Trade Relations (Spring 2014) (Tuesday).Team 3 (Auto Parts)

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Dispute Settlement Case Study Prepared for ITRN603by Geraldine Govea, Daniel Hernandez, and

Victor Duncan



Contents

Case History and Context

The Main WTO Issue

Positions of Involved Parties

Panel/AB Decisions/Recommendations

Implementations

Our Dispute Observations Time for Comments and Questions



DS340 Case Origins

Under normal circumstances, auto firms would expectto pay a lower tariff at the point of entry for importedauto parts than they would for complete vehicles.

If an automobile produced in China was comprised of

at least 60% imported parts, the imported partsbecame reclassified as “complete vehicles”. Because “complete vehicles” were charged higher

tariff rates a the point of entry, producers were thensubject to a post-entry charge for imported parts as if

they were “complete vehicles”. The measures enacted were seen by some exporters

to be inconsistent with China’s WTO obligations.





Case History: Proceedings

January 12, 2009: DSB adopted ABreport

February 11, 2009: China informed DSB

of its intention to conform



Political & Business Context

China joined WTO in 2001

China’s government initiated measuresto protect domestic auto parts

manufactures

The U.S., along with other parties, madethe case that China’s measures were

inconsistent with WTO obligations



Politics of China’s Auto Industry

Company Ownership

Dongfeng Motor State

FAW Group State

SAIC Motor State

Chang’an StateBAIC Auto State

Jianghuai (JAC) State

Brilliance Auto State

BYD Private

Chery Private

Geely Private

Great Wall Private



Politics of U.S./Canada/EC Auto Industries

Foreign auto makers dominate China’smarket

Taken from Wall Street Journal (online.wsj.com)



Statistical information on case findings

https://www.fas.org/sgp/crs/row/R43071.pdf



Statistical information cont.

Prior to 2006, Chinese vehicle imports have alwaysbeen greater or at par with its exports.

Between 2006-2008, China’s vehicle exportsincreased dramatically, which can be associated toadditional internal charges added at customs in

China. 2006 was when the United States began complaints

against China in the WTO. In 2009 China declared that it had brought its

measures into conformity with the DSB

recommendations and rulings. Graph supports theclaim and shows that since 2009, Chineseautomobile imports have increased beyond itsexports.

https://www.fas.org/sgp/crs/row/R43071.pdf





Principal issues continued

GATT Article XI: General Elimination of QuantitativeRestrictions

No prohibitions or restrictions other than duties, taxes or othercharges, whether made effective through quotas, import orexport licenses or other measures, shall be instituted ormaintained by any contracting party on the importation of anyproduct of the territory of any other contracting party or on theexportation or sale for export of any product destined for theterritory of any other contracting party.



Principal issues continued

TRIMS agreement on Quantitative Measures

(Article II)

Without prejudice to other rights and obligations underGATT 1994, no Member shall apply any TRIM that is

inconsistent with the provisions of Article III or Article XI ofGATT 1994.

An illustrative list of TRIMs that are inconsistent with theobligation of national treatment provided for in paragraph4 of Article III of GATT 1994 and the obligation of general

elimination of quantitative restrictions provided for inparagraph 1 of Article XI of GATT 1994 is contained in the

Annex to this Agreement



Decree of the People’sRepublic of China , No. 125

Decree 125 establishes a uniform system fordetermining whether an automobile’s shipmentof parts should be classified as either a “semi-knocked down kit” or a “complete-knockeddown kit”.

Article 21(1) of Decree 125 provides:

Imported automobile parts shall be

characterized as complete vehicles if one ofthe following applies:

(1) imports of CKD or SKD kits for the purposeof assembling vehicles.



Decree 125 continued Under Decree 125, the duty on a part is assessed

following assembly and production, rather than directlyupon importation (cf. Arts. 7, 11, 27-35).

The level of the duty on imported parts thus depends on

their final assembly into a completed vehicle in China. Ifthe imported parts will be incorporated in a car, which,pursuant to Decree 125, does not have sufficient localcontent, the imported parts will be subject to customsduties that are normally payable on a completely built upimported car (cf. Decree 125, Arts. 21 and 22); the finalduty on the parts is only assessed after their assemblyinto entire automobiles (cf. Art 28); whether a part bearsthe features of a complete vehicle is determined after theparts have been assembled (cf. Art 5).



