the
word "benefit", as used in Article 1.1(b), implies some kind of comparison. This must be so for there can be no “benefit” to the recipient unless the “financial contribution” makes the recipient “better off” than it would otherwise have been, absent that contribution.166
291. Vehicle manufacturers which satisfy the local content requirements of Article 21
of Decree 125 are financially "better off" than those which do not. They do not
have to pay the higher import duties for parts of typically 25% and are instead only
charged at 10%. They receive a benefit in the amount of the difference between
the two duty rates.
292. Consequently, the Chinese measure constitute a "subsidy" within the meaning of
Article 1.1.(a)(1)(ii) of the SCM Agreement.
3. The subsidy is contingent upon the use of domestic over imported goods
293. According to Article 3.1(b) of the SCM Agreement in conjunction with Article 3.2.
thereof, a Member shall neither grant nor maintain
subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods.
166 Appellate Body report in Canada – Aircraft, at para. 157.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
83
294. In Canada – Autos, the Appellate Body interpreted the word "contingent" in the
following way167
In our discussion of Article 3.1(a) in Section VI of this Report, we recalled that in Canada – Aircraft we stated that "the ordinary connotation of 'contingent' is 'conditional' or 'dependent for its existence on something else'." Thus, a subsidy is prohibited under Article 3.1(a) if it is "conditional" upon export performance, that is, if it is "dependent for its existence on" export performance. In addition, in Canada – Aircraft, we stated that contingency "in law" is demonstrated "on the basis of the words of the relevant legislation, regulation or other legal instrument." (emphasis added) As we have already explained, such conditionality can be derived by necessary implication from the words actually used in the measure. We believe that this legal standard applies not only to "contingency" under Article 3.1(a), but also to "contingency" under Article 3.1(b)of the SCM Agreement. (footnotes omitted)
295. Thus, "contingent" under Article 3.1(b) of the SCM Agreement means
"conditional" or "dependent for its existence on something else" while the
conditionality can be derived by necessary implication from the words actually
used in the measure.
296. Under the Measures, the benefit of the lower duty rate of typically 10% is only
conferred if vehicle manufacturers satisfy the local content requirements of Article
21 of Decree 125. Thus, the Measures contain a clear conditionality.
297. This conditionality also relates to "the use of domestic over imported goods".
Imports of auto parts satisfy the local content requirements of Article 21 of Decree
125 if vehicle manufacturers use sufficient domestic parts instead of imported
parts in order to stay below the relevant local content thresholds.
298. Consequently, the Measures are conditional upon the use of domestic auto parts
over imported auto parts. Therefore, they are also deemed to be specific within the
meaning of Article 2.3 of the SCM Agreement.
167 Appellate Body Report in Canada- Autos, at para. 123.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
84
4. Conclusion
299. As demonstrated above, the Measures constitute subsidies within the meaning of
Article 1.1(a)(1)(ii) of the SCM Agreement and are contingent upon the use of
domestic over imported goods within the meaning of Article 3.1(b) of the SCM
Agreement. Thus, they are prohibited subsidies inconsistent with Article 3 of the
SCM Agreement.
IV. CONCLUSION
300. For the reasons pointed out above the European Communities respectfully requests
the Panel to find that China has violated its WTO obligations.
301. The European Communities considers that
- The Policy on Development of the Automotive Industry, issued on May 21, 2004, by China’s National Development and Reform Commission as Order No. 8;
- “Administrative Measures on Importation of Automotive Parts Deemed Whole Vehicles”, issued as Decree 125 on February 28, 2005 by China’s General Administration of Customs, NDRC, Ministry of Finance, and Ministry of Commerce in accordance with the Automotive Policy Order;
- “Rules for Verifying whether Imported Automotive Parts are Deemed Whole Vehicles”, issued as Public Announcement No. 4 by Customs on March 28, 2005, in accordance with Decree 125.
are contrary to China's obligations pursuant to:
- Article 2 of the TRIMs Agreement in conjunction with paragraph 1(a) and 2(a) of the Illustrative List annexed to the TRIMs Agreement
- Article III, paragraphs 2, 4 and 5 of the GATT 1994
- Article II:1(a) and (b) of the GATT 1994;
- Article 3.1(b) together with Article 3.2 of the SCM Agreement
- The WTO Agreement, as set out in the Accession Protocol of China, in particular Part I, paragraphs 7.2 and 7.3 thereof and in paragraph 203 of the Working Party on the Accession of China in conjunction with Part I,
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
85
paragraph 1.2 of the Accession Protocol, and paragraph 342 of the Working Party Report on the Accession of China.
302. The European Communities requests the Panel to recommend that China bring
these Measures in conformity with its obligations under the corresponding covered
agreements.
303. Furthermore the EC requests the Panel to recommend, pursuant to Article 4.7 of
the SCM Agreement that China withdraw its prohibited subsidies without delay.
The EC respectfully requests that the Panel specify pursuant to Article 4.7 of the
SCM Agreement that the time period for withdrawal be 90 days after the DSB
adopts its recommendations and rulings in this dispute.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
1
TABLE OF JOINT EXHIBITS ("JE") JE-1 WTO, Accession of the People’s Republic of China, Decision of 10 November
2001, WT/L/432, November 23, 2001, online: http://docsonline.wto.org/.
JE-2 WTO, Schedule CLII to the Accession of the People’s Republic of China, WT/L/432, November 23, 2001, at pp. 67, 292-373; online: http://docsonline.wto.org/.
