WORLD TRADE  
ORGANIZATION  WT/DS339/R/Add.1 
WT/DS340/R/Add.1 
WT/DS342/R/Add.1 
18 July 2008 
 
 (08-3276) 
 Original:   English 
 
 
 
 
  
  
CHINA – MEASURES AFFECTING IMPORTS OF 
AUTOMOBILE PARTS 
 
 
Reports of the Panel 
 
 
Addendum  
  
 This addendum contains Annex A to the Repor ts of the Panel to be found in documents 
WT/DS339/R, WT/DS340/R and WT/DS342/R. Annexes B, C, D and E can be found in Add.2.   WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-1 
  
  ANNEX A 
 
RESPONSES AND COMMENTS OF PARTIES TO QUESTIONS FROM THE PANEL 
 
CONTENTS PAGE 
Annex A-1 Responses and Comments of Parties to Questions from the Panel 
following the First Substantive Meeting  A-2 
Annex A-2 Responses and Comments of Parties to Questions from the Panel 
following the Second Substantive Meeting  A-176 
Annex A-3 Responses and Comments of Parties to an Additional Question from 
the Panel 6 August 2007 A-360 
Annex A-4 Response of China to a Question from the United States following  
the Second Substantive Meeting  A-371 
 
 
 WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
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  ANNEX A-1 
 
RESPONSES AND COMMENTS OF PARTIES TO QUESTIONS FROM THE PANEL 
FOLLOWING THE FIRST SUBSTANTIVE MEETING  
  
A. M
EASURES AT ISSUE AND PRODUCTS AT ISSUE  
1. In respect of the criteria set out in Articles 21 and 22 of Decree 125: 
 
(a) (China)  Could China elaborate on the rationale behind these specific criteria.  Response of China 
 1. The rationale behind these specific criteria is to specify the groups of imported auto parts and 
components that China considers to have the essen tial character of a motor vehicle under General 
Interpretative Rule 2(a).  
(b) (All parties)  Are these types of criteria commonly used as standards by customs offices 
in determining whether parts and components of a product should be considered as a complete product? 
 
Response of China 
 
2. As discussed in response to question 117, th ere are a variety of factors that customs 
authorities consider in evaluating whether an incomp lete or unfinished article (whether assembled or 
unassembled) has the essential character of the comp lete article.  The types of criteria set forth in 
Articles 21 and 22 are consistent with these factors.   
Response of the European Communities (WT/DS339) 
 
3. The European Communities is not aware of any other WTO member using the same or 
similar criteria and such criteria are certainly not used by the EC.  
4. Leaving aside that China is using the criteria intern ally within China, the use of the criteria in 
tariff classification would lead to a violation of Article II GATT as they do not respect the HS nomenclature (in particular rule 1 of the general ru les for the interpretation of the Harmonized System 
and, to the extent rule 2(a) is relevant, the "as presented" and "essential character" criteria there 
under). 
5. The only circumstances in which parts could be classified as the complete article could be in 
the context of certain knocked down kits, but th at would require a case-by-case analysis. In this 
respect reference is made to the reply to question 47. 
Response of the United States (WT/DS340) 
 
6. The criteria set out in Articles 21 and 22 of D ecree 125 are not the types of criteria commonly 
used as standards by customs o fficials in determining whether parts and components of a product 
should be considered as a complete product.  The United States follows the long-standing principle 
that goods should be classified based on its condition as entered, regardless of what occurs to the 
goods after entry.  US Customs officials apply General Interpretative Rule (GIR) 1 and classify  WT/DS339/R/Add.1 
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  merchandise in accordance with the terms of the headings and the relevant section and chapter notes.  
When components and parts of a motor vehicle are entered, US Customs officials will determine whether they meet the terms of a particular head ing.  For example, a vehicle body is specifically 
described by the terms of heading 87.07, which pr ovide for: "Bodies (incl uding cabs), for the motor 
vehicles of headings 87.01 to 87.05".  A gasoline e ngine is specifically described by the terms of 
heading 84.07, which provide for: "Spark-ignition reciprocating or rotary internal combustion piston 
engine".   
7. In situations where a finished good is entere d unassembled (e.g., a complete kit to make 1 
good), the United States will classify the imported good that is unassembled as if it were complete 
under General Interpretative Rule 2(a).  In situati ons where incomplete or unfinished merchandise is 
imported, US Customs authorities will examine the merchandise as presented at the time of 
importation to determine whether the incomple te or unfinished merchandise has the essential 
character of the complete or finished good.  For example, see General Explanatory Note to Chapter 87 
(JE-37). 
Response of Canada (WT/DS342) 
 
8. No. Canadian customs officials perform assessme nts on a case-by-case basis of those parts as 
presented together at the border. They do not base th eir classification of those parts on a formula that 
is linked to the number of imported assemblies, much  less the percentage of imported volume or value 
of parts used in imported assemblies. This is partic ularly the case with vehicles since they consist of a 
great number of individual parts, including assemblies and sub-assemblies. 
Comments by the United States on China's response to question 1(b) 
9. In its response, China refers to its response to  the Panel's question 117.  However, the factors 
that China relies on as justification for classifying the different combinations of auto parts and 
components is in contradiction to the terms of th e Harmonized System and the proper application of 
the General Interpretative Rules.  As demonstrat ed in the US Response to question 47, customs 
officials cannot group some assemblies together and claim that they have the essential character of a 
complete motor vehicle.  For example, a single component (e.g., diesel engine sub-assembly A or sub-assembly B as described in Exhibit CHI-3) entered is classified under the terms of a heading that 
describes that component (e.g., heading 8409).  If a group of components are entered together (e.g., 
diesel engine sub-assembly A and sub-assembly B as described in Exhibit CHI-3) that may form an 
assembly (e.g., a complete diesel engine), the Un ited States would classify it under the heading that 
describes that assembly (e.g., heading 8408).  If a gr oup of components do not form an assembly, they 
are individually classified (e.g., a crankshaft and side panel would not constitute an assembly and 
would be individually classified).  None of the assemblies listed in Exhibit CHI-3 ever constitutes 
incomplete or unfinished motor vehicles within th e meaning of General Interpretative Rule 2(a); 
instead, they would be individually classified in accordance with the terms of General Interpretative 
Rule 1 (e.g., spark-ignition reciprocating or rota ry internal combustion piston engines of heading 
84.07, transmission shafts of heading 84.83, chass is fitted with engines of heading 87.06, bodies 
(including cabs) of heading 87.07).   WT/DS339/R/Add.1 
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  2. ( China )  What were China's bound and applied tariff rates for "CKD and SKD kits", 
"motor vehicles" and "auto parts" prior to Ch ina's accession to the WTO and at the time of 
China's accession to the WTO?  
 
Response of China 
 
10. Prior to China's accession to the WTO, there were no bound tariff rate for "CKD and SKD 
kits," "motor vehicles" and "auto parts". 
11. In 2001, immediately prior to China's accession to the WTO, the average applied tariff rate 
for "motor vehicles" was 63.6%, and the average app lied tariff rate for "auto parts" was 24.7%.  There 
were no separate tariff lines for "CKD and SKD ki ts" in China's Tariff Code.  CKD and SKD kits 
were classified as complete vehicles according to GIR 2(a) and the applied rates were identical to the 
tariff rates applicable to the corresponding complete vehicle model. 
12. In 2002, at the time of China's accession to th e WTO, the average bound tariff rate for "motor 
vehicles" was 49.4%, and the average bound tariff rate for "auto parts" was 20.4%.  Again, there were no separate tariff lines for "CKD and SKD kits" in Chin a's Tariff Code, and these were classified as 
motor vehicles in accordan ce with GIR 2(a).  In 2002, the average applied tariff rate for "motor 
vehicles" was 42.2%, and the average applied tariff ra te for "auto parts" was 18.1%.  These details can 
be summarized as follows: 
 Complete Vehicle CKD/SKD Kits Parts 
2001 Bound Rate None None None 
2001 Applied MFN Rate 63.6% 63.6% 24.7% 
2002 Bound Rate 49.4% 49.4% 20.4% 
2002 Applied MFN Rate 42.2% 42.2% 18.1% 
 Comments by the United States on China's response to question 2 
13. In its response, China explained that immediately prior to its accession to the WTO on 
11 December 2001, "the average applied tariff rate for 'motor vehicles' was 63.6%, and the average 
applied tariff rate for 'auto parts' was 24.7%.  There were no separate tariff lines for 'CKD and SKD 
kits' in China's Tariff Code.  CKD and SKD kits we re classified as complete vehicles according to 
GIR 2(a) and the applied rates were identical to  the tariff rates applicable to the corresponding 
complete vehicle model."  While the United States does not dispute China's statements regarding the applied tariff rates for motor vehicles, it does dis pute China's explanation regarding parts and CKD 
and SKD kits as being both inaccurate and incomplete. 
14. From 1992 to 1995, China did maintain separate tariff lines for CKDs and SKDs.  As China's 
exhibit CHI-30 shows, these tariff lines established ta riff rates that were the same as the scheduled 
tariff rates applicable to motor vehicles.  However,  China normally did not apply these rates.  Instead, 
the applicable rate for CKDs a nd SKDs was negotiated between an individual auto manufacturer and 
the Chinese authorities.  The key factors in this negotiation were the amount of the auto 
manufacturer's investment in China and the extent to which the auto manufacturer used local content 
in the assembly of its vehicles, both at the time of the negotiation and under the auto manufacturer's 
future plans.  Normally, an auto manufacturer wi th a larger amount of investment and a larger 
percentage of local content would be able to ne gotiate a lower tariff rate than would an auto 
manufacturer with a smaller amount of investment and a smaller percentage of local content.   
Particularly for the auto manufacturers that th e Chinese authorities viewed as committed to China 
based on these factors, the negotiated tariff rates for CKDs and SKDs were substantially below the  WT/DS339/R/Add.1 
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  tariff rates for motor vehicles.  In addition, th e Chinese authorities would normally apply the same 
negotiated tariff rates to parts, as the negotiated tari ff rates were often also below the tariff rates for 
parts set forth in China's tariff schedule. 
15. After 1995, China eliminated the tariff lin es for CKDs and SKDs, as China's response 
reflects.  However, contrary to Ch ina's assertions, China even then did not apply tariff rates for CKDs 
and SKDs that were the same as the scheduled ta riff rates applicable to motor vehicles.  China 
continued to apply tariff rates for CKDs and SKDs  (and parts) that were negotiated between an 
individual auto manufacturer and the Chinese author ities, just as it had in the period from 1992 to 
1995.   
16. These same tariff practices continued through the time of China's accession to the WTO and 
post-accession until China began to implement the measures at issue in this dispute. 
17. From 1992 until the implementation of the measures at issue in this dispute, China pursued 
these tariff practices because it was focused on bui lding up its capacity for the local assembly of 
motor vehicles, and it did not have sufficient domestic  manufacturers of auto parts to supply domestic 
auto manufacturers.  China therefore welcomed an d encouraged imports of CKDs and SKDs (and 
parts) that could be assembled into motor vehicles in  China, particularly by auto manufacturers that 
demonstrated a commitment to China.   
18. China's policy of encouraging imports of C KDs and SKDs (and parts) that could be 
assembled into motor vehicles locally  was facilitated by China's policy of maintaining import quotas 
on motor vehicles.  In this regard, China mainta ined import quotas on vehicles prior to its accession to 
the WTO in 2001, and it negotiated the right to maintain import quotas on motor vehicles for three years after its accession, i.e., until 1 January 2005, as reflected in Part I, pa ragraph 7.1, and Annex 3 
of China's Protocol of Accession, as explaine d more fully below under question 14(b).   
19. China's tariff practices relating to CKDs a nd SKDs (and parts) during the period from 1992 
until China's accession to the WTO at the end of 2001 help to explain w hy paragraph 93 of the 
Working Party Report accompanying China's Protocol  of Accession reads the way it does.  As the 
panel will recall, paragraph 93 provides:   
In response to questions about the tariff treatment for kits for motor vehicles, the 
representative of China confirmed that China had no tariff lines for completely 
knocked-down kits for motor vehicles or se mi-knocked down kits for motor vehicles.  
If China created such tariff lines, the tariff rates would be no more than 10 per cent. 
20. When negotiating this provision in the year s leading up to China's WTO accession, WTO 
Members, including the United States, knew that China had separate tariff lines for CKDs and SKDs that scheduled tariff rates that were the same as  those for motor vehicles from 1992 to 1995, and that 
China eliminated these tariff lines effective 1 Ja nuary 1996.  WTO Members also knew that the 
Chinese authorities had nevertheless been applying substantially lower tariff rates for CKDs and 
SKDs (and parts) than for motor vehicles, both wh en China had separate tariff lines for CKDs and 
SKDs and when it did not.  In negotiating paragrap h 93, therefore, WTO Members wanted to ensure 
that China would continue to treat CKDs and SKDs essentially as parts for tariff purposes after 
acceding to the WTO and that China would be unable to re-establish separate tariff lines for CKDs and SKDs, at higher rates, if its policy focus cha nged as its domestic auto industry evolved.     
3. (All parties)   Do automobile manufacturers themselv es also assemble or manufacture the 
so-called "assemblies" listed in Article 4 of  Decree 125?  If so, how common is this in the WT/DS339/R/Add.1 
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  automobile industry in general or in the Ch inese automobile industry?  Is there a clear 
distinction between automobile ma nufacturers and parts manufacturers? 
Response of China 
 21. It is a common practice in China for automobile manufacturers to assemble some or all of the 
assemblies listed in Article 4 of Decree 125.  For inst ance, a majority of auto manufacturers in China 
produce the body assembly by themselves.  Many auto manufacturers in China have their own 
assembly lines for engines and transmissions. 
22. Auto manufacturers and part manufacturers, however, are distinct in some respects.  First, 
auto parts manufacturers normally focus on one particular type or series of parts, while auto manufacturers focus on the overall assembly of the ve hicle.  Second, auto manufacturers are normally 
in a position to articulate and define the parameters of parts and their quality standards, which must be 
met by their auto part suppliers. 
23. The complainants have stated, and China agr ees, that the auto parts industry is highly 
fragmented in China.
1  This makes most of the part suppliers  dependent, legally or  financially, on one 
auto manufacturer.  All top auto manufacturers in Ch ina have stable and long-term supply chains for 
auto parts, as well as complex corporate structur es in which many of the necessary auto parts are 
produced by subsidiaries and joint ventures.  This  feature, as China understands it, is common in 
Asian auto industries. 
Response of the European Communities (WT/DS339) 
 
24. The answer as to whether automobile manufacturers themselves also assemble or manufacture 
the so-called "assemblies" listed in Article 4 of  Decree 125 depends on the business strategy of each 
manufacturer.  However, the European Communities unders tands that in the most typical situations at 
least some elements of the "assemblies" would be manufactured by the manufacturer of the complete 
vehicle.  This concerns in particular the vehicle body,  which is an element of a vehicle that is usually 
separate for each model.  In contrast, for exampl e the steering system and the brake system are 
typically assembled and manufactured by suppliers and sold to the vehicle manufacturer.  However, there are no general rules that apply to all manufacturers and all models. 
25. There is no difference between the automobile industry in general and the Chinese automobile 
industry with the very important exception of the way in which the contested measures affect the 
strategy of vehicle and parts manufacturers in Chin a.  As explained by the European Communities in 
its first written submission the Chinese measures fo rce vehicle manufacturers to depart from their 
normal business strategies in the rest of the world (in particular paragraphs 68 to 74).  The measures 
require in all situations that the vehicles contain a certain proportion or combination of locally made 
parts and components (or "assemblies").  If th e necessary local content is not ensured, the 
manufacturer will be obliged to pay the 25 % duty on all imported parts, which due to very small 
profit margins will mean that the given model will not be competitive in the Chinese market. 
26. With regard to the distinction between vehicle manufacturers and parts manufacturers the 
answer again depends on the specific context.  Sometimes parts manufacturers may belong to the 
same industrial group as the vehicle manufacturers but more often the parts manufacturers are 
independent and provide parts to many different vehicle manufacturers. Indeed, there are far more 
                                                     
 
1 Canada's first written submission, para.17; EC's first written submissions, para.18; US's first written 
submission, para.21.  WT/DS339/R/Add.1 
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  parts manufacturers than vehicle manufacturers. Of c ourse, due to constant changes in the industry a 
part manufacturer may become part of the same  group as the vehicle manufacturer and vice versa. 
Mergers and acquisitions are an every day phenome non in most industries.  However, it is also 
important to underline that a vehicle manufacturer often acts as the supplier of a given part or 
"assembly" to another vehicle manufacturer. Even comp etitors in the same market may co-operate in 
the context of certain vehicle models. All of this depends on the strategy of the manufacturers.  The 
Chinese measures seriously compromise the ability of the foreign industry to choose the most 
efficient business strategies in the Chinese market. 
Response of the United States (WT/DS340) 
 
27. Automobile manufacturers commonly assemble within their own operations and facilities at 
least a few of the listed assembly operations.  For example, most automobile manufacturers assemble the body, whether from stampings provided by a s upplier, stampings they make themselves, or a 
combination of both.  Engine assembly is also a common operation for automobile manufacturers.  
The same holds true for chassis assembly, assuming that  chassis means what is also referred to as the 
"frame".  It is extremely common, if not univer sal, that automobile manufacturers perform one or 
more of the listed assembly operations, although  they may not all perform the same ones or 
combinations thereof.   
28. With respect to the listed assembly operations , a clear distinction cannot be made between 
automobile and parts manufacturers. 
Response of Canada (WT/DS342) 
 
29. Manufacturers sometimes prepare the "assem blies" listed in Decree 125, as do parts 
manufacturers.  This is relatively common both in ge neral and in China, to the extent that commonly 
understood commercial practices are not affected by the measures.  That not ed, even where vehicle 
manufacturers do produce particular assemblies, many of the key parts in such assemblies used in 
China come from so-called "Tier 1" suppliers. Ther e is a commercial distinction between automobile 
manufacturers (which usually control not only th e manufacturing and final assembly of a whole 
vehicle, but also its design, marketing and branding)  and parts manufacturers (whether Tier 1, 2 or 3). 
Tier 1 parts manufacturers may engage in value- added activities related to the parts that they 
manufacture (such as research and development), wh ich activities used to be carried out solely by 
vehicle manufacturers. Commercial practice may evolve in respect of which company produces parts and which company processes or assembles them. However, automobile manufactures and parts manufacturers remain distinguished by the "b rand". Auto manufacturers produce vehicles under 
different brands with which cons umers are familiar; parts manufacturers produce parts, components or 
modules used in the vehicles and do not have their own vehicle brands. 
4. ( China )  Could China please explain the "Public Bulletin" referred to in Article 7 of 
Decree 125, including what purpose it serves, wh ether all automobile manufacturers in China 
have to apply for it and what is the reason fo r having "Characterized as Complete Vehicle" 
marked on the Bulletin for auto parts falling under this scope. 
 
Response of China 
 
30. Being listed in the Public Bulletin is requi red for auto manufacturers to produce and sell 
motor vehicles and for consumers to register and us e motor vehicles in China.  A vehicle model can 
be listed in the Public Bulletin only if it satisfies a ll requirements in respect of various regulations that 
apply to motor vehicles.  Listing a vehicle model' s registration status under Decree 125 is simply one WT/DS339/R/Add.1 
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  of the regulatory characteristics of the model that is disclosed in the Public Bulletin.  This disclosure 
aids customs officials and others in the automotive industry by designating the customs status of that 
vehicle model, including the customs status of parts and components that are imported for its 
assembly.   
5. ( China )  Please clarify, by referring to the relevant provisions of the measures at issue, 
when the decision of whether certain imported au to parts should be characterized as complete 
vehicles is made.   
 
Response of China 
 
31. This determination is made by reference to specific vehicle models, prior to the importation of 
the parts that the manufacturer will import to assemb le that vehicle model.  The overall purpose of 
this process is to determine whether, to assemble that vehicle model, the auto manufacturer imports 
multiple shipments of parts and components that have the essential character of a motor vehicle. 
32. The process begins with the manufacturer's self-evaluation under Article 7 of Decree 125.  If 
the manufacturer determines as a result of the self-evaluation that a particular vehicle model meets one or more of the thresholds for characterizing parts as having the essential character of a motor vehicle, as specified in Article 21 of Decree 125, it  must register that vehicle model with the CGA 
prior to the importation of parts for that vehicle model (Art. 7).  It must also file a registration 
statement with the CGA for that vehicle model (Art. 9).  The manufacturer's determination, whatever 
the result, is subject to review and verificati on under Chapter IV of Decree 125 (Art. 17-18).   
33. Once the manufacturer has registered a particular vehicle model in accordance with Article 9, 
it must provide an import duty bond to the CGA ba sed on its projection of monthly average imports 
for that vehicle model (Art. 12).  Thereafter, th e manufacturer must import parts for that vehicle 
model separately from other auto parts, and must decl are the imported parts as parts of a registered 
vehicle model (Art. 14-15).  These parts enter China in bond and remain under customs control 
(Art. 16, Art. 27).  Parts that are imported for the assembly of other vehicle models are declared as parts (Art. 35).   
34. The manufacturer must pay the duty when th e imported auto parts are assembled into 
complete vehicles (Art. 28).  The automobile manufact urer is required to declare duty payment on the 
tenth working day of each month based on the number  of registered vehicle models that it assembled 
in the prior month (Art. 31).   
35. If the assembled vehicle is one that has been veri fied as meeting one or more of the thresholds 
of Article 21, the CGA classifies the imported auto pa rts in that vehicle model as a motor vehicle, just 
as it would have had the imported auto parts entered China in a single shipment (Art. 28).  If the 
assembled vehicle is one that has been verified as not meeting one or more of the thresholds of 
Article 21, the CGA classifies the imported auto part s in that vehicle model as parts (Art. 28) – again, 
just as it would have had the imported auto parts entered China in a single shipment.
2 
                                                      
2 The only exceptions to these cla ssifications are if: (1) the classifi cation of a previously registered 
vehicle model changes between the entry of the parts into China and their assembly into a complete vehicle, in 
which event the manufacturer may declare those imported parts for which it has not yet paid duty under the 
relevant tariff provisions for parts (Art . 32); or (2) the imported parts are not assembled into a complete vehicle 
within a period of one year  after entry, in which event the imported parts are assessed at the duty rate for parts 
(Art. 29).  As China explained during the first substan tive meeting, the first exception provides an element of  WT/DS339/R/Add.1 
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  36. The effect of this system is that the determin ation of whether imported auto parts should be 
classified as a motor vehicle is made prior to the importation of the parts, based on the self-evaluation 
and verification process described above.  It is this  self-evaluation and verification process that gives 
rise to the declaration that is made at the time of  importation and the obligation to provide an import 
bond for these entries.   
6. ( China )  What is the purpose of requiring both self-evaluation by automobile 
manufacturers and verification by the Verification Center? 
 
Response of China 
 
37. The purpose of the self-evaluation is for auto mobile manufacturers to review each vehicle 
model in relation to the requirements of Decree 125 a nd to produce a report that details the status of 
each vehicle model in relation to those requirements.  This self-evaluation report is then verified to 
confirm that the information provided by the auto  manufacturer is genuine, complete, and accurate. 
7. ( China )  In respect of tariff classification  practice by China's customs office: 
 (a) Is there a system in China under which an importer can appeal the customs office's decision on the tariff classification of imported auto parts or other imported products.  If so, 
please explain; 
 
Response of China 
 
38. Article 64 of the Regulation on Import/Export Tariff provides that: 
A duty payer or a security provider shall pa y the duties and may apply for a review to 
the customs office at an immediate upper level according to relevant laws if [it] 
disagrees with the customs on designation as a duty payer, determination of dutiable prices, merchandise classification, origin, applicable tariff rate or exchange rate, duty reduction or duty exemption, supplement of unpaid duty, duty refund, late charges, 
method of duty calculation, and place of duty collection.  In case [the duty payer or the security provider] disputes the review conclusion, [it] may file a case to the court 
according to relevant laws. 
 Pursuant to this provision, an importer can a ppeal the tariff classification of imported auto 
parts in Chinese courts.  The courts can find that  the CGA determination is not in accordance with 
Chinese law and can direct a remand to  the agency for reconsideration. 
 (b) Please indicate whether there is any existing or pending court and/or administrative decisions in respect of the application of any of the provisions of the measures.  If so, please explain in detail; and 
 
                                                                                                                                                                    
 
flexibility to the manufacturer in acknowledging that th e sourcing of parts and assemblies for a particular 
vehicle model could change, while the second exception serves to bring finality to the customs process. WT/DS339/R/Add.1 
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  Response of China 
 
39. There are no such administrative reviews or court appeals pending in relation to the 
application of the challenged measures.   
(c) In this connection, also clarify whether the NDRC is authorized to provide its own 
interpretations of the provisions of Decree 125 and Announcement 4 in light of Article 78 of 
Policy Order 8.  If so, has NDRC issued any int erpretations of the provisions of the challenged 
measures? 
 
Response of China 
 
40. The NDRC is not authorized to provide its ow n interpretations or explanations of the 
provisions of Decree 125 and Announcement 4 under Ar ticle 78 of Policy Orde r 8, and the NDRC has 
not done so. 
8. (Complainants ) Please explain whether, and if so, to what extent, the procedural 
requirements under the measures affect the aver age period necessary for the assembly of a 
vehicle.  Response of the European Communities (WT/DS339) 
 41. It is important to put this question into its prope r context.  The consider able complexity of the 
measures in itself affects the launching of a new model in the Chinese mark et.  The bottom line for 
most manufacturers is that they must avoid the 25 % duty since otherwise it will simply not be commercially worthwhile to even begin the ad ministrative procedure under the measures.  The 
conception and launching of a new model can thus be  delayed by 2-3 years, as vehicle manufacturers 
will have to look for domestic supp liers able to provide the require d proportion of domestic parts or 
assemblies, and test their reliability.  Establishing th e self-verification report required by Article 7 of 
Decree 125 may take an additional six months for a team of 10-15 highly sk illed experts.  After a 
manufacturer decides to begin the procedures fo r introducing a new model, which it believes and 
hopes to be subject only to the 10 % duty as regards imported parts, it can in reality take up to one 
year before all the procedures are finalised.  The m easures thus also results in having to launch in a 
context of legal uncertainty that may persis t for months and sometimes even for years. 
42. At the stage of the assembly operations, the measures impose a considerable administrative 
burden and, as a consequence, additional costs.  It should be emphasised that 30% to 35% of parts are 
common to different models.  For a vehicle manufacturer, the most efficient way is to ship parts 
together and use them depending on the production needs which may easily vary from the initial plan.  
There may be a need to increase the production of a specific model as a result of sales higher than 
anticipated; there may be a need to replace urgently  deficient parts.  Because China's measures impose 
to declare for which model the parts will be  imported (Article 15 of Decree 125), vehicle 
manufacturers have to unnecessarily define in deta il for which model each part is imported.  The 
flexibility required for an economically sound management of parts supply is taken away. 
Response of the United States (WT/DS340) 
 
43. As the United States explained in paragraphs 46-66  and 99-104 of its first submission, China's 
measure impose burdensome procedural requireme nts on manufacturers who use imported parts, 
while any manufacturers who use only domestic parts are excused from these burdensome 
requirements.  This difference accords less favorable treatment to imported parts as compared to like  WT/DS339/R/Add.1 
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  domestic parts, and results in a prima facie  violation of Article III:4.  China has not even attempted to 
rebut this prima facie  case.   
44. Information on the average period of delay resulting from China's measures was not an 
element of the United States' prima facie  case on this issue, and the United States does not have such 
information readily available.  
Response of Canada (WT/DS342) 
 
45. It is not possible to describe, as a general ru le, the effect that the measures have on the 
average period necessary to assemble a vehicle.  The overall effect will vary based upon, e.g., the web 
of suppliers and the particular sourcing (both dome stic and imported) of parts.  The most significant 
delay results from a combination of the proce dural and substantive requirements:  vehicle 
manufacturers need to ensure that the domestic content in their vehicles is well over the 40% 
minimum requirements in order to avoid charg es under the measures, keeping in mind possible 
differences in valuation of imported content.  For so me models, this can result in significant delays in 
beginning production (in the order of many months).  This is so as to find domestic suppliers to 
guarantee sufficient domestic content, thereby gi ving the vehicle manufacturer comfort that the 
number of Deemed Imported Assemblies will remain below the required threshold in the event of 
differences in the valuation of certain parts. 
9. ( All parties )  Assuming that a country can have an anti-circumvention policy in the 
context of ordinary customs duties, how much fl exibility should a country have in introducing 
measures to enforce such a policy? 
 
Response of China 
 
46. The issue of circumvention in this case is one of ensuring the proper tariff classification of 
imports and thereby preventing the evasion of higher duty rates that apply to motor vehicles.  China 
considers that the challenged measures implement and enforce an interpretation of its tariff provisions 
for "motor vehicles" that is consistent with th e interpretative rules of the Harmonized System.  A 
Member's ability to adopt measures to interpret its  tariff schedule in accordance with the rules of 
Harmonized System is co-extensive with those ru les; any such measure must comport with the 
requirements of the Harmonized System. 
47. To illustrate the point, it may be helpful to use an example that is not relevant to the present 
dispute.  General Interpretative Rule 3 addresse s the circumstance in which goods are prime facie 
classifiable under two or more headings, and provides a set of rules to resolve this conflict.  Under 
GIR 3(a), "the heading which provides the most spec ific description shall be preferred to headings 
providing a more general description."  Suppose that a Member adopted a measure to advise importers 
as to which headings it considered to be "prima faci e classifiable under two or more headings," and, in 
those cases, to advise importers as to which headings  it considered to be "the most specific".   
48. This measure would affect how the Member classifies certain articles.  It could result in tariff 
classifications and determinations of duty liabil ity with which importers disagree on the facts of 
specific cases.  But from the st andpoint of evaluating the consistency of the measure with the 
Member's WTO obligations, including Article II of  the GATT 1994, the relevant inquiry would be 
whether the measure results in classifications consiste nt with the HS terms employed in that Member's 
tariff schedule.  Any assessment of such classification determinations would need to consider whether 
the results are consistent with the requirements of GIR 3(a), including, as may be pertinent, any 
interpretations of GIR 3(a) adopted by the WCO.   Thus, the measure could not result in tariff WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-12 
  
  classifications, and determinations of duty liability, that were manifestly inconsistent with GIR 3(a) 
(e.g., by identifying articles that ar e not "prima facie classifiable under two or more headings," or by 
applying the "more general description" over "the most  specific").  This is, in relevant respect, the 
degree of flexibility that a Member has in adoptin g measures to interpret its Schedule of Concessions 
in accordance with the rules of the Harmonized System.   
Response of the European Communities (WT/DS339) 
 
49. Since a county's tariff schedule has to be interp reted in the light of the Harmonized System, 
any "flexibility" must be in accordance with HS nomen clature and its rules. To the extent the question 
refers to Article XX(d) of the GATT, the "flexib ility" must comply with the requirements of that 
provision and in particular be necessary to secure compliance with laws or regulations which are not inconsistent with the GATT and fulfil the criteria laid down in the chapeau  of Article XX. 
Response of the United States (WT/DS340) 
 50. The United States cannot accept the assumption – ad vocated by China in this dispute – that it 
amounts to "circumvention" when automobile manuf acturers use normal channels of trade to source 
bulk shipments of parts for assembly purposes.  As th e United States has explained, China's attempt to 
analogize all auto manufacturing operations as the assembly of separately organized and shipped "knock down kits" is baseless, and ignores the r eality of modern manufacturing operations.   
51. Moreover, the United States does not otherwise know what China means by "circumvention" 
with respect to the application of customs laws.  The United States follows the long-standing principle 
that goods should be classified based on its condition as entered, regardless of what occurs to the 
goods after entry.   
52. The United States, however, notes that the WT O Agreement certainly does not prevent the 
enforcement of a Member's customs laws.  Many provisions of the WTO Agreement refer to the 
existence of, and the enforcement of, custom s laws.  For example, Article X of the General 
Agreement on Tariffs and Trade 1994  ("GATT 1994") imposes certain disciplines, including that 
customs laws be administered "in a uniform, impartial and reasonable manner."  Additional 
disciplines are set out in othe r WTO Agreements, such as the Agreement on Implementation of Article 
VII of the General Agreement on Tariffs and Trade 1994  ("Customs Valuation Agreement") and the 
Agreement on Import Licensing Procedures .   
Response of Canada (WT/DS342) 
 
53. Canada considers that a tariff-related "anti-ci rcumvention" policy could not operate in a 
manner consistent with the expr ess legal obligations set out in the non-discrimination articles of 
GATT 1994.  Any measures that impose internal charges only on imported products, on the theory 
that such a charge is necessary to prevent wh at China calls "circumvention" of tariffs, is prima facie  a 
violation of GATT Article III, and must be defende d under Article XX(d). While Canada believes that 
the measures cannot be justified under Article XX (see Canada's first oral submission at 
paragraphs 27-36), Canada does not co nsider it appropriate in the abstract to consider what internal 
charges might be justified under Article XX(d).  
Comments by the United States on China's response to question 9 
54. As the United States has explained, China's so-c alled concern with "circumvention" is that 
importers might make use of the lower tariff on auto parts negotiated at the time of China's accession.    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-13 
  
  55. However, the United States does agree with Chin a's general proposition that mechanisms to 
enforce customs laws must be consistent with  a Member's internati onal obligations, including 
obligations under the WTO Agreement and under the Ha rmonized System Convention.  To this end, 
China responded that the "ability to adopt measures to interpret its  tariff schedule in accordance with 
rules of Harmonized System is co-extensive with those rules; any such measure must comport with 
the requirements of the Harmonized System."  Howe ver, the substance of China's response to this 
question is intended to demonstrat e a certain "degree of flexibility … in adopting measures to 
interpret its schedule of Concessions in accordance with the rule of the Harmonized System."   
56.  China's example of a national measure interpre ting a General Interpretative Rule (GIR) fails 
to demonstrate this alleged "flexibility".  The example involves GIR 3(a), which governs goods that 
are prima facie classifiable under two or more tariff headings.  The rule provides that "the heading 
which provides the most specific description shall be preferred to headings providing a more general 
description."  China's example as sumes that a contracting party adopts a measure that advises 
importers as to which goods it considers prima f acie classifiable under more than one heading and 
advises as to which heading is more specific.
3  Such a measure would be in compliance with the 
contracting party's obligations under GIR 3(a) only if the products identified were specifically 
described by both headings. 
57. More relevant to the case at hand, there is  no degree of flexibility under the Harmonized 
System that would legitimize the "anti-circumvent ion" measures that China has implemented for the 
classification of imported auto parts.  It is China's position that "the relevant inquiry would be whether 
the measure results in classification consistent w ith the HS [Harmonized Sy stem] terms employed in 
that member's tariff schedule."  To this end, China states that the results must be consistent with the 
requirements of the GIRs.  However, China is impl ementing measures that are not in compliance with 
GIR 2(a).  GIR 2(a) permits the classification of unfinished or unassembled goods as finished goods 
based upon their condition "as presented".  The co ndition of goods presented for customs clearance is 
their condition at the time of importation.  China' s measure that mandates classification of imported 
auto parts under a tariff schedule h eading for a completed automobile is based on the future use of 
those goods in the production of a completed autom obile.  Classification on this basis is a flagrant 
violation of GRI 2(a) because classification based on use after importation is not consistent with the 
requirement that goods be classified in their condition upon importation. 
10. ( Complainants )  China submits in paragraph 15 of its first written submission that the 
details of the specific tariff headings and tariff rates are not relevant to the disposition of the 
claims before the Panel.  Do the complainants agree with China?  If so, is your view the same regardless of whether the charge concerned should be considered as tariff duty or internal 
charge?   
 Response of the European Communities (WT/DS339)  
58. The European Communities profoundly disagrees with the statement of China in 
paragraph 15 of its first written subm ission.  Rule 1 of the General Ru les for the interpretation of the 
Harmonized System states that 
                                                     
 
3 In its response to the Panel question, China stat es, "Suppose that a Member adopted a measure to 
advise importers as to which headings it considered to be "prima facie classifiable under two or more 
headings…."  This statement is illogical because a heading is  not classifiable under ot her headings.  The United 
States, for the purposes of its rebuttal to China's re sponse, presumes that China intended to refer to a 
hypothetical measure that identifies "goods" (rather than headings) that are prima faci e classifiable under two or 
more headings. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-14 
  
  "The titles of Sections, Chapters and sub-Ch apters are provided for ease of reference 
only; for legal purposes, classification shall be determined according to the terms of 
the headings and any relative Section or Ch apter Notes and, provided such headings 
or Notes do not otherwise require, according to the following provisions." (Emphasis 
added) 
As explained by explanatory note V to Rule 1, "…the terms of the headings and any 
relative Section or Chapter notes are paramount, i.e. they are the first consideration in 
determining classification". 
59. The position of China is in direct contradiction with Rule 1. 
60. The Appellate Body has also clearly recognised  the importance of the terms of the specific 
tariff headings in the context of an analysis under Ar ticle II of the GATT.  In this respect reference is 
made to Appellate Body Reports in EC –  Computer Equipment  and EC – Chicken Cuts . 
61. If the measures are considered to be imposi ng an internal charge as the European 
Communities considers, the details of the tariff headi ngs would not be relevant. The rates are relevant 
as the internal charge is the difference betw een the full vehicle rate and the part rate. 
Response of the United States (WT/DS340) 
 
62. The United States disagrees with China.  In th e US view, the tariff headings and rates in 
China's Schedule are relevant to the disposition of this  dispute.  The way specific tariff headings tie 
into the matters at issue depends on th e specific claim under consideration.   
63. GATT 1994 Articles III:4 and III:5 and TRIMs Agreement
:  For these claims, the key aspect 
of China's Schedule is the 15 per cent differential be tween the whole vehicle tariff (25%) and the parts 
tariff (10%).  China's measure's impose a WTO-inc onsistent local content requirement for vehicle 
manufacturers, which results in the imposition of the 15 per cent additional charge unless the local 
content requirements are met.  Note that this  local-content requirement is WTO-inconsistent, 
regardless  of whether the additional charge is considered an  internal charge or part of China's ordinary 
customs duties or other duties or charges.   
64. GATT 1994 Article III:2 :  If, as the United States contends, China's measures are internal 
charges, then again the key aspect is the 15 per cent differential between the whole vehicle tariff 
(25%) and the parts tariff (10%).  This additional charge is imposed only on imported parts, and never 
on domestic parts.   
65. GATT 1994 Article II : If, as China contends, China's additional charge is a customs duty, 
then such a duty breaches Ch ina's tariff bindings on parts.  In th is instance, the difference between the 
whole vehicle tariff and the duty on each imported part  is the amount by which China has breached its 
tariff bindings.   
Response of Canada (WT/DS342) 
 
66. Tariff headings would be irrelevant for pur poses of assessing the nature of goods were the 
measures properly considered to result in internal charges on auto parts. In that case, no recourse to 
Article II is necessary. To the extent the Pa nel finds it necessary to assess the measures under 
Article II, it is only China's broad tariff rate commitmen ts that are relevant to resolving this dispute.  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-15 
  
  67. China's tariff headings, under an Article II anal ysis, demonstrate the arbitrary nature of the 
measures, particularly given that China attempts to blur the distinction between parts and motor 
vehicles. That is inconsistent with the proper approach to tariff interpretation expressed in, e.g., 
Rules 1 and 2(a) of the General Rules for th e Interpretation of the Harmonized System.  
68. Canada notes that there is agreement among the parties that at least some charges under the 
measures are internal. China has conceded (implicitl y in footnote 20 of its first written submission, 
and then explicitly in response to oral questions) th at charges imposed on auto parts imported by parts 
manufacturers located in China, and then sold to ve hicle manufacturers located in China, are internal 
charges subject to Article III. 
11. ( China )  Please clarify whether there are any other legal instrument similar to the Policy 
on the Development of the Auto Industry in relation to other industry sectors in China. 
 