Decree 125 continued

The charges are applicable primarily to automobilemanufacturers, rather than the importers ofspecific auto parts.

Manufacturers are responsible for the payment ofduties even if the parts were purchased in thedomestic market from the suppliers that previouslyimported them (cf. Decree 125, Arts. 27-35).



Decree 125 continued

Verification by customs authorities at the site of themanufacturer (cf. Decree 125, Arts. 17-20) occursfollowing assembly and production. When viewedin combination with the other elements listed here

it certainly confirms the internal character of themeasures.

Finally, duties are levied according to how

imported auto parts are incorporated in domesticproduction (cf. Decree 125, Arts. 21-24).



The contested issue of U.S.

Complaint by the United States (WT/DS340).

On 30 March 2006, the European Communitiesand the United States, and on 13 April 2006,

Canada, requested consultations withChina regarding China's imposition of measuresthat adversely affect exports of automobile partsfrom the European Communities, the UnitedStates and Canada to China.

Third Parties: Argentina; Australia; Brazil; Japan;Mexico; Chinese Taipei; Thailand

Th ifi WTO t



The specific WTO agreementand specific provisions

involved. GATT 1994: Art. II, II:1, III, III:2, III:4, III:5, XI:1

Subsidies and Countervailing Measures: Art. 3,3.1(b), 3.2

Trade-Related Investment Measures (TRIMs): Art.2, 2.1

Protocol of Accession: Part I, para. 1.2, Part I,para. 7.2, Part I, para. 7.3

Th i t f th t t d

http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm

http://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm


http://www.wto.org/english/docs_e/legal_e/18-trims_e.htm










The consistency of the contestednational act with WTO

obligations. We find that the United States’ claims are

consistent with WTO obligations, mainly, theprincipal on National Treatment (GATT Art. II,

III, and XI).

WTO’s Appellate Body dutifully agrees withChina’s inconsistency in practicing WTOobligations and recommended that the DSBrequest China to bring its measures, found inthis Report, and in the US Panel Report asmodified by this Report, to be inconsistent withthe GATT 1994, into conformity with itsobligations under that Agreement (254).



China’s Stance Harmonized System (HS)

China argues that although the Harmonized system is not formally a part of theMarrakesh Agreement Establishing the WTO, it is closely linked to it and provides therules and classification of parts which are absent from the GATT 1994

HS provides the decision-making rules for resolving a wide variety of classificationissues

HS section GIR (a) 2 specifies that an unassembled or disassembled article isclassified as the complete article instead of its component parts

The charge under the measures (Policy Order 8, Decree 125, and Announcement 4) isbased on a valid application of GIR (a) 2 to multiple shipments of parts andcomponents that are linked to each other through their common assembly into thesame motor vehicle

Using this classification, the charge is seen as an ordinary customs duty since it isbased on a proper determination of the product that is subject to the duty assessment

Consistency of the measures with Article III: 4 of the GATT 1994

On this point, China argues that any influence auto manufacturers have on usingdomestic over imported auto parts derives solely from the structure of bound rates inChina’s Schedule of Concessions that creates an incentive for automobilemanufacturers to assemble vehicles in China from imported parts and componentsthat, in their entirety, do not have the “essential character” of a motor vehicle under GIR2 (a)



The European Communities’ Argument Argument: Under China’s measures, imported auto

parts that are used in the manufacture of vehicles forsale in China are subject to charges equal to thetariffs for complete vehicles, if they are imported inexcess of certain thresholds

The measures are specifically inconsistent with thefollowing: Articles II:1 (a), II:1 (b), III:2, III:4, III:5 of the GATT

1994 Articles 2.1 and 2.2 of the TRIMS Agreement

Article 3 of the SCM Agreement China’s obligations under its Accession Protocol



The Argument Brought Forth bythe United States Argument: The measures introduced by

China appear to penalize manufacturers forusing imported auto parts in themanufacture of vehicles for sale in China