JE-3 Asia Pulse, “Sino-foreign joint ventures top Chinese auto sales in 2006”, January 9, 2007.
JE-4 Global Insight, Global Insight Report: China (Automotive), January 31, 2007.
JE-5 Automotive News/Automotive News Europe (Supplement), 2006 Guide to China’s Auto Market, May 1, 2006.
JE-6 Agence France Presse, “China auto sales seen spreading to smaller cities in 2007”, January 29, 2007.
JE-7 BBC News, “Chinese car market is world No 2”, January 11, 2007, online: http://news.bbc.co.uk/2/hi/business/6252215.stm.
JE-8 Asia Pulse, “China becomes world’s third largest auto producer in 2006”, January 17, 2007.
JE-9 People’s Daily Online, “China stands as world’s 2nd largest auto market,” January 13, 2006, online: http://english.peopledaily.com.cn/200601/13/eng20060113_235259.html.
JE-10 The Economist, “Carmaking in China: The fast and the furious”, November 25, 2006.
JE-11 Shanghai Daily, “China’s car industry on fast track”, December 27, 2006, online: http://en.ce.cn/Industries/Auto/200612/27/t20061227_9907488.shtml.
JE-12 Asia Pulse, “Chinese auto makers race to the bottom”, February 9, 2007.
JE-13 Embassy of China in the United States, People’s Daily, “China becomes world’s 2nd largest auto market”, January 16, 2006, online http://www.china-embassy.org/eng/gyzg/t231212.htm.
JE-14 Ernst & Young, China’s Automotive Sector – At the Crossroads, 2005.
JE-15 Reuters, “China to introduce permits for auto exports”, January 3, 2007.
JE-16 Industry Week, “China plans to up auto parts exports by ten fold” (Agence France Press), November 21, 2006, online: http://www.industryweek.com/ReadArticle.aspx?ArticleID=13111.
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
2
JE-17 Agence France Presse, “Auto defects up in China amid price war”, November 20, 2006.
JE-18 The Policy on Development of the Automotive Industry (Order No. 8), May 21, 2004, NDRC.
JE-19 KPMG, China Automotive and Components Market 2005, November 2005.
JE-20 KPMG, Automotive and Components Market in Asia, March 2005.
JE-21 Morgan Stanley, Chinese Auto Market: Reading the Tea Leaves, February 17, 2004, online: www.uscc.gov/hearings/2004hearings/written_testimonies/04_09_23wrts/stephen_girsky.pdf .
JE-22 Booz Allen Hamilton, The Road Ahead: China’s Passenger Vehicle Market in 2015, March 2006, online: http://www.boozallen.com/publications/article/1672938.
JE-23 Automotive News/Automotive News Europe (Supplement), Guide to China’s Auto Market, May 2, 2005.
JE-24 Formal Policy on Development of Automotive Industry, February 19, 1994.
JE-25 Dic Lo, Market and Institutional Regulation in Chinese Industrialization, 1978-94 (New York: St. Martin’s Press, 1997), at p. 189.
JE-26 WTO, Report of the Working Party on the Accession of China, WT/ACC/CHN/49, October 1, 2001, online: http://docsonline.wto.org/.
JE-27 Decree 125, “Administrative Measures on Importation of Automotive Parts Deemed Whole Vehicles”, issued February 28, 2005 jointly by China’s General Administration of Customs, NDRC, Ministry of Finance and Ministry of Commerce in accordance with the Automotive Policy Order, effective April 1, 2005.
JE-28 Public Announcement No. 4, “Rules for Verifying whether Imported Automotive Parts are Deemed Whole Vehicles”, issued March 28, 2005 by China’s General Administration of Customs in accordance with Decree 125.
JE-29 Customs General Administration Joint Bulletin No. 38, July 5, 2006.
JE-30 “Classification of Power-Driven Vehicles and Trailers”, General Administration of Quality Supervision, Inspection and Quarantine, National Standard GB/T 15089-2001).
JE-31 “Procedures on Customs Control over Bonded Areas”, approved by the PRC State Council June 10, 1997, promulgated by Customs on August 1, 1997.
JE-32 Order No. 105 of Customs, “Provisions of the Customs of the People’s Republic of China on the Administration of Bonded Warehouses and the
China – Measures affecting imports of automobile parts First Written Submission WT/DS 339 by the European Communities ______________________________________________________________________
3
Goods Stored Therein”, promulgated December 5, 2003 , effective February 1, 2004.
JE-33 Order No. 63 of the PRC President, “Law of the People’s Republic of China on Administrative Penalty”, promulgated March 17, 1996, effective October 1, 1996.
JE-34 Shorter Oxford English Dictionary, 5th ed. (Oxford: Oxford University Press, 2002), at pp. 1841, 2105, 2106, 2427, 2516, 2542 and 3633.
JE-35 World Customs Organization, International Convention on the Harmonized Commodity Description and Coding System, as amended by the Protocol of Amendment , June 24, 1986, entered into force January 1, 1988.
JE-36 World Customs Organization, Fact Sheet, “The Harmonized System: The Language of International Trade”, online: http://www.wcoomd.org/ie/En/AboutUs/aboutus.html.
JE-37 Harmonized Commodity Description and Coding System – Explanatory Notes, 4th ed. (2007), Vol. 5, Chapter 87, “Vehicles other than railway or tramway rolling-stock, and parts and accessories thereof”.