Response of China 
 
69. Yes, China has adopted broad policy instruments of this nature in other industry sectors. 
12. ( China )  In respect of the alleged problems re lating to circumvention of ordinary 
customs duties for motor vehicles in China: 
 
(a) Could China explain, based on evidence, th e circumstances leading up to its decision to 
introduce the measures at issue to address this "a lleged" problem in 2005.  In particular, in 
light of China's statement in paragraph 22 of its first submission that "[t]he need to define a clear boundary between motor vehi cles and parts of motor vehicl es, coupled with evidence of 
tariff circumvention, prompted China to being consideration of measures..., consistent with 
China's Schedule of Concessions and intern ationally accepted principles of tariff 
interpretation," could China please explain in detail why the need to define such a clear 
boundary arose and provide copies of evidence of tariff circumvention referred to in this 
paragrah; 
 
Response of China 
 70. For the reasons that China has explained in response to question 13 below, China does not 
consider that it required specific evidence of "circu mvention" in order to resolve an issue of tariff 
classification in its Schedule of Concessions.  Cust oms authorities routinely resolve issues of tariff 
classification in response to requests from importers, or as a general matter of customs administration.  An example of the latter is the EC regulation provid ed in CHI-14, which seeks to ensure a "uniform 
application" of the EC tariff schedule in respect of  incomplete or unassembled pick-up trucks.  These 
types of measures provide greater certainty to importers  and ensure consistent a pplication of the tariff 
schedule by national customs authorities.   
71. In point of fact, however, China had evidence th at there was a significant issue concerning the 
evasion of higher duty rates that apply to motor vehicles, including parts and components that have the essential character of a motor vehicle.  As Chin a explained in its first written submission, China 
was aware that the value of imported parts and components had increased dramatically between 2001 
and 2004, greatly outstripping the rate of total motor vehicle production in China.
4  The sharp increase 
in the importation of auto parts and components oc curred at a time when auto manufacturers were 
introducing a large number of new vehicle models into the Chinese market.  These figures strongly 
                                                      
4 See China first written submission at para. 21.   WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-16 
  
  suggested that there were issues of tariff classifi cation concerning motor vehicles and parts of motor 
vehicles that warranted examination.  Customs au thorities routinely address sp ecific issues in customs 
administration, including the issuance of tariff cl assification guidance, in response to these types of 
import trends.  The legitimate nature of China's c oncern, and its decision to address this classification 
issue, is demonstrated by the fact that approxima tely 20 per cent of vehicl e models that have gone 
through the evaluation process are assembled from imported parts and components that have the essential character of a motor vehicle.  This point  is discussed in response to question 160 below. 
(b) How has China dealt with the alleged prob lem before the introduction of the measures 
at issue?; and   
Response of China 
 
72. With respect, the specific problem of tariff classification at issue in this dispute is not 
"alleged."  As China has sought to demonstrate by reference to the practices of other WTO Members, 
it is a problem of tariff classification that arises wh enever there is a significant difference in duty rates 
between complete articles and parts of those article.   
73. Prior to the adoption of the measures at issue, China did not have a procedure for determining 
whether multiple shipments of parts and component s were related to each other through their common 
assembly into a specific vehicle model. 
Comments by the United States on China's response to question 12(b) 
74. The United States disagrees with China's claim th at the supposed "circumvention" of ordinary 
customs duties for motor vehicles in China is simply an example of "a problem of tariff classification 
that arises whenever there is a significant differen ce in duty rates between complete articles and parts 
of those articles."  There is not a problem of classification when parts are imported separately and 
later assembled into a completed article.  Under the Harmonized Syst em, it is a longstanding principle 
that goods are classified, pursuant to General Interp retative Rule 1, under the tariff heading that most 
specifically describes those goods in their condition as imported.
5  The Harmonized System is made 
up of 96 chapters grouped into 21 sections consistin g of approximately 5,000 article descriptions in 
the headings and subheadings.  The Harmonized Sy stem is divided into categories or product 
headings beginning with crude and natural products and continuing in  further degrees of complexity 
through advanced manufactured goods .  As reflected in the United States' response to the Panel's 
question 47, there are tariff headings that specifical ly describe automobile parts, and, accordingly, 
when those parts are imported separately, they ar e classifiable under those provisions.  It is not 
"circumvention" of the tariff schedule for an auto  manufacturer to import parts separately and later 
assemble them into a completed article in the domestic market.   
(c) Could China also identify other products in its Schedule for which different tariff rates 
are applied for an article and parts and components of such an article. 
 
                                                      
5General Interpretative Rule 1 states that "for legal purposes, classification shall be determined 
according to the terms of the heading and any relative Section or Chapter No tes and, provide such heading or 
Notes do not otherwise require,  according to the following prov isions."  (Ex. CHI-15).    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-17 
  
  Response of China 
 
75. Without having undertaken a systematic review  of its Schedule of Concessions, China notes 
two other instances in which its Schedule of Conc essions creates a significant tariff rate difference 
between the complete article and parts of that article: 
• 8414.5110 (fans)    21.7% (at date of accession) 
• 8414.9020 (parts for 8414.5110 etc.) 12.0% 
• 8415.1000 (air conditioner)   21.0% (at date of accession) 
• 8415.9010 (parts for 8415.1000 etc.) 11.7% (at date of accession) 
 
13. ( All parties )   Regarding the notion of "circumvention": 
 
(a) Please explain what "circumvention" means;  and  (b) Please explain whether, and if so, how, under the WTO law, a Member is allowed to 
take an anti-circumvention measure.  If po ssible, please support your response with relevant 
GATT/WTO jurisprudence. 
 
Response of China 
 
76. China's defense of the challenged measures does not depend upon a freestanding concept of 
"circumvention," or upon the concept of a specific type of "anti-circumvention measure" within the 
framework of GATT and WTO jurisprudence.  What China refers to as "circumvention," as pertinent 
to the facts of this case, is a tariff classification issu e.  That tariff classification issue is whether a tariff 
provision for a complete article (such as motor vehicles) includes the importation and assembly of parts that, in their entirety, have the essential charac ter of that article.  This tariff classification issue is 
governed by General Interpretative Rule 2(a).   
77. As China explained in its first written submi ssion, auto manufacturers can evade the higher 
duty rate that applies to motor vehicles by structurin g their imports of parts and components so that no 
single shipment has the essential character of a mo tor vehicle, even if those parts and components 
would have been classified as a motor vehicl e had they entered China in a single shipment.
6  This is 
what China means by the "circumvention" of ordina ry customs duties under the circumstances of this 
case.  By structuring the importation of auto parts and components in this manner, auto manufacturers 
deprive China of the revenue and market access bene fits that it negotiated when it obtained a higher 
bound duty rate for motor vehicles as compared to parts and assemblies of motor vehicles.   
78. China does not consider that its right to in terpret its Schedule of Concessions in accordance 
with the rules of the Harmonized System is de pendent upon specific evidence of an intent to 
circumvent the higher duty rates on motor vehicles.  The importation and assembly of auto parts and components through multiple shipments undermines the value of the tariff concessions that China 
negotiated, whether the auto manufacturer has an intention to evade the higher duty rates on motor 
vehicles or not.  Moreover, customs authorities ro utinely classify imported articles contrary to the 
proposed classification of the importer, without  regard to whether the importer's proposed 
classification was motivated by an intention to evad e a higher duty rate.  Customs authorities interpret 
                                                     
 
6 China first written submission at para. 18.  WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-18 
  
  and enforce their tariff schedules in accordance with  the rules of the Harmonized System, not the 
intention of the importer to evade applicable duty rates.
7 
79. Nor does China consider that it requires a sp ecific authorization within the GATT 1994, or 
any other WTO agreement, to adopt a measure th at interprets its Schedule of Concessions in 
accordance with the rules of  the Harmonized System.  As explained in response to question 68, the 
Appellate Body has repeatedly affirmed the im portance of the Harmonized System, including the 
General Interpretative Rules, in the interpretati on of a Member's Schedule of Concessions.  China 
does not need a specific basis in WTO law to have recourse to General Interpretative Rule 2(a), as 
interpreted by the WCO, any more than a Member would need a specific basis in WTO law to have 
recourse, for example, to General Interpretative Rule 4 ("Goods which cannot be classified in 
accordance with the above Ru les shall be classified under the h eading appropriate to the goods to 
which they are most akin."), or to relevant classi fication decisions of the HS Committee.  These rules 
are part of the Harmonized System, which is the basis upon which WTO Members have negotiated 
their reciprocal and mutually advantageous tariff concessions. 
80. For these reasons, China considers that the cha llenged measures fall within the scope of 
measures that national customs authorities routinely a dopt to ensure the proper interpretation of their 
tariff schedules and to ensure the proper classification of imports.  These measures are subject to the disciplines of Article II.  However, to the extent th at the Panel considers that  China needed a separate 
basis under WTO law to enforce its tariff rate provisi ons for motor vehicles, that authority is provided 
by Article XX(d) of the GATT 1994.  As China expl ained in its first written submission, Decree 125 
secures compliance with China's customs laws by preventing the importation and assembly of auto 
parts as a means of circumventing China's tariff provisions for motor vehicles.
8  As discussed in 
response to question 160, there is ample eviden ce that, in the absence of these measures, auto 
manufacturers would evade the higher duty rates that apply to motor vehicles by importing parts and 
components that have the essential character of a motor vehicle, in multiple shipments.   
Response of the European Communities (WT/DS339) 
 (a) Please explain what "circumvention" means;  
81. The ordinary meaning of 'circumvention' accordi ng to the Shorter Oxford English Dictionary 
is "deceitful or fraudulent conduct perpetrated against a facile person" while 'cir cumvent' is defined as 
"deceive, outwit, overreach, find a way round, evade (a difficulty)".  The ordinary meaning of the term appears to contemplate both situations where there is criminal or fraudulent intent behind the 
action and situations where such criminal or fra udulent intent is not necessarily present and where 
circumvention would not per se be illegal. 
82. In the context of Anti-Dumping EC law define s circumvention as follows (Article 13(1) of 
regulation 384/96 as amended by regulation 461/2004):   "Circumvention shall be defined as a change 
in the pattern of trade between third countries a nd the Community or between individual companies in 
                                                     
 
7 To return to the example of GI R 3(a) provided in response to question 9, a Member might adopt a 
measure to advise importers as to which headings it consid ered to be "prima facie cla ssifiable under two or more 
headings," and to advise importers, in those cases, as to which heading it considered to be "the most specific."  
The Member might adopt such a meas ure in response to evidence that importers were taking advantage of 
possible ambiguities as to which of two tariff headings might apply in order to obtain lower duty rates.  But the 
Member would not need evidence of this intention before  it could take steps to interpret and enforce its tariff 
schedule.   
8 China first written submission at paras. 203-214.    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-19 
  
  the country subject to measures and the Community, which stems from a practice, process or work for 
which there is insufficient due cause or economic ju stification other than the imposition of the duty, 
and where there is evidence of injury or that the remedial effects of the dut y are being undermined in 
terms of the prices and/or quantities of the like product, and where there is evidence of dumping in 
relation to the normal values previously establishe d for the like product, if  necessary in accordance 
with the provisions of Article 2."  To understand th is provision in its context reference is made to 
replies to questions 132 and 141. 
(b) Please explain whether, and if so, how, under the WTO law, a Member is allowed to 
take an anti-circumvention measure.  If po ssible, please support your response with relevant 
GATT/WTO jurisprudence. 
 
83. Anti-circumvention measures are explicitly contemplated under WTO law under Article 10 of 
the Agreement on Agriculture and in the context of  Anti-Dumping.  The Ministerial Decision on Anti-
Circumvention adopted by the Trade Negotiati ons Committee on 15 December 1993 noted that the 
problem of circumvention of anti-dumping duty m easures formed part of the negotiations which 
preceded the Agreement on Implementation of Artic le VI of GATT 1994 but the negotiators were 
unable to agree on specific text.  The European Co mmunities is of the view that anti-circumvention 
measures are permissible for the purposes of enforc ing Anti Dumping duties within the framework of 
Article VI of the GATT 1994 and the Agreement implem enting Article VI of the GATT.  In respect of 
Anti-Dumping the EC is not aware of other GATT or WTO jurisprudence except for the GATT panel 
report EEC – Parts and Components . 
84. To the extent the question refers to Article XX  (d) of the GATT, reference is made to the 
reply given to question 9. 
Response of the United States (WT/DS340) 
 85. The United States respectfully refers the Pane l to the US Response to Question 9.  To 
summarize, the United States does not know wh at China means by its use of the term 
"circumvention," other than that China believes that it is "circumvention" for automobile manufacturers to request the tariff treatment that Chin a promised to provide to automotive parts.  As 
also noted, the WTO Agreements contemplate that Members may enforce their Customs laws, so long 
as Members comply with relevant WTO obligations, such as Article X of the GATT 1994.   
Response of Canada (WT/DS342) 
 
(a) Please explain what "circumvention" means; 
 
86. There is no recognized concept of "circumvention" in the tariff context. In the context of anti-
dumping charges imposed in accordance with GATT Artic le VI, there are clear references to "anti-
circumvention" in, for example, EEC – Parts and Components ,
9 as well as the Ministerial Decision on 
Anti-Circumvention10 adopted by the Trade Negotiations Committee on 15 December 1993.  
87. However, China's use of the term "circumventi on" is to justify internal charges that it 
considers necessary to prevent what it characterizes as "evasion" of tariffs. In the context of Article II, 
charges must be internal in order for this concept of "circumvention" to apply. Otherwise, the charge 
is properly characterized simply as either an "ordinar y customs duty" or an "other duty or charge", in 
                                                      
9 EEC –Parts and Components , Report of the GATT Panel, BISD 37S/132, adopted May 16, 1990. 
10 LT/UR/D-3/1, April 15, 1994. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-20 
  
  which case the charge must be set out in the Me mber's Schedule and must be applied based on the 
state of the imported product on presentation at the border.  
(b) Please explain whether, and if so, how, under the WTO law, a Member is allowed to 
take an anti-circumvention measure.  If po ssible, please support your response with relevant 
GATT/WTO jurisprudence. 
 
88. In Canada's view, any internal charge that is applied to the detriment of like imported 
products violates Article III:2.  This violation may be justified under Article XX(d), or possibly in 
reference to other provisions of the WTO Agreement  (for example, charges related to anti-dumping 
measures may be justifiable on the basis of Article V I).  This analysis is supported by the panel in 
EEC – Parts and Components , which, at paragraphs 5.12 to 5.18, analyzed the intern al charges in the 
light of Article XX(d).  
Comments by the United States on China's response to question 13(b) 
89. In describing its notion of "circumvention" in the context of this dispute, China argues that its 
concerns reflect a tariff classification issue.  China explains:  "That tariff classification issue is whether a tariff provision for a complete article (such as motor vehicles) includes the importation and 
assembly of parts that, in their entirety, have th e essential character of that article.  This tariff 
classification issue is governed by General Interpre tative Rule 2(a)."  China then acknowledges that 
auto manufacturers "structur[e] th eir imports of parts and components so that no single shipment has 
the essential character of a motor vehicle," but it describes this activity as circumvention because 
these auto manufacturers pay the lower tariff rates app licable to parts instead of the higher tariff rates 
applicable to motor vehicles.  In China's word s, this activity is circumvention because "auto 
manufacturers deprive China of the revenue and mark et access benefits that it negotiated when it 
obtained a higher bound duty rate for motor vehicles as compared to parts and assemblies of motor 
vehicles." 
90. China, however, has no basis for arguing that it is  being deprived of the "revenue benefits" 
that it negotiated in the form of higher duty rates for motor vehicles.  The United States and other WTO Members negotiated lower duty rates on parts, and it is they who are being deprived (by the 
application of China's measures) of their negotiated benefits.  
91. China also glosses over the true coverage of the measures at issue by describing them as 
being aimed at importing parts "in multiple shipme nts."  China's measures cover the importation of 
parts (1) in multiple shipments, (2) from multiple suppliers, (3) from multiple countries,
11 (4) pursuant 
to multiple purchase orders, (5) placed as much as one year apart.  Moreover, the number of 
shipments potentially grouped toge ther by China's measures is astoundi ng.  Even the simplest motor 
vehicle contains about 1,500 parts, as is shown in Ch ina's discussion in response to question 69.  More 
commonly, motor vehicles have thousands of parts. 
92. According to China, the tariff classification issu e is "whether a tariff provision for a complete 
article (such as motor vehicles) includes the importati on and assembly of parts that, in their entirety, 
have the essential character of that article."  Chin a specifies that "[t]his tariff classification issue is 
governed by General Interpretative Rule 2(a)."  Th e United States notes that the concept of parts "in 
their entirety" is not included in the GIR 2(a).  GIR 2(a) provides for the classification of goods "as 
presented," which is their condition at the time of importation.  Consistent with GIR 1, when an 
                                                      
11 China's measures even cover parts that auto manuf acturers purchase from suppliers in China if those 
suppliers had themselves imported those parts.  WT/DS339/R/Add.1 
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  imported auto part is specifically described by a heading of the tariff schedule, it is classifiable under 
that heading notwithstanding that, post importation, th e auto part may be used in the assembly of a 
complete automobile.  Even a measure that compel s an auto manufacturer to provide proof of the 
post-importation assembly of many different imported parts, in their entirety, into a complete 
automobile does not retroactively confer to tho se parts at the time of importation the "essential 
character" of an automobile.     
14. In paragraph 21 its first written submission, China indicates that between 2001 and 
2004, the value of imported parts and components increased by 300%. 
 
(a) ( Complainants )  Please comment on this statement,  including whether, and if so, how, 
these types of data are relevant to the measures at issue; and 
 Response of the European Communities (WT/DS339) 
 93. The European Communities does not consider that such statistics are relevant to the measures 
at issue.  The European Communities is of the view  that the Schedule of concessions of China or the 
Harmonised System under chapters 84 and 87 do no t provide for the anti-circumvention measures 
argued by China.  Hence, there is no need to consider trade statistics. 
94. However, in general the European Communities is  of the view that such statistics could at 
most demonstrate that after WTO accession, trade has in creased in imported parts and components.  
This is a direct consequence of China's commitment  to reduce the tariff rate for parts and components 
to a bound level of 10 % or less.  If the expected effect of a commitment could serve as a justification 
for not respecting this commitment any longer, this would entirely undermine the legal value of WTO commitments.  Any possible changes in trade pattern s should also be examined in the light of all 
relevant data including the changes in imports of complete vehicles, production of complete vehicles 
in China, production of auto parts in China (which may require imports of parts further processed in 
China) and the number of vehicles in circulation in  China (which affects the demand for imports of 
parts for repair and maintenance). 
Response of the United States (WT/DS340) 
 
95. The United States fails to see how the trade data presented by China is relevant to any matters 
at issue in this dispute.  The United States has prima facie  established breaches of various provisions 
of the WTO Agreement, including Article III of the GATT 1994 and the TRIMs Agreement.  China's 
trade data is not relevant to these claims.  The United States does note, however, that data on trade 
flows could be relevant for dete rmining the level of nullification and impairment under Article 22 of 
the Understanding on Rules and Procedures Governing the Settlement of Disputes  ("DSU").   
96. The United States understands that China relies on these data in support of its theory that 
automobile manufacturers began to split their CKD kits  into separate shipments in order to avoid the 
whole vehicle rate that China claims it is allowed to apply to such kits.  As an initial matter, the 
United States does not agree with China's views on the classification of separate shipments as a single 
CKD.  But even leaving this aside, China's data  on total imports of parts and components do not 
support China's factual assertions.  China has presente d no data showing that imports of CKD kits fell 
over the same period.  And, more importantly, Ch ina has presented no evidence that these imported 
parts and components were destined for facilities th at assembled "kits", as oppo sed to being destined 
for either (a) replacement parts or (b) manufactur ing plants that imported bulk parts and components 
in the normal course of operations.   WT/DS339/R/Add.1 
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  Response of Canada (WT/DS342) 
 
97. Canada is not in a position to confirm the speci fic facts put forward by China, but does not 
disagree that parts imports grew in respon se to increased demand within China.   
98. However, Canada strongly disagrees with China' s interpretation of this statistic. China in 
effect asks the Panel to conclude that increased importation of auto parts is evidence that vehicle 
manufacturers are improperly importing parts on which they should be paying whole-vehicle duties. 
Canada notes simply that China has presented no evidence on which such a conclusion could be 
based. 
99. From an economic point of view, fluctuations  in imports and exports may result from any 
number of factors, such as domestic demand, fo reign supply, trade regulations, currency rates, 
investment flows and tax policies.  It is impossible to quantify which factors give rise to a 300% rise 
in imports, on the basis of a mere assertion that th e size of the growth must be significant.  The only 
evidence available demonstrates that the surge in im ports of auto parts into China is related to the 
increased supply of vehicles in China, both for dom estic consumption and ex port.  More important, 
China's WTO commitments are independent of growth in a particular set of imports.  China has not 
established, in respect of those commitments, wh ether or how that import growth may be a 
justification for the measures. 
(b) ( China )  Could China please also indicate the percentage change, if any, in imports of 
complete vehicles during this same period. 
 Response of China 
 
100. The figures are as indicated in the following table: 
 2001 2002 2003 2004 
Unit 71,398 128,195 171,710 175,654 
Increase Rate (%) - 80% 34% 2.3% 
Value (1,000USD) 1,712,394 3,209,378 5,275,917 5,416,170 Complete 
Vehicles 
Increase Rate (%) - 87% 64% 2.7% 
Auto Parts 2,155,639 2,312,355 7,384,300 8,679,599 
Engine Parts 443,765 639,715 1,400,043 1,712,467 
Total (1,000USD) 2,599,404 2,952,070 8,784,343 10,392,066 Auto 
Parts 
Increase Rate (%) - 13.6% 197.6% 18.3% 
 
101. The table indicates that the rates of increase for complete vehicles sharply declined in 2003 
and 2004.  This is abnormal in light of the fact that China's quota on complete vehicles was 
substantially loosened over these years.  In compar ison, the rates of increase for auto parts were as 
high as 197.6% in 2003.  The importation of complete vehicles accounted for 52.09% of total imports of auto products in 2002.  This percentage decreased to 37.52% in 2003 and 34.26% in 2004, 
indicating a shift toward importing vehicle parts. 
Comments by the United States on China's response to question 14(b) 
102. In its response to question 14(b), China again makes the point that it found a pattern of 
"circumvention" during the period from 2001 to 2004 because imports of auto parts increased overall 
at a quicker rate than did imports of motor vehicles.   China also points to a slowing rate of increase  WT/DS339/R/Add.1 
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  for imported motor vehicles in 2003 and 2004 and ar gues that this trend was "abnormal" because 
China's import quotas on motor vehicles were bei ng "substantially loosened" during this time period. 
103. China's response is not convincing.  China was doing everything in its power to limit imports 
of motor vehicles during the years 2001, 2002 and 2003.  Only in 2004 did China begin to lift the 
barriers that it had put in place to limit vehicle imports, and these barriers were only lifted in full by the end of 2004 (with the exception of the high tariff rates that are still applicable to motor vehicles). 
104. As explained above (see qu estion 2), during the period from 2001 to 2004, China was 
pursuing tariff practices that encouraged the impor tation of parts and even CKDs and SKDs for 
assembly in China, while it was discouraging the importation of  vehicles through an import quota 
regime.  Under the import quota regime, China set an annual import quota for motor vehicles (and two 
key parts) at a value of $6 billion, with annual in creases of 15 per cent.  At the same time, however, 
China actively impeded foreign auto companies' attemp ts to fill this quota, whic h kept their imports of 
vehicles even further artificially low.  
105. The United States described this situation in the 2002 USTR Report to Congress on China's 
WTO Compliance, which was issued on 11 December 2002.  That report explained: 
"From the outset, China's quota system was beset with problems.  The State Council 
did not issue necessary regulations until mid-December 2001.  Not only were these 
regulations late, but they also appeared  to be inconsistent with China's WTO 
commitments in certain respects.  Furt her delay ensued as the administering 
authorities charged with implementing this sy stem – [the Ministry of Foreign Trade 
and Economic Cooperation, known as MOFTEC] for some products and the State 
Economic and Trade Commission (SETC) fo r other products – struggled with 
implementation.  More problems arose when MOFTEC and SETC finally began allocating quotas.  In the case of auto s, for example, while MOFTEC issued 
necessary implementing rules shortly after the issuance of the State Council's 
regulations, it did not open up the quota application process until February [2002], 
and it did not begin to allocate quotas until late April [2002].  Because of a lack of transparency, it was difficult to assess wh ether the quotas were allocated in 
accordance with the agreed ru les.  It became apparent, however, that MOFTEC was 
creating false fill rates by filling the quota fo r autos with auto parts (other than the 
key auto parts allowed by China's accessi on agreement).  By mid-year, MOFTEC had 
also not yet fully allocated the auto quotas,  although part of this delay was due to 
MOFTEC's crackdown on the illegal secondary market for auto import licenses."
12 
106. The report goes on to recount the efforts of the United States to obtain improvements in the 
operations of China's quota system, based on deta iled commitments that China had made in its 
Protocol of Accession regarding applicable rul es and procedures.  The United States raised its 
concerns bilaterally with China and during mee tings of the Committee on Market Access and the 
Committee on Import Licensing, as did other WTO Members.  The report concluded that "[w]hile it is possible that some of the problems that arose dur ing 2002, such as the missed deadlines, may have 
been attributable to first-time difficulties in implementing a new system, other problems seemed to reflect protectionist policies, particularly, for example, MOFTEC's filling of the quota for autos with 
auto parts."  Id., pages 12-13. 
                                                     
 
12  2002 USTR Report to Congress on China's WTO Compliance, page 12.   WT/DS339/R/Add.1 
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Page A-24 
  
  107. One year later, on 11 December 2003, the United States reported little improvement in 
China's import quota system for vehicles.  The 2003 USTR Report to Congress on China's WTO Compliance explained: 
In 2003, the problems encountered with the auto quota system in 2002 continued, and 
MOFTEC was again late in issuing quota a llocations, which resulted in uncertainty 
and significant disruption of wholesale and retail operations for imported autos.  
Given the persistence of these problems, it appears that China's poor implementation of its auto quota commitments is not due simply to difficulties in implementing a new 
quota system.
13 
108. Following sustained pressure from the United States, at the end of 2003, China began to 
loosen its restrictions on the importa tion of some motor vehicles.  At that time, "China announced that 
certain US auto companies would be authorized to  import sizeable quantities of US-produced autos in 
2004 without having to use Chinese enterprises holding quotas.  This development effectively ends 
the auto quota system for these companies as of the end of 2003, one year ahead of schedule."14 
109. Thus, the import data that China proffers in  response to question 14(b) does not reflect 
China's notion of circumvention.  It does not demo nstrate that auto manufacturers decided to change 
their business practices to avoid the higher duty rat es on motor vehicles.  Rather, the data reflects the 
Chinese government's own concerted efforts to disc ourage imports of motor vehicles by manipulating 
an already restrictive quota regime while promoting imports of CKDs and SKDs  and parts through the 
tariff practices described above under question 2.   
15. ( China )  Out of the total CKD and SKD kits imported since the entry into force of the 
measures at issue, what proportion of such imports was made under the second paragraph of Article 2 of Decree 125? 
 
Response of China 
 
110. Since the adoption of the challe nged measures, all imports of CKD and SKD kits have been 
made under Article 2.2 of Decree 125. 
16. ( China )  Article 30 of Decree 125 states that rules under this measure "apply to the 
situations in which vehicles manufactured und er 'trade-for-processing' programmes are sold 
into the domestic market".     
(a) Please clarify whether this sentence also applies to manufacturers "located in a bonded 
zone, in an export processing zone, or in ot her special zones supervised by the customs"; 
 
Response of China 
 
111. The provision cited by the question is not applicable to the situation of bonded zones.  
Domestic sales of complete vehicle assembled under trade-for-processing programmes are dealt with by Article 30.2 of Decree 125, while domestic sa les of complete vehicles assembled in bonded zones 
and other special zones are d ealt with by Article 30.3. 
                                                     
 
13 Id., page 23. 
14 Id., page 24.  WT/DS339/R/Add.1 
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 Page A-25 
  
  112. Like other inward processing regimes maintained  by other WTO Members, the key feature of 
the trade-for-processing programme is deferral of duties on imports of materials that are used to produce products for export.  Eligible processors import materials for processing into final products 
that they will export from China.  Eligible processo rs do not need to be located in a bonded zone or 
another type of special zone supervised by the cust oms.  Eligible processors are required to post bonds 
rather than pay duties when they import materials fo r this purpose.  Article 30.2 simply concerns the 
circumstance in which parts imported under the trad e-for-processing programme are, in fact, used to 
assemble motor vehicles that are sold into the domestic market.   
(b) Please explain automobile manufacturers located (i) "in a bonded zone", (ii) "in an 
export processing zone", and (iii) "in oth er special zones supervised by the customs"; 
 
Response of China 
 113. Auto manufacturers located in these special cust oms zones are part of the "processing trade."  
Because these special customs zones are geographica lly isolated with fence requirements, they are 
easier for customs authorities to supervise, and offe r certain benefits to importers.  Unlike out-of-zone 
processors, for example, in-zone processors are not required to post a cash deposit on imports of 
materials for use in the production of goods for export. 
(c) Please explain the difference between automo bile manufacturers referred to in Article 2 
of Decree 125 and those operating under the "tra de-for-processing" program and located in a 
"bonded zone", in an "export processing zone" or "other special zones supervised by the customs under Article 30 of Decree 125; and 
 
Response of China 
 
114. According to Article 7.1 of Decree 125, au tomobile manufacturers operating under the 
processing trade, including those located in speci al customs zones, are outside the scope of 
Decree 125 unless they sell automobile products into  the domestic Chinese market, a circumstance 
dealt with by Article 30.  This is natural because  processors are not required to pay customs duties on 
imported parts, as long as they process and export these imports in accordance with the conditions of 
the programme.   
(d) Please clarify the relationship between Article 49 of Order 8 and Article 30 of 
Decree 125. 
 