The measures are inconsistent with thefollowing legal texts:

Article 2 of TRIMs Agreement

GATT 1994 Articles II and III SCM Agreement Article 3

The Protocol of Accession





The Panel’sRecommendation Separated its findings in the form of a single document containing three

separate reports for the European Communities, the United States, andCanada respectively

Three common elements among all three countries:a) Regarding imported auto parts in general: Policy Order 8, Decree 125,

and Announcement 4 are inconsistent and unjustifiedb) In the alternative, assuming that the measures fall within the scope of

the first sentence of Article II: I (b) of the GATT 1994, the measuresare not justified and are inconsistent with Articles II and XX of theGATT 1994

c) With respect to CKD and SKD kits; Policy Order 8, Decree 125, and Announcement 4 are not inconsistent with Article II:1 (b) of the GATT1994

-The mentioned measures were also found to be inconsistent with

China’s commitment under paragraph 93 of China’s Working Party Report Recommendation: The Panel recommends that the Dispute

Settlement Body (DSU) bequest China to these inconsistent measuresas listed above into conformity with its obligations under the GATT1994 and the WTO Agreement



The Appellate Body’s Decision

Through the issuing of a single documentconsisting of three reports, the Appellate Body(AB) made the following recommendation forthe European Communities, the United States,

and Canada: A recommendation that the DSB request

China to bring its measures, found in theAB December 15, 2008 Report and in the

panel reports as modified in the AB report,to be inconsistent with the GATT 1994, intoconformity with its obligations under theGATT 1994



Implementation Timeline &Procedures February 11, 2009 China informed the DSB at the DSB Meeting that it intended to implement

the DSB rulings and needed an adequate amount of time to do so. February 27, 2009

The European Communities, the United States, and Canada informed theDSB that the appropriate amount of time is 7 months and 20 days, with amaximum expiration date of September 1, 2009

August 31, 2009 China informed the DSB that on August 15, 2009 both its Ministry of

Industry and Information Technology and National Development and ReformCommission had issued a joint decree to stop the implementation ofrelevant provisions concerning the importation of auto parts in the

Automobile Industry Development Policy On August 28, 2009 the General Administration on Customs and relevant

agencies had declared a joint decree to repeal Decree 125 Seeing as all these new decrees would come into effect on September

1, 2009 China declared that it had brought its measures intoconformity with the DSB recommendations and rulings



Observations: InternationalConsiderations Third Parties: Japan, Australia, Mexico, Chinese Taipei, Thailand, Argentina, and Brazil Argentina Sided with the complainants that the measures are not justified under Article XX of the

GATT 1994 Japan Had a substantial trade interest as a result of being one of the major trading partners of

China in the automobile sector Mexico As an automobile parts producer, Mexico participated as a third party due to its trade

interest in the case Australia Substantial trade and commercial interests due to increasing volume of trade between

Australia and China (exports to China increased from AUD 70 million in 2004 to AUD284 million in 2005)

Brazil Raised certain questions such as: how should the Panel characterize China’s Policy

Order 8, Decree 125, and Announcement 4 as a matter of WTO Law?





Questions?



Sources USTR report on Obama’s challenge to China on this case: http://www.ustr.gov/about-

us/press-office/press-releases/2012/september/obama-administration-challenges-china-auto-subsidies

Canada-China Business Council article: http://www.ccbc.com/zh-hant/research-reports-2/sectoral-research/canada-china-relationship/

European Commission Trade Market Access Database:

http://madb.europa.eu/madb/statistical.htm?from=form&format=0&ahscode1=8708000000&cb_reporters=EU27&cb_partners=0720&list_years=2012&list_years=2011&list_years=2010&cb_measures=iv&cb_measures=iq&cb_measures=ev&cb_measures=eq&cb_ measures=isq&cb_measures=esq&submit=Search

GATT 1994, TRIMS, Protocol of Accession

WTO Dispute Settlement File for DS340:

http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds340_e.htm Dispute Summary Report to the Panel, including all annexes Report to the Appellate Body

Documents

Trade Relations (Spring 2014) (Tuesday).Team 3 (Auto Parts)