Response of China 
 
115. There is no relationship between the two articles cited.  Article 49 of Order No. 8 concerns 
the application of investment policies to vehi cle manufacturers in export-processing zones.   
17. ( Complainants ) China submits in footnote 14 in its first written submission that "the 
complainants appear to have mistaken the rule s applicable to bonded areas as applicable to 
bonded entries" and that "pursuant to Art. 12 of Decree 125 importers provide comprehensive 
import bonds commensurate with their stated plans for importing and assembling auto parts 
that have the essential character of a motor vehicle".  Please comment on China's statement. 
 WT/DS339/R/Add.1 
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  Response of the European Communities (WT/DS339) 
 
116. The European Communities does not believe it h as misunderstood the Chinese rules.  It seems 
that the suspending regime allegedly applied by China concerning bonded goods at issue is a hybrid 
one, which confuses international customs practice regarding bonded areas with the "bond" imposed 
on vehicle manufacturers in the amount of the relevant duty on automotive parts on importation. China refers to the word "bonded" in relation to both situations (guarantee – transit procedure) and 
this has a misleading effect.  The "bond" (i.e. the guarantee or security deposit) is made on the basis of 
the duty rate for parts (generally 10 %), i.e. on the basis of the characteristics of the goods as 
presented to customs.  The European Communities also  refers to the more detailed answer given by 
Canada. 
Response of the United States (WT/DS340) 
 
117. China – both in the above cited footnote 14 and in  its answers at the fi rst substantive meeting 
– has presented a clarification of its bonding requirements on imported auto parts.  This clarification further supports the position of the United States that the additional charges imposed by China's 
measures are internal charges, not Customs duties.   
118. In particular, China has clarified (1) that a ll automotive parts covered by China's measures 
enter under a bond based on the 10% rate for auto part s, and (2) that the bond is simply a financial 
guarantee, and does not involve any control by Ch inese Customs on the importers disposition of the 
part.  That is, if the importer sells the part as a spar e part, or if for any reason the part is not used in 
the manufacture of a vehicle within one year, then the 10% parts rate applies.  Only if
 the part is used 
in the manufacture of a vehicle not meeting local content requirements will China proceed to impose 
the 25 per cent "whole vehicle" rate on the part. 
Response of Canada (WT/DS342) 
 
119. China has not explained what it means by the concept of "bonded entries", which is not a 
concept that exists in Canadian law.  In contr ast, there is a recognized concept in international 
customs practice of bonded areas (e.g., bonded warehouse) or export-processing zones (e.g., free trade zone), which are areas of special customs supervisi on, control and administration. In using the term 
"bonded entries", China appears to be referring to the bond imposed on vehicle manufacturers in the 
amount of 10% of the value of parts that they import directly.  This bond is simply akin to a "security deposit" to ensure payment of the duty liability based on the state of the good as presented at the 
border.  China has not disagreed with what the comp lainants believe is the relevant fact related to 
bonding – that parts imported into China are not ke pt physically segregated.  Imported parts are not 
kept in bonded areas or export-processing zones, they are not required to be kept separately in sealed 
containers, and they are not otherwise rest ricted from entering the internal market. 
18. ( China )  Please explain in detail about " comprehensive duty bonds" that automobile 
manufacturers importing auto parts charact erized as complete vehicles must pay under 
Article 12 of Decree 125. 
 
Response of China 
 
120. The pertinent part of Article 66 of the Cu stoms Law of China provides that "in case the 
consigner or the consignee applies for release of th e goods before the determination in respect of 
classification and valuation is made or valid cust oms declaration form and accompanied documents 
and/or certificates are provided, customs shall allow release [of the goods] where [the consigner or the  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-27 
  
  consignee] provides bonds, commensurate with th e legal obligation it shall assume pursuant to 
relevant laws and regulations."  Parties may provide comprehensive customs bonds, upon the 
approval of customs, for customs matters of the same  nature that will reoccur multiple times within a 
given time period.  Article 12 of Decree 125 is an application of these general customs bond rules in 
the particular circumstance of auto parts that are imported for registered vehicle models.  These 
comprehensive duty bonds are required to ensure th at the auto manufacturer abides by all relevant 
customs rules and can satisfy the customs liability. 
121. The amount of the comprehensive customs bonds is based on the projected amount of duties 
that the importer will pay each month.  In pract ice, customs calculates the bonds based on the 
applicable rates for auto parts, which minimizes the burden on auto manufacturers.  Customs offices 
are required to recalculate the bonds every three months and may require the auto manufacturer to 
adjust the amount of the bond. 
19. ( China )  Please explain what procedural requirements "the administration of bonded 
goods" under Article 16 of Decree 125 entail, including what the phrase " remain under customs 
control " in paragraph 31 of your first submission means. 
 
Response of China 
 
122. The "administration of bonded goods" may vary fro m one type of customs matter to another.  
The following is an outline of the procedure in a typical scenario, the importation of goods for use 
under the trade-in-processing programme: 
• An eligible processor registers itself with the relevant customs office; 
• The eligible processor obtains from the re levant customs office a Processing Trade 
Manual; 
• Each transaction, by which raw materials ar e obtained from foreign sources, is recorded 
in the Processing Trade Manual and other applicable customs records; 
• The consumption of raw materials is recorded in the Processing Trade Manual and other 
applicable customs records; and 
• Once the finished products are exported, the processor applies for the appropriate 
adjustment of the import entry in its Processing Trade Manual and other applicable customs records. 
 123. Article 100 of the Customs Law of China defin es "goods remaining under customs control" as 
goods that are: 
• covered by Article 23 of the Customs Law of China; 
• in the status of pass-through, tran sit, or continuous transportation; 
• under special duty exemption and reduction; 
• under a temporary import/export arrangement; 
• in bonded status; or 
• not fulfilling all necessary customs requirements. 
 
20. ( China )  Article 27 of Decree 125 refers to "the rules for bonded goods".   
 
(a) Please clarify whether the rules ref erred to in this provision are " Procedures on Customs 
Control over Bonded Areas ", as provided by the complainants in Exhibit JE-31.  If not, please 
explain how the rules referred to in Articl e 27 of Decree 125 are different from the rules WT/DS339/R/Add.1 
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Page A-28 
  
  provided in Procedures on Customs Co ntrol over Bonded Areas  and provide a translated copy of 
such rules for bonded goods; and Response of China 
 
124. Article 27 of Decree 125 does not refer to the Customs Control measures over Bonded Zones, 
which is only one of many types of  "rules for bonded goods."  As is the case in the customs practices 
of other WTO Members, China's "rules for bonded goods" vary from one customs procedure to another, depending on the nature of the procedure and the degree of customs control that is required.   
125. The bonding requirements under the measures at  issue include the following elements: 
• the registration of vehicle models for whic h the imported auto parts have the essential 
character of a motor vehicle;  
• a requirement that the auto manufacturer keep accurate records of the parts and 
components that it imports in bond, and account for their assembly into registered vehicle models; 
• the establishment of the Q-account, which connect s the auto manufacturer to the relevant 
customs office via the Internet; 
• recording each entry of bonded auto parts fo r the registered vehicle models in the Q-
account; and 
• making adjustments to the Q-account as parts and components that entered in bond are 
assembled into registered vehicle models and the applicable duties are paid. 
 
(b) Could China explain how "the rules for bonded goods" are applied to the auto parts 
imported by auto part suppliers and then subsequently sold to  automobile manufacturers?  In 
China's view, are these imported auto parts not in free circulation. 
 
Response of China 
 
126. The rules for bonded goods do not apply to auto parts imported by a third party and 
subsequently sold to the auto manufacturer.  As described in response to question 83, these goods are 
in free circulation in China.   
21. ( China )  Please explain the respective roles playe d by various Chinese authorities, such 
as the General Administration of Customs, the NDRC, the Ministry of Commerce, and the 
Ministry of Finance, with respect to the administra tion of the rules relating to the imposition of 
the charge and the procedural requi rements under the measures at issue. 
 
Response of China 
 
127. The role of the GENERAL ADMINISTRATION OF CUSTOMS relating to the measures at 
issue includes: 
• being a member of the Leading Panel (Article 6.2 of Decree 125); 
• receiving auto manufacturers' self-evalua tion conclusion and registration request 
(Articles 7.1 and 19.2 of Decree 125); 
• receiving auto manufacturers' review applica tion (Articles 7.2 and 19.2 of Decree 125); 
• entrusting the State Verification Centre for Complete Vehicle Character ("Verification 
Centre") to conduct reviews (Article 7.2 of Decree 125); 
• 
issuing review opinions (Article 7.3 of Decree 125);  WT/DS339/R/Add.1 
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  • receiving auto manufacturers' registration materials and forwarding them to relevant 
authorities (Articles 10, 19.2, 30.2, and 30.3 of Decree 125); 
• receiving auto manufacturers' verification requests and entrusting the Verification Centre 
to conduct verifications (Articles 17, 19.1, 19.2, and 20.2 of Decree 125); 
• formulating detailed verification ru les (Article 17 of Decree 125);  
• designating the Verification Centre to conduc t verification when the auto manufacturer 
does not apply for registration or ve rification (Article 26 of Decree 125); 
• administering imported auto parts for regist ered vehicle models in accordance with the 
rules for bonded goods (Artic le 27 of Decree 125); and 
• making classification determinations a nd assessing applicable customs duties in 
accordance with China's customs laws (Articles 28, 31 of Decree 125)  
 
128. The role of the NATIONAL DEVELOPMENT AND REFORM COMMISSION relating to 
the measures at issue includes: 
• being a member of the Leading Panel (Article 6.2 of Decree 125); 
• marking "Complete Vehicle Character" on the Public Bulletin for On-Road Vehicle 
Manufacturers and Their Products (A rticle 7.4 of Decree 125); and 
• suspending the relevant vehicle model listing in  the Public Bulletin in the event that an 
auto manufacturer violates relevant rules (Article 37 of Decree 125). 
 129. The role of the MINISTRY OF COMMERCE re lating to the measures at issue includes: 
• being a member of the Leading Panel (Article 6.2 of Decree 125); and 
• marking "complete vehicle character" on the Automatic Import License (Article 7.4 of 
Decree 125). 
 
130. The role of the MINISTRY OF FINANCE relati ng to the measures at issue includes being a 
member of the Leading Panel (Article 6.2 of Decree 125). 
22. ( China )  Article 10 of Decree 125 states, inter alia , "Having received the relevant 
documents, the NDRC, the Ministry of Comme rce, and the district customs office ... shall 
administer the registration in accordance with their respective responsibilities."  Article 11 of 
Decree 125 then sets out the responsi bilities for the district customs office.  In light of the terms 
of Article 11, what are the respective respon sibilities of the NDRC and the Ministry of 
Commerce in this regard as referred to in Article 10? 
 
Response of China 
 
131. These responsibilities are detailed in response to question 21.   
23. ( China )  Please elaborate, by referring to Articles 2, 3 and 4 of Announcement  4, on the 
respective functions of the "Leading Panel Office" and the "Verification Center" in respect of 
the verification of imported auto part s characterized as complete vehicles. 
 Response of China 
 
132. The Leading Panel Office is an executive o ffice of the Leading Panel.  The office is 
responsible for daily work in the administration of Decree 125, such as coordination of the 
verification efforts. WT/DS339/R/Add.1 
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  133. The function of the Verification Centre in relation to the measures at issue includes: 
• being entrusted by the customs office to conduc t simple or on-site reviews (Article 7.2 of 
Decree 125 and Article 4 of Announcement No.4); 
• being entrusted by the customs office to conduct verifications on registered vehicle 
models and to issue the Verification Report (A rticles 17, 18, 19.l, 19.2, 20.1, 20.2, 30.2 
and 30.3 of Decree 125 and Article 4 of Announcement No.4); and 
• being instructed by the customs office to  conduct verifications in case an auto 
manufacturer does not apply for registration or  verification (Article 26 of Decree 125 and 
Article 4(3) of Announcement No.4). 
 
134. The Verification Centre is to be an indepe ndent professional firm, which is now organized 
under the auspices of the China Auto motive Technology & Research Centre. 
24. ( China )  In respect of Article 29 of Decree 125, as provided by China in Exhibit CHI-3: 
 
(a) Please elaborate on the companies that can be considered as "the affiliated companies of 
the automobile manufacturer" within the meaning of Article 29; 
 
Response of China 
 
135. This is a translation error.  The provision should read as follows: 
Article 29 If the customs characterizes the imported automobile parts as 
complete vehicles for the purpose of classification and duty collection, the 
importation duty and the importation VAT, which have been paid by suppliers of these imported parts upon importation, sha ll be deducted, provided that the 
automobile manufacturer provides relevant proof of duty payment. 
(b) If this term applies only to the companies that have a certain relationship  with 
automobile manufacturers, then how is the impo rtation of auto parts by supplier companies 
with no affiliation  with automobile manufacturers treated under the measures?; and 
 
Response of China 
 
136. There is no difference.   
(c) Article 29 also refers to "in accordance wi th relevant regulations."  Please clarify the 
"relevant regulations" indicated in Article 29 and provide a translated copy of the relevant regulations. 
 
Response of China 
 137. No specific regulation is referred to by this phr ase.  It directs the auto manufacturer to the 
normal customs declaration procedures. 
25. ( China )  While Article 18 of Announcement 4 refers to a "change of tariff classification" 
as the basic criterion for "substantial processi ng", the complainants submit that the two 
additional criteria specified therein involve aggregate value-based considerations (i.e. " ad 
valorem  percentage" and "manufacturing and processing procedures").  Please clarify whether  WT/DS339/R/Add.1 
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  this is a correct understanding of Article 18 a nd explain how substantial processing is applied 
within the meaning of Article 19 of Announcement 4. 
 
Response of China 
 
138. Article 18 of Announcement No. 4 sets forth thr ee criteria for "substantial processing," which 
are valid criteria for "substantial transformation" widely adopted as part of many countries' rules of origin, including China's Regulation on Rules of Origin for Import or Export Goods . 
139. The primary criterion is a "change of tariff head ing".  The other two criteria apply only if a 
"change of tariff heading" does not, on its own, result  in a finding of substantial transformation.  The 
first supplementary criterion is the ad valorem valu e added by the processing.  This criterion is used 
by many customs authorities in making substantial transformation determinations, and is explicitly 
recognized by Article 2(a)(ii) of the Agreemen t on Rules of Origin.  The second supplementary 
criterion involves an examination of the nature of the process and whether it vests the essential 
character to the processed goods.  Again, this is a factor that many customs authorities consider in 
making substantial transfor mation determinations.   
26. ( China )  In respect of Article 22(2) of Decree 125, it is understood that the new class A/B 
distinction will enter into force as of 1 July 2008.   If so, please explain why this should not be 
considered as an indication of arbitrariness of China's measures for determining when 
imported auto parts should be considered as a complete vehicle.  
Response of China 
 
140. China has deferred the implementation of Article 22(2) primarily because of the 
administrative complexity of implementing this particular provision.  There is nothing arbitrary about 
the A/B distinction, or its deferral.  The parts designated under Class A reflect China's consideration 
of which parts, by themselves, impart the essential ch aracter of the particular assembly at issue.  The 
parts designated under Class B reflect China's considera tion of the other parts of that assembly which, 
in the aggregate, also impart th e essential character of the assem bly at issue.  Until the class A/B 
distinction takes effect, China is classifying assemb lies on the basis of the aggregate threshold number 
of parts for that assembly.  With or without th e class A/B distinction, China considers that the 
designated parts at the designated thresholds impa rt the essential character of that assembly.   
27. ( China )  If China was concerned with tariff circu mvention on automobile parts at the 
time of its accession to the WTO, why didn't Chin a indicate specific terms and conditions to this 
effect in its Schedule? 
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  Response of China 
 
141. As explained in response to question 54, China was not required to inscribe specific terms and 
conditions in its Schedule of C oncessions to preserve its ability to interpret its Schedule of 
Concessions in accordance with the ru les of the Harmonized System, as interpreted by the WCO.  The 
Harmonized System, which includes the General In terpretative Rules, is the basis upon which WTO 
Members negotiate and schedule their tariff commitm ents; it is not a "term or condition" that 
Members must include in their Schedules of Concessions in order to preserve.  When Members 
negotiate Schedules of Concessions on the basis of the Harmonized System, it must be presumed that 
they are aware of the rules of classificati on that apply to the Harmonized System.   
142. For the reasons set forth in response to question 133, China considers that it is more relevant 
to pose this question in the reverse:  If the compla inants thought that China should not be allowed to 
apply GIR 2(a) to its tariff provisions for "motor vehicles," and that China should not be allowed to 
avail itself of the longstanding interpretation of GIR 2(a) that the WCO reaffirmed in 1995, then why 
didn't they negotiate a specific commitment to this e ffect?  Moreover, if the complainants thought that 
China should not be allowed to resolve the relations hip between complete articles and parts of articles 
in the same manner as the complainants had done in respect of duties that were of concern to them, 
then why didn't they obta in such a commitment?  These were, afte r all, the relevant circumstances that 
prevailed at the time of China's accession to the WT O.  In light of these circumstances, the burden 
rested on the complainants to obtain a commitment  that China would not adhere to these rules and 
practices.   
28. ( China )  Please clarify the order in which the application to the NDRC to be listed on 
Public Bulletin and the application to the Mini stry of Commerce for an automatic importation 
licence take place under the measures at issue. 
 
Response of China 
 
143. Being listed in the Public Bulletin is requi red for auto manufacturers to produce and sell 
motor vehicles in China. If an auto manufacturer is  planning to produce and sell a particular vehicle 
model, the manufacturer shall apply to the NDRC to be  listed in the Public Bulletin.  As explained in 
response to question 4, one of the regulatory character istics that is listed in the Public Bulletin with 
respect to a specific vehicle is its customs status under Decree 125.   
144. With regard to automatic import licences fo r motor vehicle products, the purpose of 
establishing the automatic import licence system is  to monitor the importation of motor vehicle 
products.  If an auto manufacturer is planning to im port auto parts which are subject to an automatic 
import licence requirement, it must apply to MOFCOM for this purpose.  This process is unrelated to 
the listing in the Public Bulletin. 
29. ( China ) Please explain why registration with Customs is unnecessary under Article 7 of 
Decree 125 for imported auto parts that are de termined not to be considered as complete 
vehicles after self-evaluation and review by the Verification Center. 
 
Response of China 
 
145. The purpose of registration is to keep track of  how auto manufacturers import and assemble 
auto parts that, in their entirety, have the essential character of a motor vehicle.  This determination is 
made on a model-by-model basis.  The registration of  a vehicle model confirms that imports of auto  WT/DS339/R/Add.1 
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  parts for that vehicle model will be subject to the duty provisions for motor vehicles, and subject to 
the customs procedures that Decree 125 establishes to collect these duties.   
146. According to Decree 125, if the auto manufact urer conducts a self-evaluation and determines 
that the imported auto parts should not be characteri zed as a complete vehicle, and this is confirmed 
by the Verification Center, registration of that vehicle model is unnecessary because imports of parts for that vehicle model will not be subject to th e customs procedures that Decree 125 establishes. 
30. ( China )  Please explain in detail, citing specific provisions and providing a translated 
version thereof, if necessary, the customs violat ions and criminal liabilities referred to in the 
first and second sentences of Article 36 of Decree 125.   
Response of China 
 
147. There are three types of acts encompassed by  the laws referred to in Article 36 of 
Decree 125: (1) criminal smuggling violations; (2) non-criminal smuggling violations; and (3) other 
customs violations.  Article 153 of the Criminal Law of the People's Republic of China defines 
smuggling as a criminal offence by reference to the amount of the import taxes that are evaded.  The 
amount of any criminal penalties and the durati on of any imprisonment depend upon the amount of 
the import taxes that are evaded.  Article 82 of the Customs Law and Articles 7 and 9 of the 
Regulation of the People's Republic of China on the Implementation of Customs Administrative 
Punishment define non-criminal smuggling as acts of smuggling that do not rise to the thresholds of a 
criminal offence.  Penalties for these violations  include confiscation of the smuggled goods, the 
imposition of fines, and the destruction or confisca tion of equipment used in the act of smuggling.  
Finally, Articles 12, 14, 15, 18, and 23 of the Regulation of the People's Republic of China on the 
Implementation of Customs Administrative Punishment define other types of non-smuggling customs 
violations, such as the submission of untruthful declarations (Article 15) or actions that violate 
customs control of goods (Article 18).  The fi nancial penalties for these violations vary.   
148. CHI-34 contains translations of the releva nt portions of these la ws and regulations. 
31. ( China )  An auto part manufacturer
 located in China imports "100 vehicle bodies" and 
"100 engines" in a single shipment with the purpose of assembling these assemblies in China 
and subsequently selling the 100 assembled assemblies to a vehicle manufacturer  located in 
China who subsequently uses: 
 (a) 50 assemblies to assemble whole vehicles for sale in China; (b) 30 assemblies to assemble whole vehicl es to be exported from China; and  
(c) 20 assemblies as replacement parts of vehicles for sale in China. 
(d) Please explain, citing the applicable provisions, how these "100 vehicle bodies" and "100 
engines" would be respectively treated under the measures at the border and after they 
will have been used by the automobile manufacturer as indicated above. 
 
Response of China 
 149. Vehicle bodies and engines are, in most cases, uniqu e to specific vehicle models.  It is highly 
unlikely that an auto part manufacturer would import both the bodies and engines of a specific vehicle model, and then sell those assemblies in an arm's-leng th transaction to an auto manufacturer in China.  
These assemblies are generally not interchangeable with other vehicles, and certainly are not interchangeable with vehicle models produced by  different automobile manufacturers.  Bodies, 
engines, and other assemblies are made to the specifications of each automobile manufacturer, WT/DS339/R/Add.1 
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  ordinarily for a specific vehicle model (or a number of  closely related vehicle models).  Thus, if an 
auto part manufacturer were to import these assemblies,  it would have to be by prior arrangement with 
the automobile manufacturer.   
150. This highlights the problem of customs administ ration that China has in respect of enforcing 
Decree 125.  Because of the close commercial rela tionships between auto part manufacturers and 
automobile manufacturers, and the heavy commercial dependence of th e former upon the latter, it is 
possible for auto manufacturers to arrange with their au to parts suppliers to be the importers of record 
for the auto parts and components that they use to  assemble specific vehicle models.  This is the 
loophole that Article 29 of Decree 125 seeks to close by applying the motor vehicle duty rates to 
imported auto parts and components that have the essential character of a motor vehicle, without 
regard to whether the auto manufacturer or a th ird-party supplier was the importer of record.   
151. Under the particular facts of this question, howe ver, China considers that the body and engine 
of a vehicle model have the essential character of a motor vehicle.  This is evidenced in Article 21 of 
Decree 125.  Thus, China would classify the imports  described in this question as a motor vehicle 
without regard to who the importer was (i.e., a part s manufacturer, an auto manufacturer, or any other 
importer).   
32. ( Complainants )   In paragraphs 62-67 of its first written submission, China cites 
examples of customs practices from certain WTO Members, including from the complainants, to demonstrate the existence of the "widespread" and "consistent practice of WTO Members in 
imposing customs duties after the 'time and poin t of importation'".  Please comment on the 
accuracy of these examples and their relevance to the characterization of the measures. 
 
Response of the European Communities (WT/DS339) 
 
152. China misinterprets the customs legislation it cites by trying to mix up ordinary tariff 
classification with the customs procedures related to the post clearance recovery of the customs debt.  
When goods are imported into the EC in order to be released for free circulation, a customs 
declaration is lodged with the customs administration.  It contains the precise physical description of the goods that is sometimes also supported by pi ctures or laboratory analysis.  The importer will 
propose a tariff code (CN code in the EC) where to  classify such goods.  The customs administration 
will then "take a snapshot" of the customs declaration related to the goods at issue
 and classify them 
according to the HS rules in force at the time of importation.  These are transposed into the EC's 
Combined Nomenclature (or, we understand, the US' HTSUS).  Only rarely are goods physically 
inspected at the border.  If it turns out that the ta riff classification at the  time of importation has been 
done by relying upon incorrect documentation subm itted by the importer (for instance misleading 
laboratory analysis, different characteristics of the goods imported that do not correspond to those 
indicated in the import declaration), the customs administration is allowed to check the goods and 
re-classify them accordingly because the goods that have been imported are different from those 
declared in the customs import declaration lodged by the importer at the time of importation.  As it is 
apparent from the above, China's examples are ba sed on the rules in force concerning the post 
clearance recovery of the customs debt that have nothing to do with the ordinary tariff classification 
done at the border at the time of importation.  In other words, the imposition and collection of 
customs duties is always made on the basis of the status of goods at the time of importation  or in other 
words as presented at the border . 
153. The EC understands that the same applies for the customs systems of the US and Canada.  
Even if there was, in the legal system of an individual WTO member, a practice of classifying goods  WT/DS339/R/Add.1 
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  based on events after importation, such practice wo uld not be "widespread a nd consistent" and would 
certainly not fulfil the test of Article 31(3)(b) of the Vienna Convention. 
Response of the United States (WT/DS340) 
 154. Paragraph 62 refers to "the consistent practice of WTO Members in imposing customs duties 
after "the time or point of importation" in order to demonstrate that, as stated in paragraph 63, 
Article II of the GATT "is not limited to charges that ar e collected 'on or at the point of importation.'"  
Contrary to China's characterization of US practic e in paragraph 63, the imposition of customs duties 
occurs at the time of importation of goods that ar e entered into the United States.  Specifically, 
19 C.F.R. § 141.1(a) provides that duties and liability for their payment accrue upon imported merchandise on arrival of the importing vessel or other means of transport within the United States.  Additional duty liability does not accrue based upon th e usage of the goods after entering the United 
States. 
155. The classification of the goods is based on th e condition of the goods when imported and 
entered for consumption in the United States.  The classification and corresponding amount of duties 
owed must be identified and deposited at the time of importation, when the importer files an Entry 
Summary.  This is the point at which customs du ties are imposed.  China implies that the United 
States "imposes" customs duties beyond the point of  importation into the United States by alleging 
"customs authorities are not required to make a final classification determination and assessment of 
duty liability until one year after the merchandise has entered the customs territory of the United 
States."  19 C.F.R. § 159.11.    
156. The United States mandates a one-year time frame for liquidation, to which China refers in 
paragraph 62, for the purpose of providing an adequate  amount of time to verify the accuracy of the 
information provided by the importer concerning the nature of the imported goods, including the 
correctness of their classification based upon their condition at the time of importation.  Liquidation 
means the final computation of the duties that  accrued on an entry of imported merchandise, 
19 C.F.R. § 159.1, which are based solely on the condition of the merchandise at the time of 
importation, 19 C.F.R. § 141.1(a).  The one-year tim e frame for liquidation is necessary due to the 
sheer volume of goods arriving at the ports, for which the United States is not in a position to instantaneously review entry docum ents and determine their accuracy at the time of importation.   
157. China also notes in paragraph 64 that the Unite d States only requires the deposit of estimated 
duties at the time of importation, pending the finalizat ion of those duties within one year from the date 
that the goods are entered for consumption into the United States. This practice does not undermine 
the legal requirement that the imposition of customs duties occurs at the time of importation.  Estimated duties are deposited in lieu of the fi nal imposition of duties, per 19 C.F.R. § 141.101, 
because (as explained above) the United States is una ble to verify the accuracy of the classification 
and amount of duties alleged by the importer based on the condition of the goods at the time of their 
importation.  The one-year time frame within which the United States will verify the accuracy of the 
amount of the estimated duties is not a time frame within which the United States may impose additional customs duties, unless such duties are base d upon the condition of the goods at the time of 
their importation. 
158. Paragraph 65 alleges that "man y countries specify more specialized circumstances in which 
duties can be assessed after the time or point of impor tation."  The first example cited by China is the 
allegation that Canada "retains the authority to reconsider the origin, classification, and value of 
imported goods for a period of up to four years af ter liquidation."  The other examples also involve 
like provisions under the laws of the EC, New Zeala nd, Australia, and India, all of which permit a WT/DS339/R/Add.1 
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Page A-36 
  
  final determination of duty liability after the goods ha ve been imported.  Retaining the right to verify 
the accuracy of origin, classification, valuation, a nd other facts that may affect the dutiability of goods 
is fundamentally different from China's measure, wh ich changes the level of a charge based on the 
local content thresholds of an internal manufact uring operation.  In contrast, the imposition of 
customs duties must be based upon the condition of the goods at the time of importation.  If an importer misrepresents that condition (by misstating the origin, classification, value, etc. of the 
goods), then proper enforcement of the trade laws requires the imposition of the additional duties that 
were properly owed based on the condition of the merchandise at the time of importation.  
159. In paragraph 67, China identifies an allege d nexus between "widesp read and consistent 
practices of WTO Members" (as described in the preceding paragraphs) that impose "charges after 'the time or point of importation'" when "the  charge bears an objective relationship to the 
administration and enforcement of a valid custom s liability."  These "widespread" and "consistent" 
practices of WTO Members, as described by Chin a in paragraphs 62-67, are relevant to China's 
position concerning the permissibility of its classifica tion of auto parts only to the extent there is a 
valid customs liability.  In regard to the classifica tion of goods, this determin ation is a valid customs 
liability when it is based on the condition of the goods  at the time of importation.  The examples cited 
by China merely demonstrate that other WTO Member s enforce this particular valid customs liability 
by verifying that the classification of the goods is correctly based upon their condition at the time of 
importation. 
Response of Canada (WT/DS342) 
 
160. Canada disagrees. It is common and consistent  customs practice to classify a good based on 
an objective assessment of the essential character istics of the good as presented at the border. 
Although the duty may be calculated and paid later,  liability for customs duties is based on this 
assessment. 
161. With specific reference to Canadian law cited by China, Canada's Customs Act  establishes 
how a good is assessed at the point of importation.
15 In particular,  Sections 32 and 33 describe the 
conditions under which goods may be  released from customs control before duty payment has been 
made. However, the calculation of the duty remain s based upon the essential character of the goods on 
presentation prior to release from customs. Sections 57 to 66 of the Customs Act  elaborate on the 
process for making determinations, re-determinati ons or further re-determinations of tariff 
classification, which may occur after the good has been imported, but remain based on the condition 
of the goods at the time of importation . 
162. In terms of the practice of other customs authorities cited by China,16 China has attempted to 
relate its measures to the customs regimes of a number of WTO Members by drawing selectively, and 
out of context, from those regimes. In fact, all of  the cited customs authorities follow the practice of 
examining goods based upon their status at presentation at the border: 
• Australia's  legislation assesses duty based upon the status of goods as they arrive at the 
border. Section 162A of Australia's Customs Act 1901  deals with the special case of 
items temporarily brought into Australia and then removed,17 such as commercial 
                                                      
15 Customs Act, R.S.C. 1985 (2nd Supp.), c. 1 (Customs Act), excerpted sections (Exhibit CDA-1). 
16 China's first written submission, at paras. 62-67. 
17 Ibid., at fn. 43 (Exhibit CHI-12).  WT/DS339/R/Add.1 
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  samples, shipping containe rs, and scientific equipment.
18 Section 165 simply allows 
Australian customs to seek payment after im portation where there was an underpayment 
or erroneous refund of duties.19  
 
• New Zealand's  case law establishes clearly that " goods are to be identified in their 
condition at time of their importation" and th at "identification must be objective, having 
regard to the characteristics which th e goods present on informed inspection".20 The 
provisions cited by China merely relate to  common practices of customs authorities in 
relation to that snapshot: allowing payment to  occur after importation (Section 86 of New 
Zealand's Customs and Excise Act of 1996 ) and allowing corrections for inaccurate 
assessments (Section 89 of the Act).21  
 
• India's  customs law also assesses duty based u pon the snapshot at the border. The 
provision in India's Provisional Duty Assessm ent Regulations cited by China regarding 
provisional duty assessment22 refers to the ability of customs to provisionally determine 
duty in instances where further examina tion of the snapshot is needed ( e.g., scientific 
testing, professional examination, current market pricing research).23 
 
• European Communities' law can best be addressed by Canada's co-complainant 
directly, but Canada notes that the provisions cited by China simply reflect the same general practices discussed above, namely pro cedures relating to examining the snapshot 
of a good taken at the border.
24  
 
33. ( Complainants )  In your view, should imported CKD or SKD kits be classified 
differently than the auto parts included in such ki ts if such auto parts were to be imported 
separately? 
 
Response of the European Communities (WT/DS339)  
163. To the extent that a CKD or SKD kit would be s ubject to a separate tariff line or be classified 
in casu  as the complete vehicle because all the parts of  a complete vehicle are presented to customs at 
the same time, there could be a difference between the classification of separately imported parts and 
a CKD or SKD kit.  However, depending on the partic ular case it can also be that both the kits and the 
parts imported separately would be classified as parts. It  is therefore not possible to treat such kits in a 
generalised manner as imports of complete vehicl es as is the case with the contested measures. 
                                                     
 
18 See on this topic Australian Customs Service, Temporary Importations; online at: 
http://www.customs.gov.au/site/pag e.cfm?u=4355 (Exhibit CDA-2). 
19 Cited by China in its first written submission, at fn. 44 (Exhibit CHI-12). 
20 Campervan correctly classified [2005] NZCAA 2 (1 February 2005), at para. 15 (Exhibit CDA-3). 
21 China's first written submission, at fns. 41 and 42 (Exhibit CHI-11). 
22 Ibid., at fn. 45 (Exhibit CHI-13). 
23 See Batra v. Commissioner of Customs (Indian Customs, Excise and Service Tax Appellate 
Tribunal, Appeal No. C/615/03, decision dated  March 20, 2006) for a discussion of the procedure for 
investigating the proper price of the good on presentation at the border following a preliminary assessement – in 
that case the reassessment was set aside base d on a lack of evidence (Exhibit CDA-4). 
24 China's first written submission, at fns. 38, 39 and 40 (Exhibit CHI-10). WT/DS339/R/Add.1 
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  Response of the United States (WT/DS340) 
 
164. Yes, the classification should be different.  Under the Harmonized System, a good should be 
classified in its condition as imported.  Assuming that an imported CKD or SKD kits is a complete 
vehicle unassembled, it would be classified differently th an the auto parts included in such kits if such 
auto parts were to be imported separately.  
Response of Canada (WT/DS342) 
 165. Canada notes as a preliminary matter that the Harmonized System does not use the terms 
CKD or SKD, nor are they in common use in custom s practice.  In the auto industry, the terms CKD 
and SKD are used without a fixed definition.  The terms refer to a large collection of parts imported 
together for the purpose of assembling a vehicle in  the internal market.  While CKDs usually are 
completely unassembled, SKDs contain parts that are partially assembled.  
166. For tariff classification, what is relevant is the application of Rule 2(a), which requires a 
determination of whether imported parts have  the essential character of a whole product. 
167. The terms CKD or SKD become relevant in th is dispute only because they are used both in 
the Working Party Report on China's accession, and in the measures.  In this context, certain 
collections of parts may only properly be described as CKDs or SKDs where all or nearly all of the 
parts necessary to construct a whole vehicle are presented to customs together in one shipment.  
Chinese customs officials have the discretion either to  classify CKDs or SKDs as parts, or to classify 
them at the six-digit level as a whole vehicle (in wh ich case there should be a further classification at 
the seven- or eight-digit level to show that it is a whole vehicle in unassembled form, and therefore 
subject to a 10% duty). 
168. Separate shipments of parts must be classified  separately, based upon the parts in a given 
shipment.  Canada does not accept China's implicit cl aim that separate shipments of parts may be 
related, nor that separate shipments of parts can be considered to have the essential character of a 
whole vehicle. In practice, parts shipments include a variety of parts for a variety of vehicles, from multiple suppliers and possibly to multiple destinations in the internal market. 
34. ( China )  In light of the example given in paragraph 97 and your statement in 
paragraph 98 of your first written submission, is  China of the view that CKD or SKD kits under 
Article 21(1) of Decree 125 are of the same value or quantity as the combinations of auto parts 
set out in Article 21(2) and (3).  Please explain in detail. 
 
Response of China 
 169. Not necessarily.  The example provided in paragraph 97 of China's first written submission 
was meant to illustrate the basic principle underl ying Decree 125 by using a relatively "easy" case – a 
motor vehicle that the auto ma nufacturer assembles entirely from imported parts and components.  
The point of this example is that the tariff clas sification of imported auto parts and components should 
not change based solely on the manner in which the auto manufacturer structures its imports.   
170. The same principle applies, however, to im ported parts and components that have the 
essential character of a motor vehicle within the mean ing of GIR 2(a), even if the imported parts and 
components represent less than 100 per cent of the parts and components necessary to assemble the 
complete vehicle.  Whether the auto manufact urer imports these parts and components in one 
shipment or in multiple shipments, the tariff cla ssification should be the same.  The purpose of the  WT/DS339/R/Add.1 
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  combinations of auto parts set out in Article 21(2) and 21(3) is to define th e thresholds of imported 
parts and components that China considers to have the essential character of a motor vehicle.  These 
combinations of auto parts may or may not be equiva lent in quantity or value to the quantity or value 
of auto parts that constitute a CKD or SKD kit.  Th e relevant inquiry under GIR 2(a) is whether they 
have the essential character of a motor vehicle. 
35. ( China )  In respect of the criteria of Article 21(2) of Decree 125, the European 
Communities argues that "China applies the full ve hicle duty to all imported parts if the vehicle 
contains certain imported assemblies that constitu te only 17-29% of the value of the complete 
vehicle" (paragraph 67 of the European Communities' oral statement).   
 (a) Please comment on the specific values iden tified by the European Communities with 
respect to the imported assemblies under Article 21(2) of Decree 125; and   
(b) Please clarify the value for each combinatio n of imported auto parts under Article 21(1) 
and (2) of Decree 125. 
 
Response of China 
 
171. China has addressed this particular contention of  the EC in response to questions 64 and 147.  
In sum, the EC is challenging where China has drawn the line for purposes of the essential character 
test.  This is a separate question from the validity of the challenged measures per se. 
36. ( China )  Please provide a copy of the customs form that importers in China are required 
to fill out.  If there are any additional forms to be filled out specifically by auto parts importers 
in China, please indicate them and provide copies of such forms. 
 
Response of China 
 
172. CHI-35 contains a copy of this customs form.   
37. ( All parties )  Please explain the relationship between the obligations respectively under 
Article II and Article III of the GATT 1994 in light  of the Appellate Body's statement in Japan - 
Alcoholic Beverages II that "the broad purpose of Article III of avoiding protectionism must be 
remembered when considering the relationship between Article III and other provisions of the 
WTO Agreement."  Further, how do you relat e this statement to the instant case? 
 
Response of China 
 173. The Appellate Body's statement in Japan – Alcoholic Beverages II highlights the importance 
of the threshold issue in this dispute.  The Appe llate Body stated that "the broad and fundamental 
purpose of Article III is to avoid protectionism in the application of internal  tax and regulatory 
measures."
25   Quoting the GATT panel report in Italy – Agricultural Machinery , the Appellate Body 
observed that "the intention of the drafters of th e Agreement was clearly to treat the imported products 
in the same way as the like domestic products once they had been cleared through customs ."26   
                                                      
25 Appellate Body Report, Japan – Alcoholic Beverages  II at p. 16 (emphasis added).   
26 Appellate Body Report,  Japan – Alcoholic Beverages II  at p. 16, quoting Italian Discrimination 
Against Imported Agricultural Machinery, BISD 7S/60, para. 11 (emphasis added). WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
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  174. These statements follow from the plain language of Article III, which, by its terms, applies to 
"imported" products.
27  This limitation on the scope of Artic le III is critical to understanding its 
relationship to Article II.  Article II countenances a particular type of discrimination against imported 
products – the application of ordinary customs du ties to which domestic products are not subject.  
Members may apply such duties to products from other Members "on their importation" into the customs territory, and in accordance with the li mits bound in their Schedules of Concessions.  Once 
the products are "imported," however, they beco me subject to the basic principles of non-
discrimination set forth in Article III. 
175. Whether one examines the matter from the standpoint  of Article II ("on their importation"), or 
from the standpoint of Article III ("imported"), it is evident that the delineation between Article II and 
Article III requires some understanding of what it means for products to have completed the process 
of importation.  It is the completion of this pro cess that marks the turning point between permissible 
discrimination under Article II and impermissible discrimination under Article III.  The Appellate 
Body in Japan – Alcoholic Beverages II acknowledged this distinction,  and highlighted a possible 
answer to the interpretive issue, by refe rring to the statement of the GATT panel in Italy – 
Agricultural Machinery  that Article III applies to "imported products … once they ha[ve] been 
cleared through customs."   
176. In China's consideration, imports have been  "cleared through customs" once all customs 
formalities are complete and the goods are in free circulation within the customs territory.  In 
particular, China considers that imports have been "cleared through customs" once the national 
customs authorities have completed the administrativ e processes that are n ecessary for the imposition 
and assessment of the specific border charges that the Member is allowed to impose in respect of the 
imports at issue, and the imports are no longer subj ect to customs control.  A Member may not impose 
any charge in connection with the customs clearance process and thereby evade the non-
discrimination disciplines of Article III.  Rather, it must be a charge of a type that the Member is 
allowed to impose under its Schedule of Concessions or in accordance with other WTO provisions.   
177. This brings China to the tariff classification issu e at the heart of the present dispute.  As China 
has explained, the challenged measures interpret the tariff provisions for "motor vehicles" in China's 
Schedule of Concessions to include the importation and assembly of auto parts and components that 
have the essential character of a motor vehicle, w ithout regard to whether the parts and components 
enter China in one shipment or in multiple shipme nts.  The critical issue in relation to China's 
obligations under Article II and its  Schedule of Concessions is whether China is allowed to interpret 
the term "motor vehicles" in this way, and to est ablish a customs process to give effect to this 
interpretation.  As China has explained, the appli cation of General Interpretive Rule 2(a) to multiple 
shipments of auto parts and components is cons istent with the decision of the World Customs 
Organization, and is consistent with the practi ce of other WTO Members in like circumstances.  
China's interpretation of the term "motor vehicles," a nd its adoption of measures to give effect to this 
interpretation, are therefore cons istent with its WTO obligations. 
178. A basic feature of the customs process that Ch ina has adopted to give effect to this 
interpretation of the term "motor vehicles" is to defer the completion of customs formalities in respect 
of parts that are declared as parts of register ed vehicle models until the auto manufacturer has 
imported and assembled all of the imported parts a nd components that it will use to assemble that 
vehicle model.  Until this process is complete, the imported parts and components are subject to a customs bond and remain under customs control in acco rdance with the customs laws of China.  
                                                     
 
27 See, e.g., Art. III:2 ("imported into the territory of any other contracting party"); Art. III:4 ("imported 
into the territory of any other contracting party").    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-41 
  
  When the Customs General Administration of Ch ina assesses customs duties on these imported parts 
and components in accordance with the declaration that the manufacturer made at the time of 
importation, these parts and components are not yet "imported."  The parts and components are not in 
free circulation, and the Customs General Admini stration has not yet completed the administrative 
process for the clearance of these parts and component s into the customs territory of China.   
179. What these considerations demonstrate is that it is not "protectionism" for a Member to 
interpret and enforce its Schedule of Concessions in accordance with the rules of the Harmonized 
System, and to establish customs processes for this purpose.  The concerns of Article II and the 
concerns of Article III are of equal dignity and im portance within the GATT system.  Just as Article II 
does not allow Members to take actions that wo uld be inconsistent with its obligations under 
Article III, Article III does not prohibit Members from ta king actions that are consistent with its rights 
under Article II.   
Response of the European Communities (WT/DS339) 
 180. The statement of the Appellate Body in Japan – Alcoholic Beverages II  demonstrates that the 
purpose of Article III is broader than guaranteei ng that internal measures of WTO members do not 
undermine their commitments under Article II.  This demonstrates that the measures and in particular 
the cumbersome procedural requirements that go ma nifestly beyond any general customs procedures 
would violate the national treatment obligation under Article III even if China had no bound tariffs on 
the products at issue.  This statement would al so seem to lend support to a position that the same 
measures could breach both Article II and Artic le III of the GATT 1994 depending on the emphasis 
and angle of the analysis.  The European  Communities would also like to refer to EC – Export 
Subsidies on Sugar  where the Appellate Body considered that Article II:1(b) does not permit members 
to qualify their obligations under other provi sions of the GATT (paragraphs 217 to 219). 
Response of the United States (WT/DS340) 
 
181. As explained in Japan-Alcohol , Article III "obliges Members of the WTO to provide equality 
of competitive conditions for imported produc ts in relation to domestic products."
28  Article II has a 
different purpose and imposes different obligations – under Article II, Members bind their tariff rates 
on specific goods, and are obliged to charge no higher Customs duties than the level set out in their 
respective schedules.  Since Article II is an additional obligation, nothi ng in Article II is intended to, 
or indeed could, undermine the national treat ment obligations set out in Article III.   
182. The following paragraph from Japan – Alcoholic Beverages II  is directly relevant to the 
disposition of this dispute.   
The broad purpose of Article III of avoidi ng protectionism must be remembered 
when considering the relationship between  Article III and other provisions of the 
WTO Agreement.  Although the protection of negotiated tariff concessions is 
certainly one purpose of Article III, the st atement in Paragraph 6.13 of the Panel 
Report that "one of the main purposes of Article III is to guarantee that WTO Members will not undermine through inte rnal measures their commitments under 
Article II" should not be overemphasized.  Th e sheltering scope of Article III is not 
limited to products that are the subject of tariff concessions under Article II.  The 
Article III national treatment obligation is a general prohibition on the use of internal 
taxes and other internal regulatory measures so as to afford protection to domestic 
                                                      
28 Japan – Alcoholic Beverages II , at 17.   WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-42 
  
  production.  This obligation clearly ex tends also to products not bound under 
Article II.  This is confirmed by the negotiating history of Article III.29 
183. In particular, the reasoning in this paragraph highlights that China's measures – which favor 
the use of domestic parts over imported parts by im posing higher charges on other imported parts, as 
well as through the imposition of extra administrative burdens, if local content thresholds are not met 
– are independent breaches of Article III:4, regardless  of any question under Article II with regard to 
whether China has breached its tariff concessions on au to parts.  The independent scope of Article III, 
and in particular the fact that Article III applies regardless of any question of tariff bindings, is the 
basis for the US position during the first substantive meeting that the Panel should begin its analysis 
with China's breaches of Article III:4.   
Response of Canada (WT/DS342) 
 
184. The statement from the Appellate Body in Japan – Alcoholic Beverages II  reflects the breadth 
of a Member's obligations respecting internal m easures when compared with the narrower scope of 
obligations respecting border charges.  The Appellate  Body considered in that same paragraph the 
statement of the panel that "one of the main pur poses of Article III is to guarantee that WTO Members 
will not undermine through internal measu res their commitments under Article II".30  Importantly, 
however, it reasoned that this logic applies not only to scheduled products, but also to those that are 
not specifically bound under Article II.  In a similar vein, in EC – Export Subsidies on Sugar , the 
Appellate Body reasoned that there is no authority to allow a Member to qualify its obligations under 
the GATT by means of its Schedule.31 
185. A border charge must be limited to those "ord inary customs duties" or "other duties and 
charges" listed in a Member's Schedule and must apply to a good as presented at the border. GATT Article II:2 and the Ad Note to Article III also confirm that an internal charge can be applied to a 
product presented at the border to the extent that it is  consistent with an internal charge levied on a 
like product.  The obligation set out in Article III to eschew protectionism not only constrains the 
scope of charges under Article II to the limits set  out in a Member's Schedule; necessarily, it also 
prohibits a creative application of those charges so as to affect internal competition, whether or not 
such application occurs after the good passes the borde r.  The very principle of negotiating clear tariff 
rates is to facilitate trade free of protectionism. 
186. Applied to the instant case, the Appellate Body's  statement demonstrates the inconsistency of 
China's measures with the specific requirements of Article III.  It also demonstrates that, since the 
avoidance of protectionism is implicit in th e relationship between Article III and other GATT 
provisions, the tariff bindings on auto parts are only one element of the broader obligation to avoid 
trade protectionism. 
38. (China ) Please comment on the systemic concern s expressed by the complainants and 
certain third parties that 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 
                                                     
 
29 Japan – Alcoholic Beverages II , at 17 (emphasis added).   
30 Appellate Body Report, Japan – Alcoholic Beverages II , WT/DS8/AB/R, WT/DS10/AB/R, 
WT/DS11/AB/R, adopted 1 November 1996, at pp. 16-17. 
31 EC – Export Subsidies on Sugar , Report of the Appellate Body, WT/DS265/AB/R, 
WT/DS266/AB/R, WT/DS283/AB/R, adopted 19 May 2005, at paras. 217-220, quoting from the US – Sugar  
GATT Panel Report.  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-43 
  
  classification, the system of tariff classifi cation would circumvent GATT 1994's core national 
treatment obligations under Article III. 
 
Response of China 
 
187. China considers that these concerns misconstrue the nature of the interpretive issue before the 
Panel.  It is not China's position that Members may base tariff classification determinations on the 
"processing and manufacturing of the products after im portation."  Rather, it is China's position that 
Members may interpret their Schedules of Concessions in  a manner that is consistent with the rules of 
the Harmonized System, and consistent with the practices of other WTO Members in like 
circumstances.   
188. The present dispute involves a narrow and technical issue of customs classification:  The 
relationship between complete articles and parts of t hose articles.  As China has explained at length, 
this specific issue of customs classification is addr essed by General Interpretative Rule 2(a) of the 
Harmonized System.  GIR 2(a) states that a tariff provision for a complete article includes unassembled parts and components of the complete artic le that have the essential character of that 
article.  As explained in response to question 111,  the World Customs Organization has interpreted 
GIR 2(a) to permit members of the Harmonized System  to apply this principle of tariff interpretation 
to complete articles that are assembled from multi ple shipments of parts and components.  This 
application of GIR 2(a) is, as explained in res ponse to question 112, constrained by the rules of 
GIR 2(a) itself:  The parts and components must ha ve the essential character of the complete article, 
and they must be capable of assembly by means of  the types of assembly op erations specified in 
Explanatory Note VII to GIR 2(a).   
189. The need for customs authorities to apply GIR 2(a) in this manner arises only in 
circumstances in which there is a significant differe nce in duty rates between the complete article and 
the parts of that article.  This could arise in th e case of ordinary customs duties (as in the case of 
motor vehicles in China, or furniture in Canada ) or in the case of other types of duties (such as 
complete articles that are subject to anti-dumping or countervailing duties).  When this need arises, 
customs authorities must implement a process to determine whether specific importers are importing 
parts and components in multiple shipments that, in their entirety, have the essential character of the 
complete article that is subject to the higher ra te of duty.  Such a process necessarily entails an 
examination of the importer's practice with respect to the importation and assembly of parts and components in multiple shipments, and whether those imported parts and components, in their 
entirety, have the essential character of the complete article.  This is not a tariff classification based on 
"the processing and manufacturing of the products afte r importation."  Rather, it is a determination as 
to whether a particular series of import transactions are related to each other through their common 
assembly into a complete article.  This determina tion ascertains the commercial reality of whether the 
importer is importing parts and components in multip le shipments that have the essential character of 
the complete article. 
190. It should be evident from the foregoing that Chin a is not advocating a general principle that 
"the processing and manufacturing of products after importation" can be "generally accepted as an 
intermediate step before tariff classification."  China is not saying, for example, that customs 
authorities could classify a bolt of cloth as a "shirt" because of how it might be (or is actually) processed and manufactured after importation.  Nor is  China saying that customs authorities can defer 
tariff classification to see how imported articles are processed and manufactured, and then base the tariff classification on the resulting product.  Inst ead, China's position is that customs authorities are 
permitted under Article II of the GATT 1994 to deal with the complex relationship between complete 
articles and parts of those articles in a manner that is consistent with the Ha rmonized System, and in a WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-44 
  
  manner that allows customs authorities to give effect to the substance of a series of import 
transactions over their form.   
191. Contrary to the complainants' hyperbole, this is not an assault on the core national treatment 
disciplines of Article III of the GATT.  China is not even remotely suggesting that Members can 
impose discriminatory measures on imported products  merely by characterizing the measures as 
border measures under Article II.  Nor is China suggesting that Members can use tariff classification determinations to impose measures that are incons istent with the non-discrimination principles of 
Article III.  China's position is simply that Member s may interpret their Schedules of Concessions in 
accordance with the rules of the Harmonized System, and in a manner that is consistent with the 
object and purpose of securing the benefit of recipro cal and mutually advantageous tariff concessions.   
192. It suits the complainants' purposes to turn a t echnical issue of tariff classification into an 
alleged assault on Article III of the GATT.  By misch aracterizing the nature  and scope of China's 
argument, the complainants' have sought to portray China's position as creating a massive loophole in 
Article III.  It does no such thing.  The position that China is advocating is limited to the specific 
circumstance in which there is a significant duty diffe rential between a complete  article and the parts 
of that article.  China considers that this is not a common situation, and certainly not one whose 
resolution would pose a systemic risk to the GATT.  In China's view, the only loophole that needs 
closing is the complainants' position that importers  can evade higher duties that apply to complete 
articles merely through the manner in which they st ructure their imports.  This arbitrary, form-over-
substance position is the only argument in this pro ceeding that poses a systemic risk to the GATT – 
that is, to the security and predictabilit y of tariff concessions under Article II.   
39. ( Complainants )  Please comment on the tariff classi fication decisions of the complainant 
governments referred to by China in relation to Explanatory Note VII to Rule 2(a) of the 
General Interpretative Rules in paragraphs 102- 103 and footnote 74 of China's first written 
submission.  
Response of the European Communities (WT/DS339) 
 
193. The description provided by China of judgment of the Court of Justice of the European 
Communities in case 165/78 Michaelis  under paragraphs 102 and 103 of its first written submission is 
misleading and taken out of context. 
194. First, the Schedule of concessions of the then EEC in 1978 contained a special tariff heading 
"for the parts of an unassembled or disassembled article" (see question 1 referred to the Court of 
Justice by the national court). 
195. Second, all the parts were presented to the customs at the same time
.  China entirely ignores 
this fundamentally important element. 
196. Third, the Court explicitly came to the conclu sion that the parts as presented to the customs 
would allow the assembly of a complete article i.e. all the parts necessary to make the complete article 
were presented to the customs.  Hence, the unfinished article had the essential character  of the 
complete or finished article. 
Response of the United States (WT/DS340) 
 197. The United States does not understand China's reliance on the US ruling (HQ 960242), as the 
classification decision did not address whether th e imported goods should be considered parts or  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-45 
  
  incomplete, unassembled goods.  The facts in the US ruling indicate that all of the slipper components 
(vamps and soles) were entered together and that there were no excess components.  
 
Response of Canada (WT/DS342)  
198. The Explanatory Note is mean t to cover situations where all parts arrive at the border in one 
shipment.  In such situations, all parts that are nece ssary to form the article are classified together if 
they have the "essential character" of that complete or finished article as presented.  Any excess parts 
not required to form that article contained in the same shipment can be classified as parts. 
199. The IMCO – J. Michaelis GmbH & Co. v. Oberfinanzdirektion de Berlin  case cited by China 
is correct in its interpretation of Explanatory Note  VII, but taken out of context and misapplied by 
China to its measures.  The European Court of Ju stice was considering a single shipment, containing 
all the parts necessary to manufacture pens, and a cer tain number of excess parts.  That is, multiple 
shipments were not in issue, a fact that China conveniently neglects to mention.  
40. ( China )  Please clarify whether various combinations of auto parts listed in Article 21(2) 
of Decree 125, for example, a body and an engine  as provided in Article 21(2)(a), refer only to 
the situation where those specific auto parts are imported together at the same time, either 
assembled or without being fitted together, as the European Communities submits in paragraphs 261 and 265 of its first written submission. 
 
Response of China 
 
200. China does not believe that this was the EC 's characterization of Article 21(2)(a) of 
Decree 125.  As stated in paragraph 261 of the EC's first written submission, Article 21(2)(a) 
"foresees a situation where the vehicle body and the engine are imported together or separately  but 
without being fitted together."  (Emphasis added.)  This is essentially correct .  Consistent with the 
overall purpose of Decree 125, the structure of the im port transactions is not relevant; what matters is 
whether the imported part and components in a partic ular vehicle model, in their entirety, have the 
essential character of a motor vehicle. 
41. ( China )  In respect of Article 24 of Decree 125 (and Article 16 of Announcement 4), 
Could China please confirm:  
(a) Whether "assemblies and sub-assemblies" are not excluded from "imported unfinished 
automobile parts";  and 
 
Response of China 
 
201. Assemblies and sub-assemblies are excluded from "imported unfinished automobile parts."  
Assemblies and sub-assemblies of parts are not susceptib le to substantial transformation; they already 
constitute a finished portion of the motor vehicle and will not undergo further transformation prior to 
their assembly into the vehicle.  An example of an  "imported unfinished automobile part" would be a 
semi-manufactured steel bar or disc that is not rec ognizable as a finished part, and that must undergo 
further processing (e.g., into a spring or washer ) before it is assembled with other parts and 
components. 
(b) If not excluded, whether it is possible to  consider "imported unfinished assemblies" that 
have been "substantially processed" in China as "domestic automobile parts". WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-46 
  
   
Response of China 
 202. As explained above, assemblies and sub-assemblies are not subject to further transformation. 
42. ( China )  Could China please confirm whether Regulation on Rules of Origin for Imported 
and Exported Goods of the People's Republic of China  is applicable to "substantial processing" 
as indicated in Article 17 of Announcement 4. 
 
Response of China 
 
203. The Regulation on Rules of Origin for Imported and Exported Goods of the People's Republic 
of China does not directly apply to "substantial processing" as indicated in Article 17 of 
Announcement 4.  This is because neither D ecree 125 nor Announcement No. 4 relates to the 
application of Rules of Origin.  However, the substantial transformation criteria for "substantial 
processing" in Article 17 are specified by reference to the Regulation. 
43. ( China )  When automobile manufacturers or auto  part manufacturers in China import 
key component or sub-assemblies, as indicated in Annexes 1 and 2 to Decree 125, to incorporate 
into one of the assemblies referred to in Article 4 of Decree 125, what  is the tariff rate applicable 
to those parts? 
 
Response of China 
 
204. If the key components or sub-assemblies are parts of  a registered vehicle model, the tariff rate 
applicable to those parts is the releva nt tariff rate for motor vehicles.   
44. ( China )  Please clarify what "inter-customs-transhipment" (or "Customs-to-Customs 
transfer" according to the translation provided by  the complainants) provided in Article 13 of 
Decree 125 means. 
 
Response of China 
 205. According to the Customs Supervision Rules of the People's Republic of China on Inter-
customs-transshipment of Goods , the reference to "inter-customs -transshipment" refers to the 
movement of goods under the supervision of the cu stoms from the port of entry to another designated 
port that will be responsible for the handling of cu stoms clearance procedures.   Under Article 13 of 
Decree 125, the auto manufacturer declares imports of  parts for registered vehicle models and pays 
the applicable duties through the customs office where th e auto manufacturer is located.  It is for this 
purpose of centralized administration that an inter-customs movement would occur.     
45. ( China )  Please elaborate on the registration requirements indicated in Articles 7, 26 and 
37 respectively of Decree 125. 
 
Response of China 
 
206. All three articles refer to the same registration process, under different circumstances.  
Article 7 states the general obligation to register a vehicle model that meets one or more the thresholds of Decree 125 prior to the importation of pa rts for that vehicle model.  Article 26 concerns 
the ability of the CGA to direct a verification of  a vehicle model in the event that the auto 
manufacturer has failed to register or apply for verifi cation of that vehicle model.  Article 37 concerns  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-47 
  
  the situation in which an auto manufacturer, in viol ation of Decree 125, imports auto parts that have 
the essential character of a motor vehicle in multiple shipments without having registered that vehicle 
model. 
46. ( China )  Could China clarify the exact point in time and place that automobile 
manufacturers must pay tariff duties for imported  auto parts in relation to the terms of 
Articles 13 and 28 of Decree 125. 
 
Response of China 
 
207. While Articles 13 and 28 are relevant to this  question, the most relevant provision is 
Article 31 of Decree 125.  Article 13 establishes wher e the automobile manufacturer is to declare the 
importation of parts and pay duties for registered vehi cle models – to the district customs office where 
the manufacturer is located.  Article 28 establish es when the auto manufacturer is to declare duty 
payments – when the imported auto parts are asse mbled into registered vehicle models.  But the 
"exact point in time and place" at which the automo bile manufacturer pays the duty is governed by 
Article 31.  As described in response to question 5,  Article 31 requires the automobile manufacturer to 
declare duty payments on the tenth working day of each month based on the number of registered vehicle models that it assembled in the prior month. 
47. (Complainants )  Please explain how CKD and SKD kit imports are classified in your 
country. 
 Response of the European Communities (WT/DS339)  
208. The European Communities does not have a tari ff line for CKD and SKD kits.  There is no 
established legal definition for such kits but as indicated under paragraph 267 of its first written 
submission, the European Communities understands these concepts under the measures as referring to 
kits that consist of all
 parts necessary to make a complete  automotive product, in most cases a 
complete vehicle.  In view of the Chapter not e to Chapter 87 of the Harmonized System, which 
provides for a specific application of Rule 2 (a) of  the Harmonized System in this context, the 
classification of CKD and SKD kits in an individu al case is a difficult question as the Chapter note 
uses concepts such as "fitting" and "equipping" pu tting therefore emphasis on the state of assembly 
and manufacture of the relevant product. An SKD kit that by definition denotes 'semi-knocked down' 
kits would from a general point of view appear more likely to fulfil th e conditions to be classifiable as 
a complete vehicle (or other relevant product) as th e parts would be presented to the customs with a 
certain degree of "fitting and equipping".  A CKD kit that denotes a 'completely knocked down' kit is 
in principle further away from the examples provi ded for by the Chapter note to chapter 87 as the 
parts presented to the customs are in a completely  unassembled state.  However, a CKD kit that 
consists of all the parts necessary to assemble a complete vehicle may in some circumstances be classified as the complete vehicle provided that no working operation beyond assembly for completion into a complete vehicle is necessary in ac cordance with explanatory note VII to rule 2 (a). 
In this respect it should be emphasised that differe nt kits intended to become complete vehicles may 
need different further working operations depending e. g. of the level of high technology electronics in 
the final vehicle.  Therefore, the classification of a kit must always be made on a case by case basis and not generally as China does unless the member's  schedules provide for tariff lines for different 
kind of kits. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-48 
  
  Response of the United States (WT/DS340) 
 
209. The terms "CKD" and "SKD" are not terms that are defined or used in the Harmonized 
System, nor are they defined or used by the United States in its administration of the Harmonized 
Tariff Schedule of the United States.  To the exte nt that the United States understands these terms as 
defined by China in Decree 125, Annex I of Exhi bit 3-CHI, we classify merchandise in its condition 
as imported.  For example, a single component entered is classified under the terms of a heading that describes that component.  If a group of components ar e entered together that may form an assembly, 
we would classify it under the heading that descr ibes that assembly.  If a group of components do not 
form an assembly, they are individually classified  (e.g., a crankshaft and side panel would not 
constitute an assembly and would be individually classified).  Given the limited description in Annex 1, the following chart explains how the United States would classify these assemblies and 
sub-assemblies:  
Assembly 
Name Description Sub-
assembly 
Letter U.S. Classification 
Vehicle Bodies Class M1 A If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class M1 B If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class M1 2 A's & 
1 B If entered together, then we would classify under heading 87.07, as 
bodies by application of GIR 2(a) 
 Class M2 A If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class M2 B If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class M2 A&B Given the descriptions of the sub- assemblies, we do not see how 2 A 
sub-assemblies can be combined as S ub-assembly A covers roof box.  
 Class M3 A If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class M3 B If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class M3 A&B Given the descriptions of the sub- assemblies, we do not see how 2 A 
sub-assemblies can be combined as S ub-assembly A covers roof box.  
 Class N A If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class N B If sub-assembly is entered separa tely, we would classify under 
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or 
under subheading 8709.90 (if for the vehicles of heading 87.09) 
 Class N A&B Given the descriptions of the sub- assemblies, we do not see how 2 A 
sub-assemblies can be combined as S ub-assembly A covers roof box.  
Engine 
Assemblies Diesel 
Engine A If sub-assembly entered separately, we would cl assify under subheading 
8409.99 
 Diesel 
Engine B If sub-assembly entered separately, we would cl assify under subheading 
8409.99 
 Diesel 
Engine A&B If sub-assemblies A and B are entered together, then we would classify 
under subheading 8408.20, by application of GIR 2(a)  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-49 
  
  Assembly 
Name Description Sub-
assembly 
Letter U.S. Classification 
 Gasoline 
Engine A  If sub-assembly entered separately, we would cl assify under subheading 
8409.91 
 Gasoline 
Engine B If sub-assembly entered separately, we would cl assify under subheading 
8409.91 
 Gasoline 
Engine A&B If sub-assemblies A and B are entered together, then we would classify 
under subheading 8407.31 to 8407.34 (depending upon cylinder 
capacity), by application of GIR 2(a). 
Transmission 
Assemblies MT A If sub-assembly entered separately, we would cl assify under subheading 
8708.93 (if for the vehicles of headings 87.01-87.05) or subheading 
8709.90 (if for the vehicles of heading 87.09) 
 AT A If sub-assembly entered separately, we would cl assify under subheading 
8708.93 (if for the vehicles of headings 87.01-87.05) or subheading 
8709.90 (if for the vehicles of heading 87.09) 
 AT B If sub-assembly entered separately, we would cl assify under subheading 
8708.40 (if for the vehicles of headings 87.01-87.05) or subheading 
8709.90 (if for the vehicles of heading 87.09) 
 AT  A&B If sub-assemblies A and B are entered together, then we would classify 
under subheading 8708.40 by application of GIR 2(a)  
Vehicle axle of 
Class M1, M2, 
M3 and N 
vehicles Driving 
axle  We would classify under subheading 8708.50 (if for the vehicles of 
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of 
heading 87.09) 
 Driven axle   We would classify under subheading 8708.50 (if for the vehicles of 
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of 
heading 87.09) 
Frames   We would classify under subheading 8708.99 (if for the vehicles of 
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of 
heading 87.09) 
Braking 
Systems   Assuming that all components are ente red together as an assembly, we 
would classify under subheading 8708.30.  If components entered 
separately, then classifi cation may be under provis ions of chapters 84, 
85, 87, or 90. 
Steering 
Systems Power 
steering  We would classify under subheading 8708.94 (if for the vehicles of 
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of 
heading 87.09)  
 Non-power 
steering  We would classify under subheading 8708.94 (if for the vehicles of 
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of 
heading 87.09) 
 
Response of Canada (WT/DS342) 
 
210. As discussed in more detail in response to Question 33, Canada does not use these terms in 
customs classification. Rather, classification on importation is determined on the basis of the essential 
character of the good.  
48. ( China )  Please clarify whether there is a legal hierarchy among Policy Order 8, 
Decree 125 and Announcement 4.  If so, please ex plain, and if not, which legal instrument 
should prevail in case of conflict between these measures?  WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-50 
  
  Response of China 
 
211. There is no "legal hierarchy" between Po licy Order No. 8 and Decree 125 in the sense 
suggested by the question.  As explained in res ponse to questions 49 and 50, Order No. 8 is a broad 
policy instrument that sets forth general goals across a wide array of issues relating to motor vehicles 
and the automobile industry.  Chapter XI of Order No. 8 addresses the administration and enforcement of China's tariff rates for motor vehicl es and motor vehicle parts.  Article 60 of Order 
No. 8 directed the CGA, together with other relevant agencies, to promulgate the specific 
administrative rules to give effect to the general principles set forth in Chapter XI.  The CGA did so 
through the promulgation of Decree 125.  Afterwar ds, in order to detail the procedures for the 
verification of evaluations by automobile manufacturers, the CGA formulated Announcement No. 4 to provide further details concerning the verification process. 
212. The legal obligation of auto manufacturers to pa y the applicable customs duties on imports of 
auto parts that have the essential character of a mo tor vehicle, and the customs procedures that the 
CGA has adopted to ensure the proper classification of  these imports and the collection of the relevant 
duties, are set forth in Decree 125.   
49. ( China )  Should Decree 125 and Announcement 4 be read in light of the preamble of 
Policy Order 8? 
 
Response of China 
 
213. As China has explained, Order No. 8 encompasses a vast array of topics relating to the 
development and use of motor vehicles in China,  including, inter alia, emissions standards, 
environmental control technologies, the developm ent of hybrid vehicles, consumer protection, 
consumer financing for motor vehicle purchases,  automotive insurance, vehicle safety, auto 
trademarks and brands, foreign direct invest ment, domestic and intern ational cooperation in 
automotive research and development, the establishm ent of auto dealerships, road planning and 
construction, and vehicle registration and inspection, among many other topics.   
214. The preamble to Order No. 8 encompasses all of these topics in broad and sweeping terms.  
China does not consider that the language in the preamb le to Order No. 8 is meaningful or relevant to 
an evaluation of the one chapter of Order No. 8 that  is relevant to the present dispute – the chapter 
concerning the administration and enforcement of China's tariff provisions for motor vehicles and motor vehicle parts.  It is that chapter, and that chapter only, that gave rise to the customs enforcement 
procedures embodied in Decree 125 and Announcement No. 4 that are the subject matter of this 
dispute.   
50. ( China )  Does China agree with the interpretation advanced by the complainants 
regarding the objectives of Policy Order 8, for example the statements in paragraphs 28-29 of 
Canada's first written submission?  If not, could China please indicate what are the main 
objectives of Policy Order 8? 
Response of China 
 
215. China does not agree with this interpretation.  As explained in response to question 49, 
Order No. 8 encompasses a vast array of topics related to motor vehicles and the motor vehicle industry in China.  To the extent that there is  a "main objective," or even "main objectives," of 
Order No. 8, they are broadly reflected in the titl es of the different chapter headings.  As noted,  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-51 
  
  Chapter XI of Order No. 8 concerns the administra tion and enforcement of China's tariff provisions 
for motor vehicles. 
216. China considers that the complainants' effort  to mix and match different aspects of the 
policies set forth in Order No. 8 is an attempt to shif t attention away from a critical fact in this dispute 
– the fact that China negotiated a Schedule of Concessions that allows it to maintain higher duty rates 
on motor vehicles than the duty rates that apply to parts and components of motor vehicles.  This difference in tariff rates has an impact on market access and a concomitant impact on the 
development of domestic producers .  This is in the very nature of customs duties.  As China explains 
in response to question 133 below, the issue presented in this dispute is whether China is allowed to 
enforce these market access arrangements, or whet her, as the complainants contend, those market 
access arrangements are essentially unenforceable.   
51. (Complainants)   Do the complainants agree with the translations provided by China of 
the challenged measures in Exhibits CHI-2, CH I-3, CHI-4?  If not, please indicate specific 
provisions of the measures to wh ich the complainants do not agree.   
 
Response of the European Communities (WT/DS339) 
 
217. During the consultations the co-complainants re quested several times the translation of the 
measures from China. China committed to provide us w ith a translation during the consultations.  This 
commitment was not kept.  Therefore we have been  obliged to do the translations ourselves. There 
has been a considerable investment of time and effort  to make the translation as accurate as possible.  
With this background the European Communities c onsiders that it is not in accordance with the 
principle of due process to require the complainants to now rely on translations that China provided 
only in its first written submission i.e. 5 weeks after submitting our own first written submission. It 
would therefore be for China to argue why the transl ations submitted by the complainants may not be 
accurate. 
218. In the alternative and to reply to the specific question of the Panel, we have listed the points 
on which we disagree with the translations provided by China in a separate doc ument attached to the 
replies to the questions (Exhibit JE – 38). 
Response of the United States (WT/DS340) 
 219. In furtherance of the Complainants' decision to submit an initial set of joint exhibits, 
including translations of China's measures in Exhibits CHI-2, CHI-3, CHI-4, the United States 
respectfully refers the Panel to the EC's response to this question.   
Response of Canada (WT/DS342) 
 
220. The complainants worked carefully  with translators in an attempt to provide translations of 
the measures that are complete, clear and grammatically  correct in English.  Those translations were 
provided by the complainants as JE-18, JE-27 a nd JE-28, and are the translations on which the 
complainants rely. 
221. CHI-2, CHI-3 and CHI-4 generally conform in s ubstance with the translations provided by 
the complainants.  However, as set out in the answers to questions provided by the European 
Communities, China's translations differ from the transl ations of the complainants in various material 
ways.  Canada associates itself with the EC respon se to this question in respect of the detail and 
significance of those differences. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-52 
  
  52. ( China )  Does China agree with the complainants' translation of China's 1994 
Automotive Policy Order as provided in Exhibit JE-24?  If not, please indicate specific provisions of the measures to which China does not agree. 
 
Response of China 
 
222. China has submitted as CHI-36 a redlined versio n of the complainants' translation, noting 
specific corrections to the translation. 
53. ( China )  China has submitted a translated version of Policy Order 8 for Articles 52 
through 62 in Exhibit CHI-2.  Does China agree with the translations provided by the complainants in Exhibit JE-18 for the remaining  parts of Policy Order. 8?  If not, please 
indicate the specific provisions translated by th e complainants with which China does not agree 
and provide explanations for such position and translations by China of such provisions. 
 
Response of China 
 
223. China has submitted as CHI-37 a redlined versio n of the complainants' translation, noting 
specific corrections to the translation. 
54. ( China ) China submits that the criteria in Article 21 of Decree 125 allows for a an ex-
ante verification of whether the importer intends to  import auto parts and components which, in 
their entirety, constitute the essential character of a complete vehicle, and that this is a condition 
declared at the time of importation . Could China explain why it did not include such "condition" 
in its Schedule of Concessions? 
 
Response of China 
 
224. The term "condition" in Article II:1(b) of the GATT 1994 refers to conditions that the 
Member intends to have "some qualifying or limiting e ffect on the substantive content or scope of the 
concession or commitment."
32  The paradigmatic "condition" on a ta riff rate concession is a tariff rate 
quota, such as the one at issue in Canada – Dairy .  That is not the type of "condition" at issue in this 
dispute.  China has not restricted, in any way, th e substantive content or scope of its tariff rate 
concessions on motor vehicles.  Importers are free to import as many motor vehicles as they wish, without qualification or restriction.  The measures  challenged in this dispute simply ensure that 
imported parts and components that have the essentia l character of a motor vehicle receive the same 
tariff classification whether they enter China in one shipment or in multiple shipments.  The 
declaration to which China has referred, and that the importer makes at the time of importation, is part 
of the customs process that China h as adopted to ensure this result. 
225. As the parties discussed at length during the first substantive meeting, the GATT panel in 
EEC – Parts and Components considered that a measure is within the scope of Article II if it imposes 
charges " conditional upon the importation of a product or at the time or point of importation."
33  
China has demonstrated that WTO Members routinel y assess border charges after the time or point of 
importation, and no party appears to  question this proposition.  In ev aluating whether the charges that 
Members assess after the time or point of importation are border charges within the scope of Article II, the relevant inquiry is, in China's view, whethe r the importer's obligation to pay the charge arose 
by reason of the importation of the product, i.e., as a "condition" of the importation of the product.  
                                                     
 
32 Canada – Dairy  at para. 134.   
33 EEC – Parts and Components  at para. 5.5 (emphasis added).    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-53 
  
  The importer's obligation to pay the applicable cu stoms duty is a condition of the importation of the 
product – that is, it is the importation of the product that  triggers the obligation to satisfy the liability.  
As China has explained, Members may assess and confirm these charges after the time or point of 
importation, provided that they relate back to a charge that the Member was allowed to impose by 
reason of the importation of the product. 
226. In this light, the "condition declared at the time of importation" is that a particular shipment of 
auto parts is one of a series of shipments of auto  parts that, in their entirety, have the essential 
character of a motor vehicle.  This "condition" is a characteristic of the import, not a limitation or 
restriction on the importer's ability to import motor vehicles at the bound duty rate.  Having made this 
declaration, the auto manufacturer imports these pa rts and components subject to the obligation to pay 
the applicable duty rate for motor vehicles when, as declared, it assembles these parts and components 
into a motor vehicle that it has previously register ed as meeting one or more of the thresholds in 
Article 21 of Decree 125.  The imposition of this  duty is a valid border charge under Article II 
because it objectively relates to an ordinary custom s duty that China is allowed to impose, and that 
arose by reason of the importation of the product. 
227. As China has explained in response to several other questions, the customs process that China 
has adopted to apply GIR 2(a) to multiple shipments of auto parts and components is consistent with 
the rules of the Harmonized System, as interpreted by the WCO, and consistent with the practice of 
other WTO Members in addressing the relationship between complete articles and parts of articles.  
The Harmonized System is not a "term, condition or qualification" that China was required to inscribe 
in its Schedule of Concessions before it could take  steps to interpret its Schedule of Concessions in 
accordance with the rules of the Harmonized System.   
55. ( All parties )  Please explain in detail what customs "clearance" means. 
 
Response of China  
228. The definition of "customs clearance," as well as other related terms, is addressed by the 
Revised Kyoto Convention on the Simplificatio n and Harmonization of Customs Procedures (the 
"Kyoto Convention ").
34  As the notion of "clearance" is built upon several other international customs 
concepts, China will approach this topic in a cumulative fashion. 
229. The Kyoto Convention defines "clearance" as "the accomp lishment of the Customs formalities 
necessary to allow goods to enter home use, to be  exported or to be placed under another Customs 
procedure."  There are two key concepts embedded in this definition: "Customs formalities" and 
"Customs procedures."  The Kyoto Convention defines "Customs formalities" as "all the operations 
which must be carried out by the persons concerned and by the Customs in order to comply with the 
Customs law."  While the Kyoto Convention does not directly define the term "Customs procedure," 
the WCO has elsewhere defined the term "customs pr ocedure" as a "treatment applied by the Customs 
to goods which are subject to Customs control."35  This is reflected in the Kyoto Convention itself, 
which defines the term "Customs control" as "measu res applied by the Customs to ensure compliance 
with Customs law."  Thus, a "Customs procedure"  is a measure applied by customs to ensure 
compliance with customs law. 
                                                      
34 The Kyoto Convention entered into force on 3 February 2006.  All three complainants, as well as 
China, have ratified the convention.  Relevant portions of the Kyoto Convention appear at CHI-38.   
35 World Customs Organization, Glossary of International Customs Terms  (CHI-39) WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-54 
  
  230. As reflected in the definition of "clearance," one  such "Customs procedure" is "clearance for 
home use."  The Kyoto Convention defines this as "the Customs procedur e which provides that 
imported goods enter into free circulation in the Customs territory upon the payment of any import 
duties and taxes chargeable and the accomplishmen t of all the necessary Customs formalities."  The 
term "goods in free circulation," in turn, is de fined as "goods which may be disposed of without 
Customs restriction." 
231. These layered definitions support China's contenti on that goods have been "cleared through 
customs" once all of the customs formalities requi red in connection with the importation of those 
goods are complete, and the goods are no longer subject to customs control.  It is important to note 
that, under the Kyoto Convention , the release of the goods does no t necessarily mean that the goods 
have "cleared" customs.  Under the Kyoto Convention , the term "release of goods" means "the action 
by the Customs to permit goods undergoing clearance  to be placed at the disposal of the persons 
concerned."  Thus, goods can be "released" to the im porter (i.e., placed at its disposal), even though 
the goods have not been "cleared" (for example, because the goods remain under customs control).   
232. These considerations further support China's c ontention that the time or place at which a 
charge is imposed is not determinative of whether th e charge is within the scope of Article II of the 
GATT.  The entire structure of the Kyoto Convention supports the conclusion that customs formalities 
are routinely concluded after  the goods have been released into the customs territory.  The relevant 
consideration is whether the customs procedure to which the goods are subject after they have been 
released is one that pertains to the satisfaction of  a liability that arose by reason of the importation of 
the goods (i.e., whether it is a "Customs formality" th at is carried out "in order to comply with the 
Customs law.").   
Response of the European Communities (WT/DS339) 
 
233. The concept relates to the fact that goods, on ce the customs clearance has taken place, are in 
free circulation within the customs territory of the importing country.  In order to be released for free 
circulation all the import
 formalities will have to be complete d: goods will have to be classified 
according to HS rules and the corresponding customs duty (customs debt) will ha ve to be paid by the 
importer or at least be secured by a guarantee. 
Response of the United States (WT/DS340) 
 234. In the United States, "clearance" is a legal te rm that may apply to passengers, vessels, and 
goods entering (and, in some cases, exiting) the cust oms territory of the Unite d States.  With respect 
to the importation of goods, "clearance" is not form ally defined under the customs laws of the United 
States.  The United States defines "entry" into the United States not merely as the arrival of goods at a 
port, but as the process of presenting documentati on for clearing goods through Customs. Imported 
goods are considered cleared for entry into the Un ited States when the proper entry documentation has 
been filed and the goods are released from custom s custody (into the custody of the importer) on the 
basis of that documentation.  
Response of Canada (WT/DS342) 
 235. The term "clearance" in the Canadian context is limited to persons, conveyances, and certain 
products that are imported by private persons (i.e ., non-commercial importations).   WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-55 
  
  236. In the case of commercial importations, products  must be reported at the nearest customs 
office
36 and accounted for and duty paid at the time of importation.37 When products arrive at the 
border, the importer, carrier or broker reports their arrival at the first customs office upon entry into 
Canada. If it is convenient for the importer to account  for the products and pay any duties or taxes at 
that time, the importer may submit any documents and payment required, after which the products 
leave the control of customs officials and enter in ternal Canadian commerce. Should the importer opt 
to have the goods accounted for and duty-paid at an inland customs office, the products travel "in 
bond" to the inland office under customs control. Upon arrival at the inland customs office, either the 
importer or broker submits the required documents an d payment to customs officials, after which the 
products leave customs control and en ter internal Canadian commerce. 
Comments by the United States on China's response to question 55 
237. According to China, "[t]he relevant considera tion is whether the customs procedure to which 
the goods are subject after they have been released is  one that pertains to the satisfaction of a liability 
that arose by reason of the importation of the goods."  For tariff classification purposes, the liability 
that arises in connection with the importation of the goods is the collection of "Customs duties," 
which are defined by the revised (1999) Kyoto Co nvention on the Simplification and Harmonization 
of Customs Procedures as "the duties laid down in  the Customs tariff to which goods are liable on 
entering or leaving the Customs territory."  Theref ore, the relevant consideration in this case is 
whether China's measures enforce the collection of  a Customs duty under China's tariff schedule for 
which an auto part was liable when it entered th e customs territory of China by virtue of its 
importation.  While the time or place of the assessment  of the charge may vary, that charge cannot be 
based upon a change in the condition of the auto part  that occurred after its entry into the Customs 
territory of China. 
56. ( China )  Let us assume for a moment that an automobile manufacturer in China is 
planning to import certain automo bile parts for one of their vehicle models for sale on the 
Chinese market.  Could China please explain in  chronological order, referring to relevant 
provisions of the measures concerned and taking  into your response to previous question, "all" 
the procedural requirements that such an automo bile manufacturers must follow to import auto 
parts: 
 
Response of China 
 
238. In response to question 5, China has detailed, in  chronological order, the relevant provisions 
of the measures as they pertain to the importation of auto parts and components that, in their entirety, 
have the essential character of a motor vehicle.  Th is is the customs procedure that applies to the 
importation of auto parts and components in multip le shipments, where those parts and components 
have been verified as having the essential character of a motor vehicle.   
239. In response to the previous question, China has detailed the relevant provisions of the Kyoto 
Convention as they pertain to the customs clearance pr ocess, the completion of customs formalities, 
and the maintenance of imported goods under customs control subject to a customs procedure.  The 
chronological steps detailed in response to questi on 5 define a process whereby imported auto parts 
and components remain subject to customs control in  order to ensure compliance with China's tariff 
provisions for motor vehicles.  This process ensures the correct application of GIR 2(a) to multiple 
shipments of parts and components that are relate d to each through their common assembly into a 
                                                      
36 Customs Act, sections 12-16 (Exhibit CDA-1). 
37 Ibid., sections 32-35. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-56 
  
  specific vehicle model, consistent with the rules of the Harmonized System and consistent with the 
practices of other WTO Members under like circumstances.   
(a) Would any aspect of the procedures China just explained be different if the same 
manufacturer were to purchase all or some imported  auto parts from domestic suppliers?  If so, 
how?; 
 
240. The only procedural difference in respect of  imported auto parts purchased from suppliers 
within China arises under Article 29 of Decree 125.  Under that provision, the auto manufacturer is 
entitled to deduct from the applicable duty any amount of  duty that has already been paid in respect of 
those imported parts. 
(b) What procedures would the same automobile  manufacturer have to satisfy if it were to 
use only imported auto parts " not characterized as complete vehicles" for its vehicle model?; 
and 
 
241. The auto manufacturer must conduct the evaluation process of that vehicle model and have 
the evaluation verified by the CGA.  If the verifi cation confirms that the imported auto parts and 
components in that vehicle model do not have the essential character of a motor vehicle, auto parts that the auto manufacturer imports for this vehicle model are not subject to the customs procedure established by Decree 125.  As detailed in response to question 5, Article 35 of Decree 125 provides 
that auto parts imported for the assembly of these vehi cle models are to be declared as parts.  These 
parts do not enter in bond, are not subject to customs control, and are subject to the ordinary customs 
procedures for the payment of customs duties.   
(c) Are there any procedural requirements that automobile manufacturers using only 
domestic auto parts must satisfy for the manufac turing and sale of automobiles in the Chinese 
market?  
242. Under Article 7 of Decree 125, an automobile manufacturer is only required to undergo the 
evaluation and verification process if it assembles vehi cle models with imported parts for sale in the 
Chinese market.  If the automobile manufacturer uses only domestic auto parts, then it is not subject 
to Decree 125.   
57. ( China )  Does China have laws or regulations similar to Decree 125 and 
Announcement 4 that would apply more generally to all products having separate tariff rates 
for parts and components and complete products , in particular under China's general customs 
law?   If not, please explain why. 
 
Response of China 
 
243. As detailed in response to question 12(c), there are only limited circumstances in China's 
tariff schedule in which there is a significant tariff ra te difference between a complete article and parts 
of that article.  China does not have a law or regula tion that deals with each such circumstance.  It is 
important to recall, in this context, that China' s Schedule of Concessions establishes the upper limit of 
the duties that it may apply to imported products.  The fact that China has established a customs 
process to resolve the tariff classification relations hip between parts and wholes in one context does 
not mean that it needs to establish a similar custom s process in other such contexts.  Like customs 
authorities all over the world, China allocates its customs administration resources based on a variety of considerations, including the commercial signifi cance of the products at issue, the volume of 
imports, and the potential revenue loss from misclassification of the imports.   WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-57 
  
  58. ( China )  Please elaborate on how Article 2 of Decree 125 applies to CKD and SKD kits, 
including specific importation procedures applic able to automobile manufacturers under the 
second paragraph of Article 2. 
 
Response of China 
 
244. Importers import CKD/SKD kits into China in accordance with the ordinary provisions of the 
Customs Law of the People's Republic of China .  First, the importer must apply to the Ministry of 
Commerce for an automatic import license.  Wh en the importer imports the CKD/SKD kits, it 
declares the imports to the Customs and provides the relevant import documentation, including the 
declaration form, the automatic import license, and th e certificate of origin.  The Customs then makes 
a tariff classification of the CKD/SKD kits in acco rdance with GIR 2(a), and would classify them as 
motor vehicles.  The importer would then pay th e applicable motor vehicle duty rate for the 
CKD/SKD kits in accordance with the regular pro cedures for the payment of customs duties.   
59. ( China ) Why is the application of Article 21(3) of Decree 125 postponed until July 2008?  
Please explain in relation to the rationale behind the criteria set out in Article 21 of Decree 125. 
 
Response of China 
 
245. China has deferred the application of Article 21(3) of Decree 125 primarily because of the 
administrative complexity of implementing this par ticular criterion.  China believes that once auto 
manufacturers and customs officials have gained mo re experience with the implementation of Decree 
125, and have laid a solid foundation of record-k eeping and reporting for the administration of the 
measure, it will be easier for manufacturers and customs authorities to determine and account for the 
value of imported parts and components.   
246. As China explains in response to question 117, the value of imported parts and components in 
relation to the value of the complete article is one  criterion that customs authorities consider in the 
application of the essential character test.  The other criteria specified under Article 21 are also relevant criteria in the application of the essential character test.   
60. (Complainants )  China submits in footnote 65 of its first written submission that the 
complainants' customs authorities routinely classify CKD kits as "complete vehicles". Please 
comment on this statement 
 
Response of the European Communities (WT/DS339) 
 
247. The European Communities is not aware of any such  "routine" by its customs officials.  China 
does not present any evidence in respect of the practice of the EC.  Reference is also made to the reply 
given to question 47. 
Response of the United States (WT/DS340) 
 
248. The United States does not agree with the charact erization in footnote 65 that US customs 
authorities routinely classify CKD kits as "complete articles".  The US issues over 10,000 
classification rulings each year, but China cites only to a single ruling, and that ruling involves an 
unassembled pistol, not an automotive vehicle.  As explained in the United States answer to 
Question 47, the terms "CKD" and "SKD" are not defined or used by the United States in its 
administration of the Harmonized Tariff Schedule of the United States.  As further explained in the 
answer to Question 47, any classification decision  by US Customs would depend on the specific WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-58 
  
  details concerning the items (wheth er the importer labels them as a "CKD" or "SKD" or something 
else) as actually entered.   
Response of Canada (WT/DS342) 
 
249. As set out above in response to Questions 33 and 47, Canadian customs practice does not use 
the term "CKD", but on a case-by-case basis offici als may determine that a collection of all or 
virtually all of the parts necessary to build a ve hicle has the "essential character" of a complete 
vehicle.  
250. Canada notes that the Canadian memorandum that  China cites refers to a very specific 
category of "kit car" which, as defined in the memora ndum, refers to specialized automotive kits that 
become fully operational replicas of specialty or antique motor cars following their assembly. They 
are not CKDs or SKDs of the sort that are at issue in this dispute.  
61. ( Complainants )  Paragraph 93 of the Working Party Report states that if China were to 
have created a separate tariff line for CKD and SKD kits, the duty rate would be 10 per cent.    
(a) ( All parties )  Has China created separate tariff lines for CKD and SKD kits?; and 
 Response of China  
251. No.  China has not created separate tariff lines for CKD and SKD kits.   
Response of the European Communities (WT/DS339) 
 
252. No, the European Communities is not aware of any formal tariff line created by China for 
CKD and SKD kits. However, as stated in its firs t written submission, the European Communities is 
of the view that for all practical purposes China has introduced a disguised tariff line on such kits. 
Response of the United States (WT/DS340) 
 
253. The United States is not aware of any tariff lin es in China's tariff schedule for CKD or SKD 
kits.  However, China's measures – by treati ng CKD and SKD kits as "d eemed whole vehicles" 
subject to a 25% whole vehicle rate – have accomplished the same result as a new tariff line that 
specifically mentions CKDs and SKDs.  Thus, the de  facto result of China's measure is as if China 
created a new tariff line for CKDs and SKDs. 
Response of Canada (WT/DS342) 
 
254. China does not have a formal tariff line for e ither CKDs or SKDs. However, in its customs 
tariff for 1995, China did have separate tariff lines differentiating between certain whole vehicles and 
CKDs at the eight-digit level, while other descriptions  of a particular tariff line included the term 
"CKD" in their description. For the most part, where there was a separate tariff line at the eight-digit 
level, the duty rates for CKDs were the same. In some cases, the CKD rate was lower.
38 
255. Starting in 1996, references to CKDs were removed from China's customs tariff. China's 
evidence on how CKDs were treated after this point is  contradictory; it asserts without evidence either 
                                                      
38 See Chinese Tariff Schedules Showing CKD Lines, 1991-1995 (Exhibit CHI-30), entries for 
8704.1010 and 8704.1020.  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-59 
  
  that CKDs were prohibited from importation or that they were classified as whole vehicles.
39 The 
available evidence is limited, but suggests that  China treated CKDs as equivalent to parts.40 That 
evidence is supported by discussions during and after China's accession relating to quotas on imports 
of whole vehicles and auto parts. The evidence ar ising out of those discussions suggests a common 
understanding of WTO Members that China treat ed CKDs as parts for classification purposes: 
In the July 21, 2000 draft of the Working Party Repor t, the text indicated that China was not treating 
CKD kits as whole vehicles: "In response to quest ions from some Members [China] confirmed that 
the quota for autos and certain parts did not include CKD kits".41 
Following accession, China confirmed in the Committee on Import Licensing that it was classifying 
CKDs as parts for purposes of "customs statistics":   
[I]n Japan's statistics, auto knock-down kits, or CKD and SKD, which were imported 
for assembly in China, were not included, because in the past two years in the initial 
period of production of new car models by  Chinese domestic manufacturers, they had 
to import a considerable amount of knock-down kits for assembly production; for the 
import of these parts they had to be granted certain quotas; however, as regarded 
customs statistics, because these parts a rrived at the customs in the form of 
component parts, they had not been incor porated in the statistics for complete 
automobiles.42  (emphasis added) 
256. Canada does not understand China,  following its accession, to have created a separate tariff 
line at the seven- or eight-digit level for CKDs or  SKDs. However, Canada understands that, prior to 
the enactment of the measures, CKDs were often classi fied as parts. The effect of the measures was to 
move the classification of CKDs from parts (unde r heading 87.08) to whole vehicles (under heading 
87.03 or 87.04), and thus in effect create a new tari ff line for CKDs at the eight-digit level, just as 
China had in 1995. Canada submits  that paragraph 93 of the Working Party Report applies, and the 
new tariff line that China has effectively created must have a rate of 10%. Any other result would 
render paragraph 93 meaningless. 
(b) ( Complainants )  If a separate tariff line for CKD a nd SKD kits has not been created, 
what is the relevance of paragraph 93 of the Working Party Report to this dispute?  Response of the European Communities (WT/DS339) 
 257. The European Communities considers that without  prejudice to a potential direct violation of 
the commitment made by China under paragraph 93 of the Working Party Report, or nullification or 
impairment of benefits in the meaning of Ar ticle XXIII:1 (b) of the GATT 1994, this commitment 
provides crucial context for interpreting China' s Schedule of commitments upon accession to the 
WTO. The commitment to apply 10 % duty if it were  to create a tariff line on such kits lends strong 
support to an argument that China has considered such kits as akin to automotive parts upon accession 
to the WTO. 
                                                     
 
39 See China's first written submission, at paras. 40 and 184. 
40 See complainants' joint Background section, Canada's first written submission, at fn. 36. 
41Draft Report of the Working Party on the Accession of China to the WTO, 
WT/ACC/SPEC/CHN/1/Rev.2, July 21, 2000, at p. 34 (paragraph numbered "xx"). 
42 Report to the Council for Trade in Good s on China's Transitional Review, G/LIC/11, 
29 October 2003, at para. 3.31. WT/DS339/R/Add.1 
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  Response of the United States (WT/DS340) 
 
258. The United States submits that the final sentence of  paragraph 93, in the context of the rest of 
the paragraph, imposes an obligation on China to pr ovide a tariff treatment of no greater than 10 per 
cent on CKDs and SKDs.  The paragraph starts out by 
noting that certain me mbers of the Working 
Party expressed particular concerns about the "tariff treatment" of kits.  In fact, the paragraph twice 
uses the term "tariff treatment."  The use of the term "tariff treatment" highlights that the working 
party's concern was the rate of duty applied by Ch ina (that is, 25 per cent for whole vehicles versus 
10 per cent for parts), and that the concern was not the classification of CKDs or SKDs.  In this 
context, the only reasonable interpretation of the clau se "If China created such tariff lines" is that the 
clause simply reflects an understanding on the part of  the negotiators that CKDs and SKDs were at 
that time being entered as parts (not whole vehicl es), and that the working party was concerned that 
China would change the tariff treatment by creati ng a new CKD/SKD line with a whole-vehicle rate.  
Conversely, it would not be reasonable to read th e sentence as allowing China to provide any tariff 
treatment it wished, so long as China creates no ne w tariff heading for CKDs and SKDs.  Such a 
reading would amount to no commitment at all – as  illustrated by the current measures of China – 
since China could change tariff treatment by classi fying the CKDs/SKDs as whole vehicles, and thus 
this reading would not meet the negotiators stated  intention of addressing concerns with the tariff 
treatment  (as opposed to classification) of CKDs and SKDs.   
Response of Canada (WT/DS342) 
 
259. A tariff commitment can be created when a Member, which committed itself to provide 
certain tariff treatment if it cr eates a tariff line for a specific good, in effect does so by enacting a 
measure that pronounces how that good is to be treated , or otherwise institutes a practice in respect of 
that good's classification. Article 21(1) of Decree 125 in effect does this by treating CKDs and SKDs 
as "deemed whole vehicles" charged at a tariff rate of 25%. This would be inconsistent with China's 
commitment to apply treatment of 10%, whether or not CKDs are classified as "motor vehicles" or "parts". The principle of effective treaty interpretation, ut res magis valeat quam pereat , requires an 
interpreter to give effect to all the terms of a provision and not render them meaningless (unless it is 
clear the parties intended to do so).
43 China's commitment would be meaningless if the phrase "if a 
separate tariff line is created" was not read in the context of the whole of paragraph 93, and in the 
light of the common intentions of the pa rties when paragraph 93 was negotiated.  
260. Read in the context of the whole provision, the ordinary meaning of "if a separate tariff line is 
created" illustrates that preferential tariff treat ment is specifically to address WTO Members' 
"particular concerns  about tariff treatment in the auto sect or" (emphasis added).  That is, CKDs 
would continue to receive the 10% tariff treatment received pre-accession.   
261. Consistent with Article 32 of the Vienna Convention , this textual interp retation is supported 
by "the circumstances surrounding the conclusion" of the Accession Protocol .  In particular, the 
following facts are significant in considering the context in which that language was concluded: 
(a) all other parts and intermediate products  (bodies and chassis with engines) were 
bound at a 10% rate; 
(b) China previously had separate tariff lines for some CKDs at a lower tariff rate; 
                                                      
43 Sir Robert Jenning & Sir Arthur Watts, eds., Oppenheim's International Law, 9th ed., Volume I, 
Peace, Parts 2 to 4 (Harlow, E ssex: Longman Group UK, 1992), at  pp. 1280-1281 (Exhibit CDA-5).  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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  (c) Members understood that China was at th e time of accession classifying CKDs as 
parts, and charging them the parts rate (though without discounts for meeting domestic content thresholds);  and 
(d) most Members who have separate tariff lines for CKDs charge lower rates than for 
fully assembled vehicles. 
62. ( China )  With respect to CKD and SKD kits, is there any difference between 
"manufacturing" and "assembling".  If so, what  is the difference and how is such difference 
relevant to understanding Rule 2(a) of the General Interpretative Rules? 
 
Response of China 
 
262. The scope of GIR 2(a), second sentence, is defi ned by reference to the types of assembly 
operations specified in Explanatory Note VII to GIR 2(a).  The Explan atory Note states, in relevant 
part: 
 For the purposes of this Rule, "articles presented unassembled or 
disassembled" means articles the components of  which are to be assembled either by 
means of fixing devices (screws, nuts,  bolts , etc.) or by riveting or welding, for 
example, provided  only assembly operations are involved. 
 No account is to be taken in that regard of the complexity of the assembly 
method.  However, the components shall not be subjected to any further working 
operation for completion into the finished state. 
 
263. Neither GIR 2(a) nor the Explanatory Note contains any reference to "manufacturing".  The 
relevant consideration, in respect of the scope of GIR 2(a), is whether the unassembled parts and 
components can be assembled into the complete  article by means of the specified assembly 
operations, without regard to the complexity of th e assembly method.  No party has disputed that 
CKD and SKD kits can be assembled into a comp lete motor vehicle by means of the assembly 
methods detailed in Explanatory Note VII.  Among other considerations, this conclusion follows from 
the fact that national customs authorities routinel y classify CKD and SKD kits for motor vehicles as 
"motor vehicles" in accordance with GIR 2(a).   
264. The notion of "manufacturing" is only relevant, if at all, in what is implied by the statement 
that "the components shall not be subjected to an y further working operation for completion into the 
finished state."  By "working operation," the drafte rs of GIR 2(a) presumably meant to use the word 
"working" in the sense of "making, manufacture, construction; the manner or style in which something is made."
44  Thus, if the components must be subjected to an additional "working 
operation" (i.e., a manufacturing operation) before th ey can be assembled into the complete article, 
then the components cannot be classified as the comple te article in accordance with GIR 2(a).  In the 
context, it is reasonable to interpret the term "w orking operation" to mean some process beyond the 
types of assembly operations detailed in the Explanatory Note.   
265. In sum, the notion of "manufacturing" is not re levant to the application of GIR 2(a) to CKD 
and SKD kits, as it is beyond dispute that CKD and SKD kits are assembled into finished vehicles by 
means of the assembly operations speci fied in the Explanatory Note.   
                                                      
44 The New Shorter Oxford English Dictionary at 3720 (CHI-40).     WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-62 
  
  Comments by the United States on China's response to question 62 
266. In its response to this question, China stated: "In sum, the notion of 'manufacturing' is not 
relevant to the application of GIR 2(a) to CKD and SKD kits, as it is beyond dispute that CKD and 
SKD kits are assembled into finished vehicles by m eans of the assembly operations specified in the 
Explanatory Note."  The factual question as to whether CKD and SKD kits can be assembled into 
finished vehicles is indeed disputed by the United States, as spelled out in our  response to the Panel's 
question 47.  Further, "manufactur ing" operations are not covered by GIR 2(a).  See Explanatory 
Note VII to GIR 2(a), which states in relevant part  "[h]owever the components shall not be subjected 
to any further working operation for co mpletion into the finished state."
45 
63. ( China )  What is the relationship between "CKD and SKD kits" and the "assemblies" 
referred to in Article 21(2) of Decree 125? 
 
Response of China 
 
267. There is no particular relationship, other than th at they all consist of auto parts in various 
states of assembly.  A complete motor vehicle is, of course, an assemblage of various parts.  It is a convention in the automobile industry to group these parts into "assemblies," such as all of the 
constituent parts that make up the "transmission as sembly."  In its most literal sense, a CKD kit 
consists of the parts necessary to assemble a particular motor vehicle, completely unassembled.  In 
practice, there is a continuum between a CKD kit a nd a kit in which at least some of the parts and 
components are in a more advanced stage of assembly – that is, an SKD kit.   
64. ( China )  Could China please comment on paragraphs 67-68 of the European 
Communities' oral statement. 
 
Response of China 
 
268. In China's view, the point that the EC is trying  to make in paragraphs  67 and 68 of its oral 
statement is not entirely clear.  The EC's argum ent appears to be that the data presented in 
paragraph 19 of China's first writte n submission demonstrate that certain combinations of assemblies 
specified under Article 21 of Decree 125 do not, in  the EC's view, have the essential character of a 
motor vehicle under GIR 2(a). 
269. The first response to this contention is that th e fact that certain assemblies only constitute a 
certain portion of the value of the assembled mo tor vehicle does not necessarily mean that those 
assemblies do not, in their entirety, have the essential  character of a motor vehicle.  The ratio of a 
particular assembly to the value of the assembled motor vehicle will change from one vehicle model 
to another.  While a ratio of imported parts beyond  a certain value level may indicate that those parts 
have the essential character of the complete article, the fact that the ratio of imported parts is below a 
certain value is not necessarily determinative unde r the essential character test.  As discussed in 
response to question 117, the value of parts and components in relation to the value of the finished article is one factor that customs authorities rely  upon in applying the essential character test under 
GIR 2(a).   
270. The second response to the EC's contention is that  if it wants to challenge the application of 
Decree 125 to the facts of specific cases, and argue  that certain combinations under Article 21 of 
Decree 125 do not have the essential character of a moto r vehicle, then it should being that case either 
                                                     
 
45 Exhibit CHI-15.    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-63 
  
  to a WTO dispute settlement panel or to the Ha rmonized System Committee of the World Customs 
Organization.  But the claim that it has brought before  this Panel is that there is no set of facts to 
which China could apply the challenged measures and obtain a correct classification result.  China 
rebuts this contention in response to question 147 below.   
65. ( China )  Please clarify whether the final duty liability always lies with automobile 
manufacturers regardless of the recorded importer. 
 
Response of China 
 
271. The auto manufacturer is, in most cases, the importer of record for most of the imported parts 
and components that it assembles into a registered motor vehicle model.  In those cases, the duty 
liability lies with the auto manufacturer as the importer of record.   
272. Article 29 of Decree 125 concerns the circumstan ce in which the auto manufacturer purchases 
imported auto parts and components from a third-part y supplier in China.  In  that case, the auto 
manufacturer is liable for the difference between any duty that has already been  paid on the imported 
parts and components, and the duty that is applicable by reason of their incorporation into a registered 
vehicle model for the manufacturer has declared that  the imported parts have the essential character of 
a motor vehicle.     
66. ( China )  Please explain how tariff duties are impo sed on imported auto parts when auto 
part manufacturers import auto parts.  
Response of China 
 
273. China assumes that this question pertains to impor ts of auto parts by auto part manufacturers 
that are not also manufacturers of complete motor ve hicles.  In that event, the importer would declare 
the imported auto parts under the applicable tariff rate provisions for auto parts, and would pay the 
applicable duty rates for these parts in accordan ce with the ordinary customs procedures for the 
payment of duties.   
67. ( Complainants )  If China was imposing an anti-dumping duty on complete vehicles, 
would China in your view have the right to impose such duty upon imports of CKD and SKD 
kits? 
 Response of the European Communities (WT/DS339)  
274. Such measures should be applied in accordance with the relevant WTO rules most notably 
Article VI of the GATT 1994 and the Agreement on Implementation of Article VI of the GATT 1994. 
In any event, any such duties should not affect the normal application of the provisions in force concerning ordinary customs duties. 
Response of the United States (WT/DS340) 
 
275. A Member's ability to impose antidumping duti es is governed by Article VI of GATT 1994 
and the AD Agreement.  The investigating Member  has the right to impose anti-dumping duties on 
imports of those products for which it has made a determination that there was dumping of the 
products under investigation, injury to domestic pr oducers of the like products, and a causal link.  The 
investigating Member is not required to impose the se duties on the basis of tariff lines and, in fact, 
investigating Members rarely do.  Typically, the dut ies are applied to the products covered by the WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-64 
  
  investigating Member's determination, which can be defined in numerous ways.  The product 
coverage can be defined to apply to some but not a ll products that fall under a particular tariff line or 
to products falling under or within a variety of tariff lines. In additi on, the product coverage can apply 
to finished products or to parts or both.  That  is what the rules of GATT Article VI and the 
Anti-Dumping Agreement allow.  The only requirements are the findings of dumping, injury and causal link. 
276. Thus, with regard to the hypothesized anti-dumping order imposing duties on complete 
vehicles, it would depend on precisely how the product coverage of the anti-dumping order was 
defined as to whether duties could be applied to CKD kits and SKD kits.  If the product coverage 
expressly included the kits, and the requisite findi ngs of dumping, injury and causal link had been 
made, it would be appropriate to impose duties on the kits.  If it was unclear whether the product 
coverage included the kits and the investigating au thority made an appropriate circumvention finding, 
it would again be appropriate to impose duties on the kits.  If, however, the product coverage of the 
anti-dumping order expressly excluded the kits, it wo uld not be appropriate to impose duties on them. 
Response of Canada (WT/DS342) 
 
277. If China was imposing an anti-dumping duty on co mplete vehicles, the ability to impose that 
duty on CKDs and SKDs would depend entirely on the constraints imposed by GATT Article VI and 
the Agreement on Implementation of Article VI (the " AD Agreement "). As set out in Article 1 of the 
AD Agreement , anti-dumping duties can only be applied under the circumstances provided for in 
Article VI of the GATT 1994 and pursuant to inves tigations initiated and conducted in accordance 
with the provisions of the AD Agreement .  Anti-dumping duties can only be imposed on imports 
falling within the description of those goods cove red by an anti-dumping duty order or finding.  
278. Typically, the scope of anti-dumping duty investigations, any resulting order and, 
consequently, any anti-dumping duties imposed, will extend to goods in their assembled and 
disassembled states whenever su ch goods are commonly presented for entry at the border in a 
knocked-down state. GIR 2(a) is not directly app licable in making a determination about the proper 
scope of coverage of products to  be assessed an anti-dumping duty.  
68. ( All parties )  Please comment on the view that if  WTO Members are allowed to resort to 
the notions contained in Rule 2(a) of the General Interpretative Rules, such as "as presented" 
and "essential character", in relation to tariff cla ssification, it could have serious implications 
on the world trading system in light of tod ay's commercial reality that manufacturers import 
parts and components from different sources and assemble them together. 
 
Response of China 
 279. The Appellate Body has repeatedly affirmed the importance of the Harmonized System in 
interpreting a Member's Schedule of Concessi ons.  As the Appellate Body observed in EC – 
Computer Equipment , it was "undisputed" in that case that "the Uruguay Round tariff negotiations 
were held on the basis of the Harmonized System's nomenclature and that requests for, and offers of, 
concessions were normally made in terms of this nomenclature."
46  In EC – Chicken Cuts , the AB 
observed that "prior to, during, as well as after the Uruguay Round negotiations, there was broad 
consensus among the GATT Contracting Parties to use the Harmonized System as the basis for their 
                                                      
46 EC – Computer Equipment , at para. 89.    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-65 
  
  WTO Schedules …"
47  On this basis, the Appellate Body cons idered that "the Harmonized System is 
relevant for purposes of interpreting tariff commitments in the WTO Members' Schedules."48 
280. The General Rules are, as their name indicates, "rules for the interpretation  of the 
Harmonized System."49  As the chapeau to the General Rul es indicates, the purpose of the General 
Rules is to provide "principles" according to which "the classification of goods … shall  be governed."  
Under Article 1(a) of the International Convention on the Harm onized Commodity Description and 
Coding System (the "Harmonized System Convention"), the General Rules are a part of the 
Harmonized System.50  In addition, under Article 3.1(a)(ii)  of the Harmonized System Convention, 
contracting parties are required to apply the General Rules.  General Interpretive Rule 2 is one of six 
General Interpretive rules.  As China has explained to the Panel, the purpose of GIR 2(a) is to deal 
with the relationship between comple te articles and parts of articles.51   
281. In light of this history and cont ext, China does not consider that  the relevant issue is whether 
WTO Members should be "allowed" to apply GIR 2( a).  To the extent that they are also WCO 
members, WTO Members are required  to apply GIR 2(a).  As it pertains to the interpretation of 
Members' Schedules of Concessions, GIR 2(a) is just  as important in providing context as any other 
element of the Harmonized System.  Members have negotiated tariff commitments on the basis of the 
Harmonized System, including the principles set fort h in GIR 2(a) for distinguishing between tariff 
provisions for complete articles and tariff provisions for parts of articles.  There is no basis to conclude that this context is any l ess relevant under Article 31(2)(a) of the Vienna Convention than 
any other aspect of the Harmonized System.
52 
282. As for the concern that terms such as "essential character" and "as presented" would have on 
the world trading system, it is important to stress that GIR 2(a) does not provide a license for national customs authorities to classify imports however they wish.  With respect to GIR 2(a), first sentence, 
the article must be "incomplete or unfinished," and while there is some scope for disagreement 
concerning the application of the "essential character"  test to a specific set of facts, these types of 
disagreements tend to fall within a narrow range of relevant characteristics.  In the case of any such 
disagreements, domestic customs pr ocedures and international pro cedures in the WCO and WTO are 
available to challenge the application of the rules to specific products.   
283. With respect to GIR 2(a), second sentence, the unassembled or disassembled parts must be 
capable of assembly into the complete article w ithin a carefully circumscribed range of assembly 
operations.  Thus, customs authorities could not invoke GIR 2(a) to classify any collection of parts or 
materials as a complete article that those parts or materials could conceivably form.  Under GIR 2(a), customs authorities cannot combine iron and carbon to make steel, or combine flour and yeast to make bread.  By the terms of Explanatory Note VII to GIR 2(a), the second sentence applies only to 
"articles the components of which are to be assembled either by means of fixing devices … or by 
riveting or welding, for example, provided only assem bly operations are involved."  In actual practice, 
there is a fairly narrow range of products under th e Harmonized System to which this circumstance 
applies. 
                                                     
 
47 EC – Chicken Cuts , at para. 199.   
48 EC – Chicken Cuts , at para. 199.   
49 EC – Chicken Cuts , at para. 233.   
50 JE-35.   
51 This is underscored by General Interpretive Rule 2(b), which deals with the closely related issue of 
the relationship between a material and a mixture or combination that includes that material.   
52 See EC – Chicken Cuts  at para. 199 (concluding that, under Article 31(2)(a) of the Vienna 
Convention, the Harmonized System is  "an agreement relating to the treaty which was made between all the 
parties in connection with the conclusion of the treaty.") WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-66 
  
  284. Thus, the principles of GIR 2(a) do not pose a threat to the international trading system.  
Customs authorities have been applying the principl es of GIR 2(a) for many years, even before the 
adoption of General Interpretive Rule 2(a) in 19 63.  These principles are a standard feature of 
international customs practice.   
Response of the European Communities (WT/DS339) 
 
285. These notions cannot be taken out of their pr oper context. Rule 2 (a) very clearly 
demonstrates that all of its elements must be fu lfilled at the same time. Taking any of these notions 
out of their context entirely undermines the whole sy stem of tariff classification and results in tariff 
classification at will. Members may of course use Rule 2(a) in its proper context to assist in individual cases that fulfil all the conditions of the Rule. Howe ver, China ignores the very basic rule that is 
Rule 1 of the HS system by jumping directly into rule 2 (a) and then picks and chooses what in that 
rule fits to its anti-circumvention theory. This  would seriously compromise "the security and 
predictability of the reciprocal and mutually adva ntageous arrangements directed to the substantial 
reduction of tariffs and other barriers to  trade" (Appellate Body e.g. in EC – Chicken cuts , at para. 
243). 
Response of the United States (WT/DS340) 
 
286. If China's view were adopted, then no producer would ever be able to rely on the tariff 
bindings set out in a Member's schedule.  In ev ery case, producers would face the possibility that an 
importing Member (as China has done) would adopt thresholds that arbitrarily defined some 
collection of imported parts as having the charact er of a whole product, and would thus begin 
assessing duties on the parts as if they were the whol e product.  Moreover, if China's view were 
adopted, every Member (regardless of the specific details of their tariff bindings on parts and whole 
products ) would be entitled (as China has done) to impos e higher charges on imported parts (as long 
as the rate of duty was equal or lower to the bindi ng on the finished product) used in domestically 
manufactured products if those products failed to meet  domestic content thresholds .  In other words, 
every Member would be entitled to adopt local-cont ent based TRIMs, despite the prohibition on such 
measures in the TRIMs Agreement.   
Response of Canada (WT/DS342) 
 
287. Canada does not take issue with WTO Members making use of GIR 2(a) in classification of 
individual shipments of products on the basis of the "snapshot" of goods as they arrive at the border. 
The "essential characteristics" must be assessed  based on the objective characteristics of the product 
as presented at the border in a single shipment. 
288. In marked contrast, accepting China's argume nts that GIR 2(a) could apply to multiple 
shipments arriving at different times (whether or not  from multiple destinations, and after the product 
has been imported based on criteria such as end-u se) would undermine significantly the security and 
predictability afforded by  tariff concessions.  In EC – Chicken Cuts , the Appellate Body considered 
the understanding of Members in respect of tariff c oncessions. It noted that the object and purpose of 
the GATT 1994 is "the security and predictability of  'the reciprocal and mutually advantageous 
arrangements directed to the substantial reduc tion of tariffs and other barriers to trade'".53  A Member 
that could ignore one lower tariff concession for a nother, higher one would thwart the understanding 
                                                      
53 EC –Chicken Cuts , Report of the Appellate Body, WT/DS2 69/AB/R, WT/DS286/AB/R, adopted 
27 September 2005, at para. 241, fn. 455, citing the Appellate Body in EC – Computer Equipment .  WT/DS339/R/Add.1 
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  of Members negotiating the concession and ther eby undermine the object and purpose of the 
GATT 1994.  
Comments by the United States on China's response to question 68 
289. On page 54 of its first submission, China asserts  that: "As China has explained to the Panel, 
the purpose of GIR 2(a) is to deal with the re lationship between complete articles and parts of 
articles."  This is a misstatement of General Interp retative Rule 2(a), which deals with the relationship 
of articles either incomplete or unfinished as well as  articles complete or finished that are presented 
unassembled or disassembled.  The notion that this is the only relevant rule ignores the application of 
General Interpretative Rule 1, which states that: "f or legal purposes, classification shall be determined 
according to the terms of the heading and any rela tive Section or Chapter Notes and, provide such 
heading or Notes do not otherwise require, acco rding to the following provisions."   
290. For example, the gasoline engine assemblies d escribed in Exhibit CHI-3, are precluded from 
classification in chapter 87 as "parts" of motor vehi cles by the application of General Interpretative 
Rule 1 and Legal Note 2(e) to Section XVII (which  includes chapter 87), and directs classification of 
this assembly to Heading 84.07 which provides for: "Spark-ignition reciprocating or rotary internal 
combustion piston engines."  This interpretation is  supported by EN VIII to GIR 2(a), which provide 
that "Cases covered by this Rule are cited in the General Explanatory Notes to Sections or Chapters 
(e.g., Section XVI, and Chapters 44, 86, 87 and 89)."  The General EN to Chapter 87 states that this 
"Chapter also covers parts and accessories which ar e identifiable as being suitable for use solely or 
principally with the vehicles included therein, subject  to the provisions of the Notes to Section XVII 
(see the General Explanatory Note to the Section)." 
291. Further, China's Footnote 20 also misstates GIR 2(b).  That footnote argues: "This is 
underscored by General Interpretive Rule 2(b), whic h deals with the closely related issue of the 
relationship between a material and a mixture or co mbination that includes that material."  To the 
contrary, GIR 2(b) provides guidance on how to inte rpret headings that reference a "material or 
substance."  GIR 2(b) simply has no relevance to how customs officials should classify articles and 
parts.   
292. On page 56, China asserts the following: "T hus, the principles of GIR 2(a) do not pose a 
threat to the international trading system.  Cust oms authorities have been applying the principles of 
GIR 2(a) for many years, even before the adoption of General Interpretive Rule 2(a) in 1963.  These 
principles are a standard feature of international cu stoms practice."  China's selective use of GIR 2(a) 
does pose a threat to the international trading system, because it ignores the structure of the 
Harmonized System and General Interpretative Rule  1.  The Harmonized System is made up of 
96 chapters grouped into 21 sections  consisting of approximately 5, 000 article descriptions in the 
headings and subheadings.  The Ha rmonized System is divided into categories or product headings 
beginning with crude and natural products and continuing in furt her degrees of complexity through 
advanced manufactured goods.   
293. General Interpretative Rule 2(a) requires that customs officials make a determination as to 
whether components entered together impart the essentia l character of a complete  or finished article.  
If not, then the components are to be individually classified.  This view is supported by the structure of the Harmonized System itself, which specifically  names certain parts in their own headings (e.g., 
spark-ignition reciprocating or rotary intern al combustion piston engines of heading 84.07, 
transmission shafts of heading 84.83, chassis fitted with engines of heading 87.06, bodies (including cabs) of heading 87.07) and contains headings for parts suitable for use solely or principally with 
motor vehicles (e.g., heading 87.08 which provides for parts and accessories of the motor vehicles of WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-68 
  
  headings 87.01 to 87.05).  To classify all parts even tually incorporated into complete motor vehicles, 
as motor vehicles would empty many headings and subheadings of the goods specified therein.   
69. ( All parties )  When you refer to CKD and SKD kits in relation to the assembly of 
automobiles, are they always composed of the same combination of auto parts or is there a 
range of combinations of auto parts that coul d comprise such CKD and SKD kit?  Please also 
provide definitions of CKD and SKD kits respectively.  Response of China 
 294. There is no standard definition in the automo tive industry of what constitutes a CKD or SKD 
kit.  As China explained in its first written submissi on, the ordinary understanding of a CKD kit is that 
it includes all, or nearly all, of the parts and com ponents necessary to assemble a complete vehicle.  In 
Indonesia – Autos , the EC informed the panel that CKD kits  for export to Indonesia included "almost 
all the parts and components necessary for assembling the cars."
54  The United States informed the 
panel that the CKD kits for the Ford Escort "would have contained all of the individual parts necessary to build a complete Esco rt, except for locally procured parts and components, such as oil 
and gasoline."
55  However, industry sources sometimes use th e term "CKD kit" to include a certain 
proportion of locally-supplied parts and components.  BMW, for example, states on its web site that 
"[i]n the CKD process, certain parts and components are packaged as kits in precisely defined 
assembly steps and exported for assembly in the respective countries.  These kits are then 
supplemented with locally manufactu red parts in the partner countries ."56  As China has explained 
previously, an "SKD kit" differs from a CKD in the extent of its prior assembly; it can be thought of as a CKD kit that has been partially assembled be fore it is exported to the destination market. 
295. Because there is an inherent amount of ambiguity in these terms, one often needs to examine 
the context in which the terms are used to discern the intended meaning.  A recent article concerning a 
new "CKD logistics centre" opened by the Czech au to manufacturer Skoda Auto provides some sense 
of how these terms are used, and also provides c ontext for answering the question below concerning 
the CKD assembly process.  The article explains: 
The new CKD logistics centre has been designed for end-to-end preparation, 
packaging and shipping of Skoda vehicles in three different assembly set versions – 
SKD (semi-knocked-down), MKD (medium- knocked-down) and CKD (completely-
knocked-down). Complete unassembled vehicl es are shipped by the centre to foreign-
based assembly plants in special containers or by train. 
An SKD assembly set is made up of a completely geared body, drive unit (engine, 
transmission and front axle), rear axle and other chassis parts (such as wheels, fuel 
tank, exhaust system, etc.). … 
One level down in terms of assembly-readiness, the MKD system comprises a painted 
body plus a further 1,300 – 1,700 parts. The vehicle assembly is performed on a standard assembly line, using a technological process comparable with that applied in 
the "parent" assembly plant…. 
                                                     
 
54 Indonesia – Autos , at para. 8.239.   
55 Indonesia – Autos , at para. 8.242. 
56http://www.bmwgroup.com /e/0_0_www_bmwgroup_com/produktio n/produktionsnetzwerk/produkti
onsstandorte/montagewerke.html (visited 4 June 2007).    WT/DS339/R/Add.1 
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  The lowest level of assembly-readiness is  CKD. The manufacturing plant delivers 
body parts and other components broken down to a large number of items. The 
assembly plant welds and paints the bod y, installs the drive unit and other 
components and completes the final vehicle build on a standard assembly line.
57 
296. Note that the distinguishing feature among these three different types of kits is the degree of 
"assembly-readiness".  The SKD has substantially assembled parts and components (such as the entire 
drive unit), the MKD kit has an asse mbled body that has already been painted plus "1,300 – 1.700 
parts," while the CKD kit is "broken down to a large number of items," including an unassembled 
body.   
Response of the European Communities (WT/DS339) 
 
297. There are no established legal definitions of CKD and SKD kits. In the language of the 
industry CKD or SKD kits may denote a combination of parts that make up a certain more general 
part of a vehicle ("assembly" using the language of Decree 125) or a combination of parts that make 
up a complete vehicle.  Therefore, in the industr y the concepts are used in a variety of ways. 
However, the European Communities understands that CKD and SKD kits under the measures 
comprise all the parts necessary to make a complete vehicle. 
Response of the United States (WT/DS340) 
 
298. This response is based on the understanding of the United States regarding general industry 
usage of the terms "CKD" and "SKD".  As noted in response to Question 47 above, these terms are not used by the US Customs Service for the purpose of  tariff classification.  In addition, the United 
States is not aware of any formal, published definition of these terms. 
299. CKD stands for "complete knocked-down" and SKD stands for "semi knocked-down".  
Completely knocked-down kits" ("CKDs") are part s 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 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.. 
Response of Canada (WT/DS342) 
 
300. See Canada's response to Question 33. 
70. ( All parties )  In light of your response to the previous question, please clarify whether 
you agree with the European Communities' explanation on CKD and SKD kits in 
paragraph 267 of its first written submission, in cluding its reference to "all the parts necessary 
to manufacture not only a vehicle, but also an 'assembly'"?  
Response of China 
 
301. For the reasons set forth in response to questio n 69, China does not consider that a CKD or 
SKD kit must include all of the parts necessary to assemble a moto r vehicle.  As noted above, there is 
some ambiguity in how the automotive industry uses these terms.  While it is generally agreed that a 
CKD kit includes nearly all of the parts and com ponents necessary to assemble a motor vehicle, the 
                                                     
 
57 "Skoda Auto steps up global production with new distribution facility" (5 May 2006) (CHI-41).   WT/DS339/R/Add.1 
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Page A-70 
  
  industry sometimes uses the term "CKD kit" in  a way that encompasses a certain proportion of 
locally-supplied content.   
302. With respect to the EC's use of the term "ass embly" in relation to a CKD kit, China believes 
that the EC was referring to the possibility that a particular assembly might itself be imported in the 
form of a CKD kit.  This is contemplated by Article 22(1) of Decree 125, which provides that an 
assembly shall be considered imported if it is assemble d from "imports of a complete set of parts …"  
Thus, for example, if a transmission assembly is assembled from a complete set of imported parts, Decree 125 classifies the imported parts as a transmission assembly, not as parts of a transmission 
assembly.  This is consistent with General Interpretative Rule 2(a).   
Response of the European Communities (WT/DS339) 
 
303. The European Communities understands that this question is addressed to the other parties. 
Response of the United States (WT/DS340) 
 304. The United States notes that the EC statement in paragraph 267 is describing the EC view of 
how "CKD" and "SKD" are used in Decree 125.  The EC notes that China's measure does not 
exhaustively define these terms, and the EC "assume d" that such kits "consist of "all the parts 
necessary manufacture a vehicle or an 'assembly"."  The United States believes these assumptions are 
reasonable, given the lack of clarity in China's measures.  
Response of Canada (WT/DS342) 
 
305. As set out above, Canada agrees that CKDs or SK Ds contain all or virtually all of the parts 
necessary to manufacture a whole vehicle.  
Comment by the United States on China's response to question 70 
306. In its response to this question, China states th at it does not consider that a CKD or SKD kit 
must include all of the parts necessary to assemble a motor vehicle.  China explains that "there is 
some ambiguity in how the automo tive industry uses these terms," and that "[w]hile it is generally 
agreed that a CKD kit includes nearly all of th e parts and components necessary to assemble a motor 
vehicle, the industry sometimes uses the term 'CKD kit' in a way that encompasses a certain 
proportion of locally-supplied content."  The United States agrees that industry uses the term "kit" to 
describe a wide range of combinations of parts,  many of which do not in clude all of the parts 
necessary to assemble a motor vehicle.  However, th e Panel's question is addressed to the measures at 
issue (not industry usage of the terms).  And Chin a's measures, particularly Articles 2 and 21(1) of 
Decree 125, appear to define CKD and SKD kits as kits that include all of the parts necessary to 
assemble a motor vehicle. 
71. ( All parties )  Please explain in detail what kind of manufacturing processes are usually 
involved to make a complete vehicle using CKD or SKD kits? 
 
Response of China 
 
307. The automobile assembly process (including the assembly of CKD or SKD kits) is commonly 
divided into three parts: welding, painting, and the final assembly (or "fitting") of the vehicle.  Motor 
vehicles are assembled from metal components that ha ve been stamped, or pressed, into the required 
shapes.  While there is some variation from one vehicle model to another, the basic structural  WT/DS339/R/Add.1 
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 Page A-71 
  
  elements of a passenger motor vehicle are the side panels, the floor panels (including the front wall 
and the back wall), the roof, and the opening pane ls (i.e., the doors, bonnet, and rear hatch).  These 
components must be welded together to form the body of the vehicle (often referred to as the "body in 
white").  Once welded together, the assembled body is  painted and cured thr ough various processes of 
spraying, heating, sanding, and lacquering.  Th e painted body then goes through an assembly line 
process in which the various interior and exterior  components of the vehicle (such as the windscreen, 
dashboard, seats, and steering wheel) are fitted to the vehicle by means of screws, fasteners, or 
bonding agents.  Usually toward the end of this pro cess, the vehicle is attached to the powertrain 
assembly (consisting of the engine, transmission, and axles), which has already been assembled on a 
different assembly line.  The car is fitted with wh eels and bumpers, and the doors are attached to the 
vehicle body.  At the end of this process, the assembled vehicle undergoes inspection and testing. 
308. The nature and extent of the assembly opera tions required for any given CKD or SKD kit 
will, of course, depend upon the extent to which the parts and components of the vehicle were 
assembled prior to their arrival at the assembly f acility.  For example, an SKD kit may consist of a 
vehicle body that was welded and painted prior to export.  In that event, the vehicle would only need to undergo the final assembly process in the destinat ion market.  Likewise, the various assemblies of 
the motor vehicle (such as the engine and transmis sion) may already be assembled in an SKD kit; this 
is alluded to in the excepts from the arti cle concerning Skoda Auto quoted above.   
309. Whatever its state of prior assembly, however, both CKD and SKD kits are assembled by 
means of the types of assembly operations specified in Explanatory Note VII to General Interpretative 
Rule 2(a).   
Response of the European Communities (WT/DS339) 
 
310. It is not possible to give a general answer as the level of fitting and equipping will by 
definition vary.  The example of a SKD kit provi ded in Exhibit CHI-5 would not require complex 
manufacturing processes provided all the electroni c equipping and calibration is already done and 
only the fitting of the tyr es would be necessary. In contrast, the difference between manufacturing a 
CKD kit into a complete vehicle may not differ considerably from the manufacturing of a complete vehicle generally. However, this will depend on th e manufacturing facilities of the manufacturer and 
the complexity of the relevant model. Modern vehi cles that typically contain elements of computer 
technology require various types of calibration dur ing the manufacturing process. Most body and 
chassis components will also need further working oper ations in the form of rust treatment, painting 
and polishing. 
Response of the United States (WT/DS340) 
 
311. It is not possible to give a general answer as the level of fitting and equipping will vary 
depending on the circumstances and the content of the kit.  An SKD with a high level of assembly (or, 
put another way, very little disassembly) may requ ire relatively simple assembly operations.  In 
contrast, assembling a complete knock down kit (CKD) will be more complex.  
Response of Canada (WT/DS342) 
 312. It is not until the final stage of assembly that  the chassis with engine (tariff heading 87.07) 
combines with the body (tariff heading 87.08) to form a complete vehicle. In order to explain how CKDs or SKDs are assembled, Canada considers it necessary to set out briefly the normal manufacturing process for a complete vehicle.  WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-72 
  
  Chassis:  the frame is placed on the assembly line. The complete front and rear suspensions, 
gas tanks, rear axles and drive shafts, gear boxes, steering box components, wheel drums and 
braking systems are installed sequentially. The e ngine with its transmission is then attached. 
 
Body:  the floor pan is the largest body component, containing many panels and braces. The 
front and rear door pillars, roof and body side panels are first assembled onto the floor pan. 
Additional body components, including fully assembled doors, deck lids, hood panel, fenders, trunk lid and bumper reinforcements, are then in stalled.  Next the vehicle body is spray-
painted. After the shell leaves the paint area,  it undergoes interior assembly. This include 
parts such as instrumentation, dash panels, in terior lights, seats, door and trim panels, audio 
system, steering column, and windshield.  
 
Final Assembly: the chassis assembly conveyor and th e body shell conveyor meet at this 
stage of production. As the chassis passes th e body conveyor, the body is placed onto the 
chassis and bolted to the frame. The automobile proceeds down the line to receive final trim 
components, battery, tires, anti-freeze and gasolin e. The vehicle is inspected and is given a 
price label and is prepared for delivery to retailers if it passes. 
 313. If CKDs or SKDs are used, while final assembly may be similar, the assembly operations for 
the body and chassis will be much less complicated than assembly solely from parts. However, it is 
not possible to provide a more detailed answer in the abstract, given the number of parts and assembly 
combinations. 
72. ( All parties )  Do the complainants agree with the description of SKD kits as illustrated in 
Exhibit CHI-5.  If not, explain why. 
 
Response of China 
 
314. China notes that this question was directed to all parties, although it appears to ask a question 
of the complainants.  As China noted in its firs t written submission at para. 36, the auto industry 
sometimes uses the term "SKD kit" to refer to a complete vehicle that has been partially disassembled 
prior to shipping.  (More commonly, the term refe rs to a partially assembled motor vehicle that has 
never been fully assembled.)  That appears to be th e intended meaning of the logistics company in this 
particular case.  As stated in the text that accompanied the photo at CHI-5, the logistics company 
notes that "SKD (semi knocked down kits) have already been dismantled , packed and shipped for 
DaimlerChrysler …"
58  The company also notes that the shi pping process for these SKD kits involves 
the "partial dismantling" of these vehicles.  From th e photograph, it is evident that the "dismantling" 
entailed removing the tyres and strapping them to the shipping skid. 
Response of the European Communities (WT/DS339) 
 
315. The European Communities agrees that the description in Exhibit CHI-5 illustrates a 
particular type of an SKD kit provided all of the parts are presented to the customs at the same time. 
Response of the United States (WT/DS340) 
 
316. Exhibit CHI-5 appears to illustrate a complete ve hicle rather than an SKD kit.  It appears to 
show a fully finished vehicle with its tires strapped to the shipping skid and not yet mounted.   
                                                      
58 See http://www.blg.de/news-content2006/februar06_en.php.    WT/DS339/R/Add.1 
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 Page A-73 
  
  Response of Canada (WT/DS342) 
 
317. Canada agrees that Exhibit CHI-5 could be a par ticular type of SKD, provided that all of the 
parts necessary to manufacture the SKD in question are included in a given shipment at a given time. 
However, the example would be an unusual SKD, si nce Canada understands that SKDs usually are in 
a less advanced state of assembly than shown in the exhibit.  
73. ( All parties )  Canada submits in footnote 1 of its first written submission that "in this 
submission, except where the measures specific ally provide for other categories of goods, 
"parts" includes all auto parts and components asso ciated with the production of whole vehicles 
or individual assemblies."  In light of this statement, please clarify the exact scope of the products at issue in this case.  Please explain in detail by referring to, inter alia, HS headings. 
 
Response of China 
 318. The motor vehicles at issue fall under headings 87.02 (motor vehicles for the transport of ten 
or more persons, including the driver), 87.03 (m otor cars and other motor vehicles principally 
designed for the transport of persons), and 87.04 (motor vehicles for the transport of goods).  
Different tariff headings under Chapters 84, 85 and 87 set forth China's commitments with respect to 
parts and assemblies of motor vehicles.  These include, at the four-digit level: 
84.07 Spark-ignition reciprocating or rotary internal combustion piston engines 
84.08 Compression-ignition internal combusti on piston engines (diesel or semi-diesel 
engines) 
84.09 Parts suitable for use solely or principally with engines of heading No. 84.07 or 84.08 85.39 Electric filament or discharge lamps, including sealed beam lamp units … 
87.06 Chassis fitted with engines, for the moto r vehicles of headings Nos. 8701 to 8705 
87.07 Bodies (including cabs), for the motor vehicles of headings Nos. 8701 to 8705 87.08 Parts and accessories of the motor ve hicles of headings Nos. 8701 to 8705 
 319. Not all subheadings under these headings relate  to the motor vehicles of headings 87.02, 
87.03, or 87.04.     
Response of the European Communities (WT/DS339) 
 
320. At the four digit level the products at issue fall generally into the following HS headings: 
(a) complete vehicles (under 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) 
(b) intermediate products such as the body an d the chassis fitted with engine (under 
headings 87.06 and 87.07) 
(c) parts and accessories of the motor vehicles of headings 87.01 to 87.05 (under heading 
87.08) 
(d) parts and accessories of motor vehicles classified elsewhere than chapter 87 (in 
particular Chapters 84 and 85; in this respect  most relevant are headings 84.07, 84.08, 
84.09, 84.83 and 85.11 but also other head ings may be relevant depending on the 
vehicle type). WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-74 
  
  Response of the United States (WT/DS340) 
 
321. This footnote in Canada's first submission sets out a working definition of "parts," and the 
United States agrees with this definition.  The Un ited States notes, however, that the scope of this 
dispute is not established by any disputing party's working definition of "parts" as set out in a submission.  Rather, the scope of this dispute is set out in the terms of referenc e, which in turn refers 
to matters (including the measures) set out in the re quest for an establishment of a panel.  Thus, the 
products at issue in this dispute are the products subject to China's measures (Order No. 8, 
Decree 125, and Announcement No. 4).  The product c overage of China's measures appears to be very 
broad, and to include any piece (part, assembly, or anything else) used in the production of complete 
vehicles.   
322. The United States understands that at the four dig it level, the products at issue fall generally 
into the following HS headings: (1) complete vehicles (under 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 fitted w ith engine (under headings 87.06 and 87.07); (3) 
parts and accessories of the motor vehicles of headin gs 87.01 to 87.05 (under heading 87.08); and (4) 
parts and accessories of motor vehicles classified elsewh ere than chapter 87 (in particular Chapters 84 
and 85; in this respect most relevant are headings  84.07, 84.08, 84.09, 84.83 and 85.11 but also other 
headings may be relevant de pending on the vehicle type). 
323. Nonetheless, the tariff classification (either asser ted by complainants or asserted by China) 
does not determine the scope of the products covered w ithin the scope of this dispute.  As noted, the 
United States is challenging the consistency of th e measures with covered agreements, and the scope 
of the products encompassed in this dispute are any products that China subjects to its measures 
identified in the request for establishment of a panel. 
Response of Canada (WT/DS342) 
 
324. The products at issue in this case are all products which are, or could be, subject to charges or 
reporting requirements under the measures. 
325. Article 2 of Decree 125 specifies that charges may be imposed on all imported auto parts 
"which are needed for production and assembly of vehicles by automobile manufacturers". Article 3 
specifies that "automobiles" include vehicles having at least four wheels used for carrying passengers 
or freight. Article 20 specifies that optional parts attached to a vehicle are covered by the measures. As a consequence, Canada believes that the majority of parts at issue in this dispute fall under Chapter 
87 (especially headings 87.06, 87.07, and 87.08), w ith other parts falling notably under Chapter 40 
(especially headings 40,11, 40.12, and 40.16), 84 (esp ecially headings 84.07, 84.08, and 84.09) and 85 
(especially headings 85.01, 85.03, 85.06, 85.07, 85.11 and 85.12).  
74. ( Complainants )  Please comment on China's statemen t in footnote 129 to its first written 
submission, which was made in response to the complainants' reference to Exhibit JE 25 
(p. 189).  Response of the European Communities (WT/DS339) 
 326. This statement would appear to confirm that China considers CKD and SKD kits as 
consisting of all
 the parts necessary to manufacture a vehicl e. Furthermore, China appears to admit 
that a significant combination of parts necessary to  manufacture a vehicle presented at the same time 
to customs at the border was classified as  parts prior to China joining the WTO.  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-75 
  
  Response of the United States (WT/DS340) 
 
327. Footnote 129 of China's first written submi ssion addresses statements about CKD and SKD 
kits made in a book cited by the complainants.  Th e statements at issue appear to be correct.   
328. Prior to its WTO accession on 11 December 2001,  the Chinese government generally did not 
allow the importation of CKD or SKD kits with essentially all of the parts required to assemble a complete vehicle.  However, if an automob ile manufacturer committed to the establishment of 
significant manufacturing facilities in China, China sometimes would allow the importation of these 
kits as needed to get the operations started.   
329. With regard to kits that did not contain essentially all of the parts required to assemble a 
complete vehicle (meaning kits that lack major asse mblies such as engines or other parts required to 
meet the criteria for having the "essential character" of a complete vehicle within the meaning of the 
General Interpretive Rules and their explanatory no tes), China applied import duties at rates that 
varied depending on whether the automobile manuf acturer was sourcing 40, 60 or 80 per cent of its 
parts locally - the higher percentage of parts s ourced locally, the lower the duties on the imported 
parts. 
330. In footnote 129 of its first submission, Chin a notably does not dispute the accuracy of these 
facts.  Rather, China disputes whether or not the groups of components mentioned in the source should be called "kits".  But whether China calls th em "kits" or not is beside the point.  The source 
supports the Complainants' assertion that the groups of components being imported into China prior to 
accession were being assessed duties at rates far below the whole-vehicle rate, and again illustrates that the purpose of paragraph 93 of the Working Part y report was to ensure that groups of parts and 
components imported into China after accession woul d be assessed as parts, and not at the higher 
whole-vehicle rate.   
Response of Canada (WT/DS342) 
 
331. Since  there is no established general definition of  the terms CKD and SKD, Canada does not 
agree with China that this is a "misuse" of these te rms.  Canada does agree, as set out in answer to 
Question 61(a), that evidence of China's treatment of  CKDs and SKDs prior to accession is limited.  
As noted in response to that question, China' s own claims regarding treatment of CKDs are 
contradictory.  
332. Canada also agrees that these terms as used in  Exhibit JE-25 are broader in scope than the 
term used by the complainants, as they apparent ly included collections of parts that were not 
sufficient to assemble a whole vehicle.  As discussed in  answer to Question 33, th is is consistent with 
the broader definition of CKDs or SKDs in the auto  industry.  Further, Canada understands that the 
basic information provided by that author to the effect that CKDs and SKDs were charged lower tariff 
rates than assembled vehicles does hold true for the term as used in this  dispute.  This is so because 
even if virtually all parts necessary to assemble a vehicle were imported in one shipment that arrived 
together at the border (i.e., a CKD or SKD as the term is used in this dispute), those parts were charged a tariff rate for CKDs or SKDs with less than 40% domestic content.   While that rate was 
higher than the rate for parts used in manufactured vehicles with greater domestic content, the rate 
was nevertheless lower than the tariff rate  for imported fully assembled vehicles.  WT/DS339/R/Add.1 
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Page A-76 
  
  75. ( All parties )  Are there any differences between CKD kits and SKD kits?  If so, please 
explain. 
 
Response of China  
333. As China has explained in response to questio n 69, and as illustrated in response to that 
question, CKD and SKD kits differ in their extent of prior assembly.  An SKD kit is a CKD kit with 
various parts and components at a more advanced stage of assembly.   
Response of the European Communities (WT/DS339) 
 
334. The difference between the concepts is the di fferent level of assembly and manufacture or 
"fitting and equipping" to use the specific language used under chapter 87 of the HS system. A CKD is a 'completely knocked-down" kit in which nothing or very little is fitted or equipped while an SKD 
or a 'semi knocked-down kit' consists of partia lly assembled, fitted, equipped and/or processed 
combinations of parts that together would make up a complete vehicle.  Reference is also made to the reply provided to question 47. 
Response of the United States (WT/DS340) 
 
335. Please see the response to question 69 above. 
Response of Canada (WT/DS342) 
 
336. See Canada's response to Question 33. However, Canada does not believe that this difference 
is material for purposes of this dispute.  
76. ( China )  Article 21(1) of Decree 125 refers to "imports of  CKD or SKD kits for the 
purpose of assembling vehicles ."  Are CKD or SKD kits imported for purposes other than 
assembly of vehicles?  If so, what are those other purposes?  
 
Response of China 
 
337. CKD and SKD kits are not imported for any purpo se other than assembly into motor vehicles.  
77. ( China )  In support of the argument of circumvention, China submits in paragraph 21 of 
its first written submission that "since the adoption of the challenged measures, auto manufacturers have confirmed that approximately 120 of the 500 or so vehicle models that have 
completed the evaluation process  ... are assembled from imported  parts and components having 
the essential character of a motor vehicle." 
 
 How many of these evaluation processes w ere related to importations done by the 
manufacturer itself and how many by the suppli er?  How many of these evaluation processes 
were related to importations of CKD or SKD ki ts?  How many of these evaluation processes 
were disputed by the manufacturer under the pro ceedings of Article 12 of Announcement 4?  
How many of these evaluation processes were disput ed by the manufacturer before the courts in 
China? 
  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-77 
  
  Response of China 
 
338. As of 1 May 2007, the CGA has verified 713 vehi cle models, of which 130 have been verified 
as assembled from imported parts and components that have the essential character of a motor 
vehicle.  China is uncertain what the question means when it asks "how many of these evaluation 
processes were related to importations done by  the manufacturer itself and how many by the 
supplier."  Evaluations are performed by automobile manufacturers with respect to the vehicle models 
that they assemble.  They are not performed by part s suppliers.  If the question is intended to ask how 
many registered vehicle models ha ve imported parts that are imported exclusively  by third-party 
suppliers (and none by the manufacturer itself), the an swer is that there are 15 such models, all of 
which are buses.   
339. None of the evaluation processes have related to CKD or SKD kits.  As China has noted, auto 
manufacturers import CKD/SKD kits as motor vehicles, in accordance with GIR 2(a). 
340. None of the evaluation processes have been di sputed by the manufacturer under Article 12 of 
Announcement 4, and none have been disputed in court.   
B. N
ATURE OF THE MEASURES  
78. ( All parties )  Please comment on the following argu ment contained in paragraph 14 of 
Australia third party oral statement, made in relation to China's claim that a charge imposed 
after the time or point or importation can still be a border charge if it relates to a condition of 
liability that attached at the time of importation : 
 
"Presumably, in an attempt to establish a nexus with importation, the measures at issue include a declaration made at the time of importation.  However, this declaration appears to be entirely focu sed on the way in which the imported 
parts will be used internally within China, rather than on the contents of a 
consignment upon importation.  ...  Therefore ... the liability attaches internally , 
after the vehicle has been manufactured." (emphasis added) 
Response of China 
 
341. China has responded to essentially the same argu ment in response to question 54.  China's 
responses to questions 79 and 134 below are also per tinent to this question.  In sum, the customs 
process that China has established under the ch allenged measures serves to determine whether 
multiple shipments of parts and components are rela ted to each other through their common assembly 
into a finished motor vehicle.  The liability to pa y the customs duty does not "attach internally"; it 
attaches by reason of the importation of multiple shipments of parts and components that, in their 
entirety, have the essential character of a motor ve hicle.  The auto manufacturer's obligation to pay 
this customs duty arises by reason of the importation of a group of auto parts that have the essential 
character of a motor vehicle, whether it imports those parts in a single shipment or multiple 
shipments.   
Response of the European Communities (WT/DS339) 
 
342. The European Communities entirely agrees with the argument contained in paragraph 14 of 
Australia's third party oral statement. In this  respect, the European Co mmunities refers to the 
examples provided in paragraph 66 of its first wr itten submission, which clearly illustrate that the 
15 % additional charge on auto parts is not dependent  on the importation of the part, but on the use to WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-78 
  
  which this part was put in China.  If a WTO Me mber could transform a measure triggered by the 
internal use of imported products into a border measu re just by imposing a declaration at the border, 
Article III of the GATT woul d be reduced to nullity. 
Response of the United States (WT/DS340) 
 
343. The United States agrees with this statement, and believes that this position is consistent with 
the reasoning of the United States showing that Chin a's charges are internal ones, and not customs 
duties.   
Response of Canada (WT/DS342) 
 
344. Canada agrees with Australia's statement, and in  that regard refers the Panel to paragraphs 65 
and 66 of Canada's first written submission, as an illu stration of how liability attaches internally under 
the measures. 
79. ( China ) If a country were to require retailers importing certain goods to declare at the 
time and point of importation whether they would subsequently sell such goods internally, 
would a sales tax eventually levied internally after the selling of these goods be considered as a 
border charge, rather than an internal tax, simp ly because it is related to a "condition of 
liability attached at the time of importation"?  Would your response be different if, in addition to the declaration at the border, the re tailer were also required to place a bond? 
 
Response of China  
345. The short answers to these two questions are "no"  and "no".  In fact, these questions perfectly 
illustrate the fallacy of the complainants' conten tion that China is seeking to create a loophole in 
Article III.   
346. China has repeatedly emphasized  that it does not take the position that a WTO Member can 
impose any charge as a liability of importation, and th ereby evade the disciplines of Article III.  This 
is a fictitious argument that the complainants have s ought to attribute to China.  Within the scope of 
Article II, the relevant question is whether the charge  is one that the Member is allowed to impose by 
reason of the importation of the product, in accord ance with its Schedule of Concessions and other 
WTO obligations.  As China has explained in res ponse to other questions, it is consistent with 
Article II to impose these charges after the time or place of importation, provided that the charge 
relates to a liability that arose by reason of the importation of the product.   
347. This brings China, once again, to what it considers to be the central  issue in this dispute:  Is it 
allowed under the rules of the Harmonized System, and in accordance with the practice of other WTO 
Members, to classify as a "motor vehicle" multiple shipments of parts and components that, in their 
entirety, have the essential character of a motor ve hicle?  China has explained at length its position 
that this is a valid interpretation of the term "m otor vehicle" under international customs rules and 
practice.  Thus, the challenged measures result in th e imposition of ordinary customs duties that China 
is allowed to impose by reason of the importation of the product. 
348. The declaration that importers make at the ti me of importation, and the bond that they are 
required to provide, are simply elements of the cu stoms procedure that Chin a has adopted to give 
effect to this valid interpretation of the term "m otor vehicles" as it appears in China's Schedule of 
Concessions.  It is neither the declaration nor the bond that renders the duty valid under Article II.  
What makes the duty valid is that it reflects a prope r interpretation of the term "motor vehicles."  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-79 
  
  80. (Complainants ) Would the complainants consider that the payment by the vehicle 
manufacturer of the 25% charge on CKD and SK D kits at the border, as contemplated in 
Article 2 of Decree 125, be characterised as a "border measure" or "ordinary customs duty"?  
If so, would it be appropriate for the Panel to  consider this specific case under Article II GATT? 
 
Response of the European Communities (WT/DS339) 
 
349. Provided the regular customs procedures are used  in that context, the European Communities 
agrees that it would be appropriate for the Panel to consider this specific case under Article II GATT. 
The issue would therefore be whether it is in accord ance with Article II of the GATT to classify CKD 
and SKD kits always and automatically as complete  vehicles. As stated under paragraph 275 of the 
EC's first written submission, such a general and au tomatic classification would not be consistent with 
China's obligations under Article II. 
Response of the United States (WT/DS340) 
 
350. If the enterprise agrees to pay a 25% charge on an CKD or SKD at the border, the other 
aspects of China's measures (such as verification of lo cal content) would not apply.  In this limited 
case, the charge would appear to be a customs duty.   The issue would therefore be whether it is in 
accordance with Article II of the GATT 1994 to classify  CKD and SKD kits always and automatically 
as complete vehicles, without regard to whet her, for example, only assembly operations were 
involved in completing the whole vehicle.  In additi on, the United States contends that such tariff 
treatment of CKDs/SKDs is inconsistent with Chin a's obligations under paragraph 93 of the Working 
Party Report.   
Response of Canada (WT/DS342) 
 351. Where such a CKD or SKD is charged 25% based upon its condition as it arrives at the 
border, i.e., commonly understood customs procedures are followed, Canada agrees that this is an 
appropriate case to be considered under GATT Article II. That consideration would include , e.g., an 
evaluation of whether the particular CKD or SK D could properly be said to have "the essential 
character" of a whole vehicle, and whether the appropriate tariff rate was charged. 
81. ( Canada )  In paragraph 11 of its oral statement, Canada states that "there are clear 
rules  in international trade for assessing goods on importation.  These rules recognize that there 
must be flexibility on importation at the border..."  (emphasis added)  Please explain what these 
clear rules are. 
 
Response of Canada (WT/DS342) 
 
352. These rules are those which govern the Harmonized System, including the International 
Convention on the Harmonized Commo dity Description and Coding System  and the General Rules for 
the Interpretation of the Harmonized System. This  includes Notes and Explanatory Notes to the 
Harmonized System. Decisions of the WCO's Harmonized System Committee may also be relevant. 
82. In paragraph 4 of its oral statement, China referred to an example of an auto 
manufacturer whose imports of parts and components come "from its own affiliates and from a 
single country" (emphasis added). 
 WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-80 
  
  (a) ( China )  Could China clarify whether the measu res concerned are applied only to auto 
part imports coming from companies affiliated  with the importing automobile manufacturer 
and from a single  country?  If so, please specify the relevant provisions of the measures 
concerned; and  
Response of China 
 
353. The measures do not apply only to auto part imports coming from companies affiliated with 
the importing automobile manufacturer and from a si ngle country.  China referred to this specific 
example in its opening statement simply to illustra te the complainants' positions in this dispute. 
(b) ( All parties )  Canada refers to factors such as  "origin" of imported parts, "who" 
purchases those parts, and whether there was an earlier investigation (paragraph 24 of 
Canada's oral statement) and "the timing of shipments or their frequency" (paragraph 34 of 
Canada's oral statement).  Please explain wheth er, and if so, to what extent, these factors are 
relevant to the consideration of the nature of the challenged measures. 
 Response of China  
354. These statements by Canada are highly pertinent to  what China believes to be the central issue 
in this dispute.  Canada has effectively conceded that WTO Members can apply the principles of 
GIR 2(a) to multiple shipments of parts and compon ents, consistent with the rules of the Harmonized 
System.  In Canada's view, the issue is one of how customs authorities go about doing this.  That is, 
Canada appears to believe th at it is not a question of whether,  but how.    
355. This is a critical concession by Canada.  Once it is conceded that the WCO has interpreted 
GIR 2(a) to permit its application to multiple ship ments of related parts and components, and once it 
is conceded that other WTO Members have taken a similar approach to resolving the relationship 
between complete articles and parts of those articles, then the complainants must acknowledge  that 
customs authorities can design and implement cust oms procedures to accomplish this result.  
Moreover, the complainants must acknowledge that these customs procedures relate to the 
implementation and enforcement of customs duties th at Members are allowed to impose by reason of 
the importation of parts and components that have the essential character of the complete article.  
These procedures are therefore within th e scope of Article II of the GATT 1994. 
356. Once these important points are established, this dispute becomes one that is fundamentally 
about the specific customs procedures that China h as adopted to resolve the classification relationship 
between motor vehicles and parts of motor vehicles.  China considers that Decree 125 establishes an 
open, transparent, and predictable customs procedure for determining what Cana da has referred to as 
the "commercial reality" underlying multiple shipments of auto parts and components.
59  As China 
has explained, this procedure determines whethe r multiple shipments of parts and components are 
related to each other through their common assembly in to a specific vehicle model.  In this way, the 
procedure determines whether multiple shipments of  parts and components are equivalent to a single 
shipment of parts and components that China would have classified as a motor vehicle under 
GIR 2(a).   
357. As for the specific factors cited by Ca nada, the critical point is that China does conduct what 
Canada refers to as an "investigation."  That is the purpose of the evaluation and verification process – 
to "investigate" whether an auto manufacturer im ports parts and components for a specific vehicle 
                                                      
59 See CHI-22.    WT/DS339/R/Add.1 
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 Page A-81 
  
  model that, in their entirety, have the essential char acter of a motor vehicle.  With respect to the 
"origin" of imported parts, Chin a does not understand why this would be pertinent to the question of 
whether an auto manufacturer has imported parts an d components in multiple shipments that have the 
essential character of a motor vehicle.
60  With respect to "who" purchases the imported parts and 
components, China is not certain as to what Canada means.  To the extent that Canada is referring to 
the application of Decree 125 to parts and component s that were imported by third-party suppliers, 
China addresses this question in response to question 83.  Finally, with respect to the "timing of 
shipments or their frequency," China again does no t understand why this would be relevant to 
determining whether an auto manufacturer has im ported parts and components in multiple shipments 
that have the essential character of a motor vehicle. 
Response of the European Communities (WT/DS339) 
 
358. These factors demonstrate that the Chin ese measures are much broader than the 
"circumvention" charges th at were examined in EEC - Parts and Com ponents. Therefore they must a 
fortiori  fall under Article III of the GATT. 
Response of the United States (WT/DS340) 
 
359. Canada in its opening statemen t was responding to China's premise that its measure was 
intended to stop importers, who were in the pr actice of importing CKDs, from evading the whole-
vehicle tariff applied to CKDs by splitting the CKD into two separate boxes.  As the United States has 
noted, the premise of China's argument is false:  modern, full-scale manufacturing operations are not in the business of importing CKDs; instead, as a matter of course, manufacturers purchase bulk shipments of parts from various sources.  And, nothing  in China's measures is limited to, or targeted 
at, some hypothetical manufacturer who is splitting a CKD shipment into two or more separate boxes.   
360. Presumably, if a Customs authority were involved in an investigation as to whether an 
importer was engaged in such a practice, it might examine factors such as those set out in the above question.  However, China's measures are not in fact  aimed at such practices, and – as Canada rightly 
pointed out -- the fact that China's measures do not take account of these factors further shows that China's measures were not in fact intended to stop the alleged practice of splitting a CKD into 
separate boxes.   
Response of Canada (WT/DS342) 
 
361. The principal reason for citing those specific factors in paragraph 24 of Canada's Oral 
Statement is to demonstrate that Chinese measures are broader than the "circumvention" charges at 
issue in EEC – Parts and Components . In that case, the charges were intended to prevent 
"circumvention" of anti-dumping duties. Both the original anti-dumping duties and the anti-
circumvention charges were established following an investigation, and applied only to certain 
companies which imported products from a particular country .61 
362. These factors are relevant to a consideration of the present measures in two ways. First, it is 
relevant because even the more targeted charges considered in EEC – Parts and Components , which 
were directly linked to particular anti-dumping duti es, were still found to be internal charges subject 
to Article III:2. 
                                                      
60 Indeed, as China points out in response to question 112, the decision of the HS Committee notes that 
the application of GIR 2(a) to multiple ship ments is not a Rule of Origin issue.   
61 See EEC – Parts and Components , GATT Panel Report, at para. 2.8 and Annex I. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-82 
  
  363. Second, these factors go to the analysis of China's defence under Article XX(d). Canada 
accepts that Article XX(d), in principle, could be u sed to justify internal ch arges necessary to enforce 
customs measures. However, as discussed in paragra ph 36 of Canada's Oral Statement, the measures 
do not even attempt to target particular conduct. As such, even if the measures could be justified 
under Article XX(d), they would still be arbitrary an d act as a disguised restriction on international 
trade in auto parts.  
83. ( China )  In paragraph 27 of its oral statemen t, the United States submits that China 
appears to concede  that the imposition of a charge on a part imported by a third party  is an 
internal charge, not a customs duty based on footnote 20 of China's first written submission.  
Does China agree with this statement? 
 
Response of China 
 364. No.  China considers that any charges im posed on an auto manufacturer pursuant to 
Article 29 of Decree 125 objectively relate to the administration and enforcement of China's tariff 
provisions for motor vehicles, as they relate to  the proper classification of the imported parts and 
components as part of a collection of imported parts and components that, in their entirety, have the 
essential character of a motor vehicle.  China notes, in this connection, that the EC has measures to 
ensure that importers cannot evade the duties that a pply to the complete article by using third-party 
importers.
62  Article 29 serves the same purpose. 
365. China acknowledges, however, that this specifi c aspect of Decree 125 presents a different set 
of issues in relation to the charact erization of the measure under Article II.  In most cases, imported 
parts that the auto manufacturer purchases from a th ird-party supplier in China will have completed 
the necessary customs formalities and are no longer subj ect to customs control.  In those cases, the 
imported parts and components are in free circulati on in China.  Because Chin a believes that these are 
important considerations in the characterizati on of this aspect of the Decree 125, China has 
specifically invoked the general exception in Article XX(d) of the GATT 1994 to justify this provision.  China believes that, even if the Panel were  to find that this provision of Decree 125 is an 
internal measure subject to the disciplines of Arti cle III, it is necessary to  secure compliance with 
China's customs laws and regulations, including its va lid interpretation of the term "motor vehicles." 
84. ( Complainants )  The Panel in EEC – Parts and Components used the expression 
"conditioned upon the importation of a product" (paragraph 5.5).  In this connection, please comment on China's position that the term "on their importation" can be interpreted to encompass charges that Members impose as a condition of the importation of products from other countries (China's oral statement, paragraph 25). 
 
Response of the European Communities (WT/DS339) 
 
366. The European Communities does not believe th at the panel used the expression "conditional 
upon the importation of a product" as a legal test in EEC- Parts and Components . In paragraph 5.5 of 
the panel report the panel appears to cite or at most rephrase the arguments made by the EEC at the 
time. The actual test the panel used seems to be cont ained in paragraphs 5.6, 5.7 and 5.8 of the panel 
report. 
367. However, the European Communities understands that China aims at extending the time and 
place at which the determination of a customs liability is normally made to a time well beyond the 
                                                     
 
62 See China's first written s ubmission at para. 125.    WT/DS339/R/Add.1 
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 WT/DS342/R/Add.1 
 Page A-83 
  
  time of the product being presented to customs on importation and even beyond the time of the 
product being used internally in the manufactur e of other products. The European Communities 
fundamentally disagrees with this position of China. As China considers that the charges in question 
are "ordinary customs duties" they should be due "on importation" not "in connection with 
importation" or be "conditional u pon importation" of a product.  In reality the charges and 
administrative requirements are internal measures im posed on the basis of the use of the parts in 
China.  There is no "connection" or "condition" th at relates to importation despite the ostensible 
formal link made with customs authorities and customs procedures. 
Response of the United States (WT/DS340) 
 
368. The United States does not agree that the term "on their importation" in Article II, first 
sentence, includes measu res that Members impose "conditional upon the importation of a product."  
There is no textual or contextual basis presented by China (or otherwise) for su ch an interpretation.  
To the extent that these two phrases have different  meanings, the one chosen by China (and the one 
not actually used in the GATT) is much broader, an d seems to be chosen by China in an attempt to 
argue that its internal charge is a customs duty.   In fact, China's phrase ("conditional upon") is so 
broad that it would seem to allow an internal sal es tax to be different for domestic products and 
imported products (because the higher tax on imported products would be "co nditional" upon the fact 
that the product had been imported).  Such an in terpretation would, of c ourse, be impermissible 
because it would conflict with (and make inutile) Article III:2.   
369. China's suggested interpretation is also inconsis tent with the context of Article II:1(b) as a 
whole.  The first sentence of Article II:1(b) associ ates the phrase "on their importation" with "ordinary 
customs duties".  The second sentence of Article II: 1(b) uses a broader term – "imposed on or in 
connection with the importation" – with the catch-a ll concept of "all other duties or charges of any 
kind."  But China's interpretation would destroy th is structure – it would (without reason) associate 
the arguably even broader phrase "conditional upon importation" with ordinary customs duties, thus rendering ineffective the decision by the drafters to  use the broad concept "on or in connection with" 
in association with "other duties and charges." 
Response of Canada (WT/DS342) 
 
370. Canada does not agree with China's pos ition that the phrase "conditioned upon the 
importation of a product" is of any assistance in considering the measures. The phrase does not appear in the text of Article II, nor does the panel in EEC – Parts and Components  adopt the language as 
relevant for interpreting that Article . In Canada's view, the term was not  used by the panel in any legal 
sense. Instead, the panel was referring merely to an  argument put forward by the EEC, in the context 
of the second sentence of Article II:1(b). 
371. Even if the panel had accepted the EEC's argu ment, and allowed conditions to be imposed on 
the importation of a product, China could not re ly on a similar argument. The second sentence of 
Article II:1(b) refers to "other duties or charges". But China has clearly stated  that it takes the position 
that the charges under the measur es are "ordinary customs duties", not "other duties or charges". See 
also Canada's response to Questions 97, 99 and 100. 
372. As a further hypothetical, even if China ha d explicitly included in its Schedule a note 
allowing it to impose conditions on the importation of auto parts as an "ordinary customs duty", it 
could not rely on that condition to impose internal charges contrary to GATT Article III (which China 
concedes that it imposes with respect to imports by  anyone other than vehicle manufacturers). Panels WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-84 
  
  have consistently ruled that Members cannot use c onditions reflected in a Sc hedule so as to justify 
measures otherwise inconsistent  with their WTO obligations.
 63  
85. ( All parties )  The complainants have presented their claims in such way that that the 
Panel would be required to examine their claims under Articles III and the TRIMS Agreement 
only if the measures at issue were to be considered as internal measures.  In your view, if the 
measures were to be considered as border measures, would th e Panel still be required to 
address the complainants' claims under Articl e III and Article 2 of the TRIMs Agreement? 
 
 In this connection, would the fact that th e Appellate Body (para. 211) upheld the Panel's 
finding in EC - Bananas III that, inter alia , "border measures may be within the purview of the 
national treatment clause" (Panel Report, para. 7.176) be of any relevance to this question?  Please explain.  
Response of China 
 
373. For the reasons that China has explained, th e challenged measures are within the scope of 
Article II because they interpret and enforce China' s tariff rate provisions for motor vehicles, as set 
forth in its Schedule of Concessions.  If the Panel were to agree with China that the challenged 
measures are subject to the disciplines of Article II, this would mean, in China's view, that the Panel 
would not be required to consider the complainan ts' claims under Article III and Article 2 of the 
TRIMs Agreement. 
374. China considers that, within their respective spheres of application , Article II and Article III 
of the GATT are mutually exclusive of each other.  The critical issue is determining their respective 
spheres of application.  The basic purpose of Ar ticle III is to prohibit Members from discriminating 
against imported products in comparison to the treat ment that they provide to domestic products.  One 
of the purposes of Article II, however, is to count enance a specific type of discrimination against 
imported products – the imposition of ordinary cu stoms duties within the limits of the importing 
Member's Schedule of Concessions.  The discrimina tion inherent in a customs duty that a Member 
validly imposes is not a form of discrimination that is prohibited under Article III.  If that were the 
case, Article II would be inutile ; the right to impose ordinary customs duties would be given in 
Article II only to be taken away in Article III.  This interpretation is not consistent with the object and 
purpose of the GATT and is not consistent with principles of effective treaty interpretation. 
375. The panel and Appellate Body reports in EC – Bananas III highlight the critical importance of 
defining the respective applications of Article II and Article III in relation to a challenged measure.  In 
relevant part, EC – Bananas III  concerned the procedures that  the European Communities had 
adopted for the allocation of import licenses unde r its tariff rate quota for third-party and non-
traditional ACP bananas.  Under these procedures, "operators" who had marketed bananas from EC 
and traditional ACP sources during the preceding th ree-year period – so-called "Category B" 
operators – were allocated 30 per cent of the impor t licenses necessary to import third-party and non-
traditional ACP bananas under the TRQ.  This system  created an incentive fo r operators to purchase 
EC and traditional ACP  bananas in order to increase their share of third-party  and non-traditional 
ACP imports under the TRQ. 
376. Critically, the EC's procedures for distribu ting import licenses for third-party and non-
traditional ACP bananas bore no relationship to the tariff rate quota that it was allowed to maintain .  
                                                      
63 EEC – Imports of Beef , GATT Panel Report, L/5099 - 28S/92, adopted 10 March 1981, at paras. 2.2, 
4.5-4.6; United States –Sugar , GATT Panel Report, L/6514 - 36S/331, 22 adopted June, 1989, at para. 5.5.  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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  The EC was allowed to maintain the TRQ with in the scope of its GATT commitments, and was 
allowed to maintain a system of import licenses to give  effect to this TRQ.  The issue in dispute was 
whether the EC's procedures for distributing  these import licenses, and the eligibility criteria that it 
adopted for this purpose, were within the scope of  its rights and obligations under Article II.  The 
Appellate Body recognized this important distinc tion: "At issue in this appeal is not whether any 
import licensing requirement, as such, is within th e scope of Article III:4, but whether the EC 
procedures and requirements for the distribution  of import licenses for imported bananas among 
eligible operators within  the European Communities are within the scope of this provision."
64  The 
Appellate Body found that the EC's distribution procedures for import licenses went "far beyond the 
mere import license requirements needed to administ er the tariff rate quota for third-country and non-
traditional ACP bananas or Lomé Convention re quirements for the importation of bananas."65 
377. As it relates to the present dispute, EC – Bananas III stands for the proposition that a law or 
regulation that a Member adopts to implement and enforce a measure that it is allowed  to maintain by 
reason of the importation of a product (such as the imposition of a customs duty or the administration 
of a TRQ), including any portion of such law or regulation, must be germane  to that purpose.  This is 
what the panel meant when it stated that "border measures may be within the purview of the national 
treatment clause."66  As the panel stated, the "mere fact" th at the distribution criteria favouring the 
purchase of EC and traditional ACP bananas were incl uded within a measure that ostensibly pertained 
to the administration of the TRQ did not determine whether the distribution criteria were subject to 
the disciplines of Article II or Article III.67    What mattered, as the Appellate Body confirmed in its 
report, was whether this aspect of the measure was an element of administering the valid border measure (the TRQ), and therefore within the scope of Article II, or whether this aspect of the measure served instead to affect the internal sal e, distribution, or use of the product.
68 
378. As China has demonstrated, the challenged measures implement and enforce a valid 
interpretation of China's tariff provisions for motor ve hicles, in a manner that is consistent with the 
rules of the Harmonized System and the pr actices of other WTO Members under similar 
circumstances.  Unlike the measures at issue in EC – Bananas III , the measures are germane to the 
enforcement of China's rights and obligations under Ar ticle II, in that they define the conditions under 
which China will consider the importation of multiple  shipments of auto parts and components to be 
                                                      
64 EC – Bananas III  (AB), at para. 211.   
65 EC – Bananas III  (AB), at para. 211.  This distinction had been recognized by the panel.  The panel 
stated that "we have to distinguish the mere requirem ent to present a licence upon importation of a product as 
such from the procedures applied by the EC in the context of the licence allocation which are internal laws, 
regulations and requirements affecting the internal sale of imported products."  EC – Bananas III  (Panel), at 
para. 7.177.  The panel stated that "although licences are a condition for the importation of bananas into the EC at in-quote tariff rates, we find that the administration  of licence distribution procedures and the eligibility  
criteria for the allocation of licences to  operators form part of the EC's internal  legislation. … Therefore, the 
[EC's] argument that licensing procedures are beyond  the purview of the GATT national treatment clause 
cannot, in our view, be sustained …"  Id. at para. 7.178 (emphases added). 
66 EC – Bananas III  (Panel), at para. 7.176.   
67 EC – Bananas III  (Panel), at para. 7.177.   
68 It is therefore not the case, as the United States a ppeared to suggest at the first substantive meeting, 
that every aspect of a measure can be analyzed for its conformity with both Article II and Article III.  To the 
extent that a measure, or some aspect  thereof, gives effect to a form of discrimination that a Member is allowed 
to undertake pursuant to Article II, that same element of discrimination cannot be challenged under Article III.  
For example, when a Member requires an importer to main tain certain records with respect to imported products 
for the purposes of customs administration, this "discrimination" against imported products is not subject to the disciplines of Article III.  It is simply an aspect of  administering and enforcing the "discrimination" that the 
Member is entitled to undertake within the scope of its Article II commitments.   WT/DS339/R/Add.1 
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Page A-86 
  
  equivalent to the importation of a motor vehicle, in accordance with the principles of GIR 2(a).  The 
measures are therefore within the sphere of applicati on of Article II, and not subject to the disciplines 
of Article III.   
379. The same conclusion pertains in respect of Article 2 of the TRIMs Agreement .  Under 
Article 2 of the TRIMs Agreement , a Member may not apply "any TRIM that is inconsistent with the 
provisions of Article III or Article XI of GATT 1994."  Because the challenged measures are not 
within the scope of either Article III or Article XI of the GATT, they are not subject to the disciplines 
of the TRIMs Agreement .   
Response of the European Communities (WT/DS339) 
 
380. The European Communities does not believe th at it has presented its claims under the TRIMs 
Agreement  and Article III of the GATT in a way that woul d require the Panel first to decide whether 
the measures at issue are to be considered as internal measures or not. Indeed, the European 
Communities explicitly stated in its oral statement under paragraphs 13 and 21 that an analysis under 
the TRIMs Agreement  does not require such an ex ante  preliminary consideration. It is China that has 
decided to base its defence on a premise that the Pane l must first decide whether the measures at issue 
are internal or border measures. 
381. The European Communities considers th at the Appellate Body's finding in EC – Bananas III  
is relevant in this context. China appears to c onsider that the general description of a Measure as a 
"border measure" or "border charge" automatical ly excludes an analysis of that measure under 
Article III of the GATT and/or under the TRIMs Agreement . In other words, China appears to argue 
that a "border measure" in the case at hand equals "s ubject to Article II of the GATT".  The European 
Communities considers that a measure that attempts to operate ostensibly at the border but which in 
reality applies internally is subject to an analysis under Article III of the GATT and the TRIMs 
Agreement . 
Response of the United States (WT/DS340) 
 
382. As the United States stressed in its oral statement, the United States did not intend for its first 
submission to indicate that Article III and the TRIM s Agreement only apply if China's charge is an 
internal one, instead of a customs duty.  To the contrary, the United States submits that regardless
 of 
whether the charge is considered an internal one or a customs duty, the measures are a straightforward 
breach of Article III:4, Article III:5, and the TR IMs Agreement.  The thresholds established by 
China's measures must be met in order to avoid the increase in the amount of 15 percentage points of 
the charge on imported auto parts.  As such, ma nufacturers have a strong incentive to purchase local 
parts, which results in less favorable treatment  under Article III:4, a mixing requirement under 
Article III:5, and a prohibited local conten t requirement under the TRIMs Agreement. 
383. Paragraph 211 of EC - Bananas III is directly supportive of this point.  In that dispute, the 
Appellate Body explained as follows:   
"211. At issue in this appeal is not whether any import licensing requirement, as 
such, is within the scope of Article III:4, but whether the EC procedures and 
requirements for the distribution of im port licences for imported bananas among 
eligible operators within the European Communities are within the scope of this 
provision.  The EC licensing procedures and requirements include the operator category rules, under which 30 per cent of the import licences for third-country and 
non-traditional ACP bananas are allocated to operators that market EC or traditional  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-87 
  
  ACP bananas, and the activity function rul es, under which Category A and B licences 
are distributed among operators on the basis of their economic activities as importers, customs clearers or ripeners.  These rules go far beyond the mere import licence 
requirements needed to administer the tariff quota for third-country and 
non-traditional ACP bananas or Lomé Conve ntion requirements for the importation 
of bananas.  These rules are intended, among other things, to cross-subsidize 
distributors of EC (and ACP) bananas and to ensure that EC banana ripeners obtain a 
share of the quota rents.  As such, these ru les affect "the internal sale, offering for 
sale, purchase, ..." within the meaning of Article III:4, and therefore fall within the 
scope of this provision.  Therefore, we ag ree with the conclusion of the Panel on this 
point." 
384. As the Appellate Body described, the EC measures (licensing requirements) were border 
measures, but the criteria for allocating the licenses a ffected the internal sale, offering for sale, and 
purchase within the meaning of Article III:4.  The analys is in the current dispute is the same:  even if 
China's charges are considered cust oms duties, the fact that the leve l of these charges are conditioned 
upon the amount of local content used by the manufac turer affects the internal  sale, offering for sale, 
and purchase of imported and domestic parts.  As such, they are subject to analysis under Article III:4.  And, because the measures favor manufacturers wh o use an amount of domestic parts that meets 
China's thresholds, the measures accord less favorab le treatment to imported parts and thus breach 
China's obligations under Article III:4.   
Response of Canada (WT/DS342) 
 
385. Canada does not consider that any aspect of the measures could be interpreted so as to 
preclude an Article III or TRIMs analysis. Canada has already referred to China's concession that 
charges imposed on parts imported by any party in China other than vehicle manufacturers are 
internal. There is no question that such char ges would be examined under GATT Article III and 
TRIMS Article 2. That noted, a border measure that imposes a charge at the time of importation, in 
accordance with China's Schedule, would fall within  the ambit of Article II. No analysis under 
Article III:2 would be required.   
386. The administrative  burdens imposed by the measures on imported auto parts must be assessed 
under Article III:4. It is irrelevant where that burde n applies. Canada suggests that in analysing the 
measures' administrative requirements, it is not necessary to make a preliminary determination of whether those requirements are "border measures" or  "internal measures" before considering whether 
they violate GATT Articles III:4 and III:5.  
387. Yes. The Appellate Body recognized that GA TT Article III may apply to measures otherwise 
described as "border measures", wher e those measures "go far beyond" the requirements to administer 
standard border procedures, and a ffect the "internal sale, offering for sale, purchase,…" within the 
meaning of Article III:4.
69 Canada considers that the measures go far beyond anything typical of a 
scheduled border charge or typical customs procedure and deny national treatment to imported products, as set out at paragraphs 44 to 64 a nd 102 of Canada's first written submission.  
86. ( European Communities )  China contends that the challenged measures, which it has 
adopted to prevent circumvention of its tari ff rates for motor vehicles, operate on the same basis  
as the EC's anti-circumvention measure that wa s revised as a result of the panel's findings in 
                                                     
 
69Appellate Body Report, EC – Bananas III , WT/DS27/AB/R, adopted September 25, 1997 at 
para. 211. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-88 
  
  EEC – Parts and Components.  (first written submission of China, paras.57-61)  Please comment 
in detail on this statement, including the di fferences and similarities between the challenged 
measures and the old and revised EEC measures related to EEC – Parts and Components . 
 
Response of the European Communities (WT/DS339) 
 
388. The Anti-Dumping rules of the European Communiti es are not before the Panel. In any event, 
the European Communities considers that the premi se of China's argument is fundamentally flawed. 
Even if it were to be considered ( quod non ) that the Chinese measures enfo rce Customs duties, trying 
to extract from EC AD anti-circumvention rules or an y other such rules general principles legitimising 
anti-circumvention rules of Customs duties would be totally inappropriate. Anti Dumping measures 
are subject to entirely separate obligations within  the covered agreements  which are defined in 
Article VI of the GATT and the Agreement on the Implementation of Article VI of the GATT 1994. 
Furthermore, the Ministerial Decision on Anti-Ci rcumvention adopted by the Trade Negotiations 
Committee on 15 December 1993 explicitly recognises that uniform rules on anti-circumvention of 
anti-dumping measures have not been defined.   Any comparison is therefore bound to be 
compromised by this fundamental problem with the premise of the comparison. 
389. If one ignores this very basic problem for the comparison, there is perhaps a very general 
similarity between the old EEC measures th at were subject to the panel report in EEC – Parts and 
Components  and the Chinese measures in the sense that the final determination on the applicable 
duties was made after the assembly operations. 
390. Under the new AD anti-circumvention rules,  the possible AD duties on the parts will be 
imposed at the border, and not anymore once they are assembled in the finished product. 
391. Reference is also made to the reply given to question 132. 
87. ( All parties )  In light of the language of GATT Articles I, II, III as well as the 
Interpretative Note Ad Article III, how relevant, in your view, is the precise time and place  of the 
collection of a charge, or the enforcement of a law or regulation, to the characterization of such 
charge or law/regulation? 
 
Response of China 
 392. With the possible exception of the Note Ad Article III, China does not consider that the rights 
and obligations of WTO Members set forth in GATT Ar ticle I, II, and III are defined by reference to 
the precise time and place at which a charge is collected, or a law or regulation is enforced.  None of these articles contains terminology that is directly or necessarily linked to the time or place  at which 
the action is taken.  On the contrary, these articles use a variety of different formulations to describe 
the types of measures to which the relevant provisions pertain, all of which seem to focus on the event  
or condition that triggers the right or obligation.  For example: 
• Article I:1 refers to "customs duties and charges of any kind  imposed on or in connection 
with importation
," and likewise refers to "all rules and formalities in connection with 
importation  …"   
• Article II:1(b) refers to ordinary customs duties imposed on products " on their 
importation  into the territory," and refers also to "other duties or charges of any kind  
imposed on or in connection with  the importation  …"  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-89 
  
  • Article II:2 refers to charges that Members may apply " at any time on the importation  of 
any product …"  This is a particularly interesting formulation, as it appears to 
disassociate the notion of time from the process  of "importation," a term that is used 
throughout Articles I and II. 
• Article III:2 and Article III:4 both refer to "the products of the territory of any 
contracting party imported  into the territory of any other contracting party …" 
393. In China's view, the common theme among these vari ous provisions, to the extent one can be 
discerned, are the notions of importation  and imported  as the events or conditions that trigger the 
substantive right or obligation.  On one side are ri ghts and obligations that the Member has in respect 
of products of other Members by reason of, or as a condition of, the "importation" of those products.  
On the other side are rights and obligations that the Member has in respect of products of other 
Members by reason of, or as a condition of, the fact that they have been "imported" into that 
Member's territory.  The time or pl ace at which the event occurs (e.g ., the collection of the charge, or 
the enforcement of the law or regulation) is not central  to this distinction; what matter is the event or 
condition that gave rise to the relevant right or obligation.
70 
394. This distinction requires an understanding of wh at the process of "importation" entails, as 
well as an understanding of what it means for products  to be "imported."  China has already sought to 
provide its views on this distinction, principally in  connection with its responses to questions 37 and 
55.  In sum, China considers that the process of "importation" is complete, and that goods have been 
"imported," once all of the customs formalities requi red in connection with the importation of those 
goods have been satisfied, and the goods are no longer subject to customs control.  As China has 
stressed in response to other questions, includi ng question 79, WTO Members are not allowed to 
impose any charge on imported products, or enforce any type of measure against imported products, 
simply because it is collected or enforced as pa rt of the "importation" process.  Again, China 
considers that what matters is whether the measure is one that the Member is allowed to impose by 
reason of, or as a condition of, the importation of the product. 
Response of the European Communities (WT/DS339) 
 
395. The precise time and place of the collection of a charge, or the enforcement of a law or 
regulation may be relevant for the characterization of such charge or law/regulation under Articles I, 
II and III of the GATT. It is not possible to give a "quantitative" answer that applies across the board. 
However, for instance the actual payment of a charge i.e. the transfer of the monies due to importation 
of a good may occur after importation but the dete rmination of the amount due must be made on 
importation. 
                                                      
70 As noted, the one possible exception to this observation is the Note Ad Article III, which refers to an 
internal tax or regulatory measure that applies to both the imported product and the like domestic product, and 
which is "collected or enforced in the case of the impor ted product at the time or point of importation …"  But 
even this one reference to "the time or point of importation" is itself ambiguous, as it still requires an understanding of what importation entails, when it occurs, and where it occurs.  As China has sought to 
demonstrate (e.g., in response to question 55), the process of "importation" (or "customs clearance") does not 
necessarily conclude when the goods physically cross the border.  The process of importation, including the completion of all necessary customs formalities, is often concluded long after the time at which the goods 
physically crossed the border, and when the good s are at a place other than the frontier.   WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-90 
  
  Response of the United States (WT/DS340) 
 
396. The United States considers that the precise time  and place of the collection of a charge is 
relevant to the characterization of such charge as an internal one or as a border charge.  However, as 
the question notes by its reference to Ad Article III, an internal tax applied to  imported products at the 
border is still considered an internal tax, despite that the time and place of its collection are at the 
border and upon importation.  The United States submits  that this question must be examined based 
on the particular facts and circumstances of each case.  In this dispute, as the United States has 
explained, the key factors in favor of finding China's charge to be an internal charge include (1) that 
the level of the charge depends on details of th e manufacturing operations that take place within 
China, after importation; (2) that the level of that  charge cannot be determined until the manufacturing 
process is complete; (3) that the charge is imposed on manufacturers, not importers; (4) that the charge is imposed even on imported parts that have been imported and processed in China by 
unrelated manufacturers; (5) that the parts deemed  to be a single "whole vehicle" may have been 
sourced from different exporters and imported at separ ate times; and (6) that such parts may indeed 
even have been sourced from different countries.  Moreover, identical
 imported parts in the same  
shipment can be subject to different  charges (that are allegedly "c ustoms duties") depending on their 
internal  use – for example, if one part is used within China as a replacement part and the other part is 
used within China to manufacture a vehicle that fails to meet China's local content requirement. 
Response of Canada (WT/DS342) 
 
397. In assessing the characterization of a charge, one must consider why, as well as how or when, 
the charge is imposed. As set out in more detail in response to Question 32, in respect of border 
charges, Canada's view is that the precise time and place of collection of a char ge is not determinative 
in characterizing a charge or law/regulation as subject to Article III or II. Border charges may be 
collected well after a product has been imported in to a Member, so long as the calculation of that 
charge is based upon the condition of the product as it arrived at the border. Conversely, a clearly 
internal charge (for example, a value-added tax) ma y be collected at the exact moment that a product 
enters the country, in accordance with Article II:2(a) and Ad Article III. For a charge, what is 
significant is whether the charge relates to the pr oduct as presented at a Member's border. Any border 
charge, whether collected at the border or at some later time, may only relate to the product at that 
point in time. If it does not (i.e., a charge based on end-use), then it must be an internal charge. 
88. ( All parties )  Please explain whether a charge, law or regulation must  apply to both 
domestic and imported products to be considered internal in light of the language of Note Ad 
Article III as well as the Panel's findings in EC – Asbestos  (paras. 8.93-8.95), EEC – Animal Feed  
(para. 4.16-4.18) and Dominican Republic – Import and Sale of Cigarettes  (paras. 7.25).   
 Response of China  
398. China considers that this is an  extraordinarily difficult question of interpretation.  In China's 
view, the heart of the interpretive problem is Artic le II:1(b), second sentence, which refers to "other 
duties or charges of any kind imposed on or in connection with the importation " of a product.  Under 
one interpretation, any charge that applies exclus ively to imported products, and that is not an 
ordinary customs duty covered by Article II:1(b), firs t sentence, is an "other duty or charge" within 
the scope of Article II:1(b), second sentence.  This view finds limited support in the panel report in 
Dominican Republic – Import and Sale of Cigarettes , although it is important to note that Honduras, 
the complainant in that case, did "not contest the fact  that the transitional surcharge is an ODC within  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-91 
  
  the meaning of Article II:1(b)."
71  It also finds support in the panel report in EC – Asbestos , which 
implied that an internal measure under Article III is one that applies to both the imported product and 
the domestic product, even if the measures in respect of the imported and domestic product are not 
identical .72 
399. This interpretation is complicated by the Note Ad  Article III, which refers to "[a]ny internal 
tax or other internal charge, or any law, regul ation or requirement of the kind referred to in 
paragraph 1 which applies to an imported produc t and to the like domestic product and is collected or 
enforced in the case of the imported product at the time or point of importation …"  The italicized 
language which applies to an imported product and to the like domestic product could be read as 
describing  what an "internal tax or charge" is  – it as a tax or charge applied to imported products and 
the like domestic products.  This would support the a pparent reading of the Note Ad Article III in EC- 
Asbestos.  On the other hand, the italicized language could be read as qualifying the type of "internal 
tax or charge" to which the Note Ad Article III applies  – it applies only to "internal taxes or charges" 
that are imposed on both the imported product and the domestic like product.  This second reading 
would support the view that an "internal tax or charge" is not necessarily  one that applies to both the 
imported product and the domestic like product.  Th is second reading is supported by the fact that, 
under the first reading, the italicized language is essentially redundant – if the language "which 
applies to an imported product and to the like domes tic product" describes what an "internal tax or 
charge" is, then the language is not essential to th e intended meaning of that sentence.  That is, under 
the first reading, the sentence would have the same meaning if it were written without the italicized 
language, as follows: "[a]ny internal tax or othe r internal charge, or any law, regulation or 
requirement of the kind referred to in paragraph 1 wh ich is collected or enforced in the case of the 
imported product at the time or point of importation …".   
400. China does not consider that a resolution of this  complex interpretive issue is necessary to the 
resolution of the present dispute.  For the reasons that China has explained, the challenged measures 
implement China's tariff provisions for "motor vehicles," and result in the imposition of the ordinary  
customs duties on motor vehicles that China is allo wed to collect under its Schedule of Concessions.  
These are not "other duties or char ges" within the meaning of Article II:1(b), second sentence.  Thus, 
this dispute does not implicate the relationship betw een "other duties or charges" under Article II:1(b), 
second sentence, and "internal taxes or charges" that  are applied exclusively to "imported" products 
within the scope of Article III.    
Response of the European Communities (WT/DS339) 
 
401. The language of Article III does not require that  a charge, law or regulation must apply to 
both domestic and imported products to be considered internal under Article III of the GATT 1994. In 
fact, under Article III:1 and III:2 referen ce is made explicitly to "imported or  domestic products"  
(emphasis added). Therefore, a charge, law or regul ation does not need to apply to both domestic and 
imported products to be considered internal and su bject to Article III of the GATT.  The Ad Note to 
Article III concerns specific s ituations where both the domestic a nd the imported like good are subject 
to charges, laws, regulations or requirements but ar e collected or enforced in respect of the imported 
good at the time or point of importation. If the sco pe of Article III was limited to situations where 
internal charges, laws, regulations or requirement s are applied to both domestic and imported goods, it 
would render the most blatant discriminations (i.e . situations such as is the case with the Chinese 
measures where the internal charges, laws, regulat ions or requirements apply internally only to 
imported goods) outside th e scope of Article III. 
                                                      
71 Dominican Republic – Import and Sale of Cigarettes , at para. 7.23.   
72 EC – Asbestos  (Panel), at para. 8.93.   WT/DS339/R/Add.1 
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Page A-92 
  
  Response of the United States (WT/DS340) 
 
402. The language of Article III does not require that  a charge, law or regulation must apply to 
both domestic and imported products to be considered internal  under Article III of the GATT 1994.  
In fact, under Article III:1 and III:2, refe rence is made explicitly to "imported or domestic products."  
Moreover, if the charge had to be applied to bot h imported and domestic pro ducts to be within the 
scope of Article III, Members freely could favor domestic products – contrary to the intent of 
Article III – through the simple expedient of imposing a high internal charge (a sales tax for example) 
that applied only to imported products, while comp letely exempting domestic products from the sales 
tax.  In fact, the charge in Belgium - Family Allowances exempted domestic products, and the 
GATT 1947 Panel nonetheless found that it was an inte rnal charge that was inconsistent with 
obligations under Article III:2.   
Response of Canada (WT/DS342) 
 403. Canada does not believe that a charge, law or  regulation must apply to both domestic and 
imported products to be  considered internal. The language of Article III itself imposes no such 
requirement, and Ad Article III simply clarifies that certain types of internal measures (which apply 
equally to imported products and to like domestic products but are app lied at the border) are subject to 
Article III. In effect, Ad Article III allows internal measures to  be applied at the border on imported 
products rather than wait until those internal products  have entered the internal market, but only if 
those internal measures also apply equally (and sep arately) to domestic products. The reverse does not 
apply, and there is nothing permitting measures rela ting to the importation of goods to be applied to 
internal trade. Such an interpretation would effectiv ely eliminate the value of Article III's requirement 
to provide national treatment, since it would allow blatant measures violating national treatment ( e.g., 
"all imported goods must pay an extra 100% char ge") as long as the measures do not apply to 
domestic products.  
404. A charge need not apply directly to both impor ted and domestic goods. Instead, it is correct to 
consider whether that charge adversely affects th e conditions of competition for imported goods. This 
principle is well-established in cases where a ch arge, law or regulation only applies to imported 
goods, but, as a consequence, confers an advantage for those producers that use or purchase domestic 
goods (see Canada's first written submission, at pa ragraphs 97-99). This is consistent with EC – 
Asbestos  (concluding that what might appear to be a measure restricting importation contrary to 
Article XI could also be an internal measure) and EEC – Animal Feed Proteins . 
405. The panel in Dominican Republic – Import and Sale of Cigarettes  did suggest in passing that 
the charge in question there was "not an internal  tax … since it does not apply to domestic products", 
but as set out in paragraphs 7.22 and 7.23, there was no dispute that the charges in question were 
"other duties and charges" subject to Article II.  The only question was whether those charges were 
recorded in the Schedule of the Dominican Republic.  
89. ( All parties )  What is the meaning of " at any 
time on the importation" in the chapeau  of 
GATT Article II:2 and " at the  time or point of importation" in the GATT Interpretative Note 
Ad Article III?   Do they convey the same or different no tion of time and space?  Can these 
provisions be of any guidance for the Panel in its characterization of the nature of the 
challenged measures? 
  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-93 
  
  Response of China 
 
406. For the reasons set forth in response to questi on 87, China does not consider that any of the 
various formulations surrounding the word "importati on" in Article I, Article II, or Article III 
(including the Note Ad Article III) are clearly tied to a notion of time or space.  In fact, as China noted 
in that response, the formulation in the chapeau  to Article II:2 (" at any time  on the importation") 
appears to disassociate the notion of "importation" fro m a specific time or place.  As China also noted, 
while the Note Ad Article III refers to the "time or point of importation," even this formulation 
requires some understanding of what "importation" m eans, when it occurs, and where it occurs.  Thus, 
China does not believe that these references to time  and space provide guidance for the Panel in its 
characterization of the nature of the challenged meas ures.  For the reasons that China has explained, 
China believes that the event  or condition  giving rise to the measure is the most relevant 
consideration. 
Response of the European Communities (WT/DS339) 
 
407. The words "at any time" in the chapeau of Article II:2 GATT would seem to refer to the 
general right of members to impose the relevant char ges, duties and fees at any time. In other words, 
"at any time" refers back to the words before them  and not to the words "on importation" that come 
after. The words " at the  time or point of importation" in Ad Article III in turn seem to refer to the time 
or point of importation. The words "at any time" and "at the time" in these provisions convey 
therefore a completely different notion of time and space. Comparing these formulations would not seem to provide any guidance for the Panel. 
Response of the United States (WT/DS340) 
 
408. The United States is not aware of how these provisions could be helpful in a characterization 
of the challenged measures.  Neither the complain ants nor China contends that the measures fall 
within the scope of Article II:2 or Note Ad Article III.  Instead, the provisions at issue are Article II:1 
and Article III:2.  To be sure, the language of ot her GATT provisions (such as Article II:2 or Note Ad 
Article III) might be referred to for context, but it is unclear how those provisions provide context for 
any interpretative issues in this dispute.   
Response of Canada (WT/DS342) 
 
409. Both phrases refer to the same concept: that there is a process of importation during which 
products physically enter the territory of a WTO Member and are cleared through customs. "At any 
time" during that process internal taxes may be  imposed in accordance with Article II:2(a), but, 
despite the charge being imposed at the "time or point" of importation, Ad Article III clarifies that it is 
still an internal measure and subject to Article III.  
410. In Canada's view, "at any time" should be read in relation to the remainder of the phrase "on 
the importation". The latter phrase indicates that the point of "importation", and not after the goods are imported, is the relevant time to apply the va rious types of charges that are permissible under 
Article II:2, namely anti-dumping duties, border charges equivalent to internal charges, or fees for the 
costs associated with importation. For example, a customs assessment of a good taken on presentation 
may occur independent of the assessment of administra tive costs rendered in respect of that particular 
importation. However, "at any time" read together with "on the importation" constrains the flexibility 
of customs officials to apply any charge not otherwise contemplated in Article II:2. The phrase "at the 
time" in Ad Article III appears to establish that the actual point of importation is discrete from the WT/DS339/R/Add.1 
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Page A-94 
  
  passage of the good into the internal market for pur poses of Article III. Neither of these provisions 
would seem to provide insight into timing issues in respect of Article II:1(b). 
90. ( Complainants )  Do you consider that the factors mentioned by China in paragraph 67 of 
its first written submission are relevant to the characterization of a measure as a border 
measure.  If so, please explain whether the challenged measures:  Response of the European Communities (WT/DS339)  
411. The factors mentioned by China in paragraph 67 of its first written submission clearly aim at 
extending the scope of Article II GATT into meas ures that should be examined under Article III 
GATT. Article II:1(b), first sentence does not contain any language that would allow the 
unprecedented extension of its scope in the way China suggests in paragraph 67. As considered by the 
Appellate Body in EC – Bananas III , rules that are attach ed to a border measure should be considered 
under Article III if they affect internal sale. 
Response of the United States (WT/DS340) 
 
412. The United States does not agree with China's cont entions in paragraph 67  of its first written 
submission.  In fact, China's assertions are entirely circular – China starts with an assumption that its charges are "valid customs liabilities" and a "liabilit y that attached at the time of importation."  
Neither of these assumptions is true.  As the Unite d States has explained, the charges are internal 
ones, and the liability actually attaches not at the time of importation, but only after manufacturing.  In fact, China requires a bond at the proper 10 per cent parts rate, and the manufacturer is only liable 
for the 25 per cent "whole-vehicle rate" if the imported part is used to produce a vehicle that does not 
meet China's local content thresholds.   
413. In the response to Question 32, the United States explains in detail why the customs 
enforcement mechanisms that Ch ina refers to in paragraph 67 have no relation to the Chinese 
measures at issue in this dispute.   
Response of Canada (WT/DS342) 
 
414. Canada does not agree with China's statement in paragraph 67 of its first written submission. 
As Canada has stated previously, while payment of duties may be calcu lated or paid after importation, 
the duties must be calculated based upon the state of  goods as they are presented at the border – that is 
to say "at the time or point of importation". 
(a) bear an objective relationship to the admi nistration and enforcement of a valid customs 
liability; and  
 
Response of the European Communities (WT/DS339)  
415. Even if the criterion suggested by China woul d be accepted, the measures do not bear an 
objective relationship to the administration and enforcement of a valid customs liability since the liability is established only after the manufacture of the final product. 
Response of Canada (WT/DS342) 
 
416. An internal charge may have a relationship with a customs duty, but that does not mean that it 
is justifiable under Article II if the charge is im posed based on anything other than the state of a good  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-95 
  
  as presented at the border. Liability applied to imported pr oducts under the measures occurs only after 
the final related product, the complete automobile, rolls off the assembly line. As a result, Canada 
sees nothing in the measures to suggest a relations hip with the administration and enforcement of 
valid customs liabilities. 
(b) relate to a condition of liability that attached at the time of importation. 
 Response of the European Communities (WT/DS339)  
417. The measures do not relate to a condition of liability that attached at the time of importation 
since the liability is triggered only after the manuf acture of the final product and depending on the 
internal use of the imported product in China. Reference is also made to the reply given to 
question 84. 
Response of Canada (WT/DS342) 
 418. Canada agrees that a border charge need not be  paid at the time of importation, but it must 
relate to the "snapshot" of the good as it arrives at th at time. As discussed in greater detail in response 
to Question 84, any "conditions" must be set out in a Member's Schedule, and cannot violate other 
provisions of the GATT. The conditions created by th e measures are not set out in China's Schedule, 
and apply in any event in respect of the internal use of imported products, thereby violating Article III 
(as discussed in response to Question 37). 
91. ( European Communities )  In paragraph 27 of its written oral statement, China considers 
that a charge is "conditional upon" the impo rtation of a product if the charge bears an 
"objectively ascertainable relationship to the fulf ilment of a customs liability".  Footnote 4 to 
that paragraph suggests that China's statement has been inspired by an EEC comment on the 
findings of the Panel Report in EEC – Parts and Components .  Please comment on the relevance 
of that comment to the instant case, in particul ar to the characterization of the measures as 
internal or border measures. 
 
Response of the European Communities (WT/DS339) 
 
419. As is often the case the EEC as the losing pa rty was not pleased with the panel report and 
made comments accordingly. These comments were  made exclusively in the context of Anti-
Dumping anti-circumvention measures. Subsequen tly the EEC accepted to adopt the report.  The 
comments made by the EEC at the time are ther efore entirely irrelevant for the present case. 
 
92. ( China )  China considers that the meas ures are border measures because inter alia  they 
"do not impose duties upon parts and components after they have unconditionally  entered 
China's customs territory."  (paragraph 60 of China's first written submission, emphasis added).  Are the charges imposed upon auto pa rts imported by suppliers under Article 29 of 
Decree 125 also not imposed after they have unconditionally  entered China's customs territory?  
More broadly, and taking into account your ow n understanding of a border measure, can a 
measure related to a product that has unconditionally  entered the territory of a country still be a 
border measure?  If so, how? 
 
Response of China 
 
420. China has answered this question, in su bstance, in response to question 83.   WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-96 
  
  93. ( China ) Could China clarify whether the "charge" at issue is calculated in accordance 
with the declaration made by the importer at the time of importation, or on the basis of the 
"Verification Report" issued by the Verificati on Center after the imported parts have been 
incorporated into the relevant vehicle model, in lig ht of China's statement in paragraph 32 of its 
first written submission and Article 28 of Decree 125. 
 
Response of China 
 
421. The charge is assessed in accordan ce with the declaration made at the time of importation.  
The verification report is the conclusion  of the determination that is made prior  to the importation of 
auto parts for a particular vehicle model.  Once it ha s been verified that a particular vehicle model is 
assembled from imported parts and components that, in  their entirety, have the essential character of a 
motor vehicle, the auto manufacturer must thereafte r declare those parts as parts of a complete motor 
vehicle, and pay the applicable duty rate for motor vehicles.  This obligation will not change until the 
auto manufacturer applies for, and obtains, a new verification of the vehicle model based on a change 
in the composition of the imported auto parts, as provided for under Article 20 of Decree 125.   
94. ( United States )  In paragraph 143 of its first written submission, China refers to an 
argument made by the United States in EEC – Parts and Components  that "[i]t was a general 
principle of international customs practice that  substance should prevail over the form of a 
transaction.  In certain situations assembly op erations could constitute a sham to evade the 
payment of anti-dumping duties.  This was no different from the routine problems faced every 
day by all contracting parties of preventing effo rts to evade the collection of legitimate customs 
tariffs on merchandise."   Based on this stat ement, China argues that the United States has 
directly analogized the circumvention of AD/CV duties to the circumvention of ordinary 
customs duties.   
Please comment on China's position in this regard. 
 
Response of the United States (WT/DS340) 
 
422. The above summary of a statement made by  the United States in a submission in a 
GATT 1947 dispute does not in fact compare AD/CVD circumvention to "circumvention" of customs 
duties.  To the contrary, it refers to the routine i ssue of customs enforcement – there is no reference to 
any action by US Customs authorities to condition th e level of a charge – as China has done – based 
on the detailed conduct of inte rnal manufacturing operations. 
95. ( China )  China claims in paragraph 111 of its first written submission that it is common 
practice by WTO Members, including China, to maintain measures that prohibit the use of 
domestic assembly operations as a means of circumventing ordinary customs duties.   
  Please provide examples of imported products  other than imported auto parts to which 
China applies this anti-circumvention principle in  the context of their ordinary customs duties.  
Also, provide the legal basis under China's laws and regulations for such practice. 
 
Response of China 
 
423. As China has explained in response to question 13, China does not believe that there is a 
freestanding "anti-circumvention principle" at issue in this dispute.  What is at issue is how China and 
other WTO Members deal with the relationship between complete articles and parts of those articles 
in assessing duties, in the specific circumstance in which the complete article is subject to a higher 
rate of duty than its constituent parts.    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-97 
  
  424. China has explained in response to question 57 that there are only a limited number of 
circumstances in which this issue arises in China's tariff schedule.  For the reasons stated in that 
response, China has not chosen to adopt comparable  measures to deal with these other circumstances. 
96. ( All parties )  In respect of Article II:1(b) of the GATT 1994: 
 (a) What is the definition of "ordinary customs duties" within the meaning of Article II:1(b), first sentence?; and  
(b) What is the definition of "other duties or charges" within the meaning of Article II:1(b), 
second sentence? 
 
Response of China 
 
425. China considers that "ordin ary customs duties" are the ad valorem  or specific duties that a 
Member has bound in its Schedule of Commitments under the column heading of "bound rate," and 
that the Member is allowed to impose on the produc ts of other Members by reason of the importation 
of that product into its customs territory. 
426. China considers that "other duties or charg es" include, at a minimum, those duties and 
charges that a Member has bound in its Schedul e of Commitments under the column heading of 
"ODCs."  As noted in response to question 88, ther e is a complex interpretive question as to whether 
the term "other duties or charges" includes any charge that a Member applies exclusively to imported 
products and that is not an ordinary customs duty.   
Response of the European Communities (WT/DS339) 
 
(a) What is the definition of "ordinary customs duties" within the meaning of 
Article II:1(b), first sentence?; and  
427. The GATT 1994 does not define the concept of "ordinary customs duty". However, it 
generally denotes financial charges in the form of  a tax imposed on products "on importation" and the 
liability to which is created by the importati on. Ordinary customs duties can be specific, ad valorem  
or mixed. A specific customs duty on a product is an amount based on the weight, volume or quantity 
of that product while an ad valorem  customs duty on a good is an amount based on the value of that 
good. A mixed duty is a customs duty comprising of an ad valorem  duty to which a specific duty is 
added or subtracted. The ordinary customs duties, which are due on importation are set out in a country's tariff schedules. Most national tariffs su ch as China's follow the structure set out by the 
Harmonised System. 
(b) What is the definition of "other duties or charges" within the meaning of Article II:1(b), 
second sentence? 
428. The reference to "other duties or charges" in Article II:1(b), second sente nce aims generally at 
preventing undermining the prohibition of Article II:1(b), first sentence, of the GATT 1994, to impose 
ordinary customs duties in excess of the bindings. According to paragraph 1 of the Understanding on 
the Interpretation of Article II:1(b) of the GATT 19 94 "in order to ensure tr ansparency of the legal 
rights and obligations deriving from pa ragraph 1(b) of Article II, the nature and level of any 'other 
duties or charges' levied on bound tariff items, as referr ed to in that provision, shall be recorded in the 
Schedules of concessions annexed to GATT 1994 agains t the tariff item to which they apply. It is 
understood that such recording does not change the le gal character of 'other duties or charges' ". WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-98 
  
  Response of the United States (WT/DS340) 
 
429. The GATT 1994 does not define the term "ordinary customs duty".  The United States 
understands an ordinary customs duty means a tax imposed on a good upon its importation, and 
calculated based on the quantity or value of the good at the time of importation.  Ordinary customs 
duties can be specific, ad valorem or mixed.  A sp ecific customs duty on a good is an amount based 
on the weight, volume or quantity of that product upon importation.  An ad valorem customs duty on a good is an amount based on the value of that good upon importation.  A mixed duty is a 
combination of an ad valorem duty and a specific duty. 
430. "Other duties or charges" in Article II:1(b) , second sentence is intended as a catch-all phrase 
to prevent the avoidance of a Member's bindings on ordinary customs duties.  According to paragraph 1 of the Understanding on the Interpretation of Article II:1(b) of the GATT 1994 "in order 
to ensure transparency of the legal rights and ob ligations deriving from paragr aph 1(b) of Article II, 
the nature and level of any 'other duties or charges'  levied on bound tariff items, as referred to in that 
provision, shall be recorded in the Schedules of concessions annexed to GATT 1994 against the tariff 
item to which they apply. It is understood that su ch recording does not change the legal character of 
'other duties or charges' ". 
Response of Canada (WT/DS342) 
(a) What is the definition of "ordinary customs duties" within the meaning of 
Article II:1(b), first sentence?; and 
 
431. As reported in the Guide to GATT Law and Practice:  
The word 'ordinary' was used to distinguish  between the rates on regular tariffs shown 
in the columns of the schedules (in French " droits de douane proprement dit ") and the 
various supplementary duties and charges [imposed on imports] such as primage 
duty.
73 
432. In practical terms, "ordinary customs duties" w ithin the meaning of Article II are duties which 
are charged on imported products during the process of  importation, and which are no greater than the 
bound rates set out in a Member's Schedule. They do not include supplementary charges of any kind that are direct or in connection with importation, and can be specific (based on, e.g., quantity or 
weight), ad valorem  (based on value), or a mix of the two.  
(b) What is the definition of "other duties or charges" within the meaning of Article II:1(b), 
second sentence? 
433. The Guide to GATT Law and Practice  notes that "other duties and charges" were defined by 
the GATT Council to include only charges that discriminate against imports, and do not include the 
charges set forth in Article II:2 (charges equiva lent to internal taxes, anti-dumping charges, etc.). 
"Other duties and charges" are charged during the process of importation, and are set out in a Member's Schedule in the column for "other  duties or charges", as required by the Understanding on 
the Interpretation of Article II:1(b) of the GATT 1994 .  
434. China's Schedule does not contain any "other duti es or charges" relevant to this dispute. 
                                                     
 
73 Guide to GATT Law and Practice , Volume I, at p. 78 (Exhibit CDA-6).  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-99 
  
  97. ( All parties )  What is the difference between a charge  imposed "on ... the importation" 
and a charge imposed "in connection with the importation" within the meaning of Article II:1(b), second sentence of the GATT?   
 
Response of China 
 
435. While there is considerable ambiguity in this  terminology, China considers that the most 
likely explanation for the use of the different form ulation in Article II:1(b), second sentence, is that 
the types  of charges at issue ("other duties or charges" ) are more varied in nature than "ordinary 
customs duties," the subject matter of Article II:1(b) , first sentence.  As explained in response to 
question 96, an "ordinary customs duty" is an ad valorem  or specific duty that a Member is allowed to 
impose by reason of the importation of the product.  Th ere is a single event that triggers the Member's 
right to impose the ordinary customs duty, and the importer's obligation to pay it – the importation of 
the product into the customs territory.  (As Chin a has explained at length in response to other 
questions, this does not mean that the ordina ry customs duty must be collected at the time or place  of 
importation.)  An "other duty or charge," by cont rast, may have other, more specific events or 
conditions that trigger the right to impose the char ge and the obligation to pay it.  These events or 
conditions would be spelled out in the Member's Schedule of Concessions.  Because these events or 
conditions are more varied, the drafters may ha ve used the "in connection with" language in 
Article II:1(b), second sentence, to reflect this fact.   
Response of the European Communities (WT/DS339) 
 
436. In view of the obligation to record the nature a nd level of any "other duties or charges" in the 
Schedules of concessions in accordance with paragr aph 1 of the Understanding on the Interpretation 
of Article II:1(b) of the GATT, the difference do es not seem to have any practical meaning beyond 
the difference of scope between Article II:1(b), fi rst and second sentence. In any event, there is no 
difference from the point of view of making the relevant customs classification of the product, which is to be made in accordance w ith the objective characteristics of the product as presented at the border 
and on the basis of the declaration to the customs. 
Response of the United States (WT/DS340) 
 437. Please see the US response to Question 84.   
Response of Canada (WT/DS342) 
 
438. The phrase "in connection with importation" origin ally may have been intended to reflect the 
fact that such duties or charges were not set out in a Schedule and could have been applied in ways 
other than those for ordinary customs duties. However, given paragraph 1 of the Understanding on the 
Interpretation of Article II:1(b) of the GATT 1994 , there is no practical difference in meaning. 
439. Only  Article II:1(b), first sentence, is relevant to  resolving this dispute, because China alleges 
it is enforcing "ordinary custom duties" and does not  consider its measures to apply "other duties or 
charges".  
98. ( European Communities )  Responding to the above question the European Communities 
stated during the first substantive meeting, inter alia , that there was no GATT/WTO 
jurisprudence on the meaning of the term "in connection with the importation".  Please elaborate more on this in light of the fact that the decision in the GATT Panel Report in EEC – 
Parts and Components
 examined an EEC argument that its measure was a border measure WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-100 
  
  precisely because it was levied "in co nnection with the importation" (see, inter alia , paras. 5.5 
and 5.7 of that Panel Report). 
 
Response of the European Communities (WT/DS339) 
 
440. The European Communities is not aware of juri sprudence that would define the words "in 
connection with importation" generally. In para 5.5 of EEC – Parts and Components  the panel 
appears to simply quote or at most rephrase the arguments made by EEC at the time. Under 
paragraphs 5.6 and 5.7 the panel c onsidered that the policy purpose of  a charge, the mere description 
or categorization of a charge under the domestic law of a contracting party or the treatment of the 
goods "as not being in free circulation" are not relevant to provide the required 'connection with importation'. To apply this reasoning to the presen t case, the description or categorization of the 
charges made under Chinese law is not relevant for determining whether the charges are levied "in 
connection with importation". In particular, the fact  that Chinese customs authorities are involved in 
the procedures and that the charge to be paid by  the manufacturer on the imported parts is called a 
duty is irrelevant for determining whether there is  a connection with importation within the meaning 
of Article II:1(b) of the GATT. If one were to acce pt China's arguments that the imported auto parts 
are subject to bonding requirements or that the measures are addressing circumvention of customs duties, both arguments woul d be equally irrelevant. 
99. ( All parties )  What is the difference between a law or regulation  enforced "on the 
importation" and a law or regulation enfo rced "in connection with the importation"? 
 
Response of China 
 
441. China is uncertain of the textual basis for this question, as neither Article II nor Article III 
(nor Article I) uses this terminology in relation to  the enforcement of laws of regulations.  For the 
reasons that China has set forth in response to other questions, China believes that what is relevant for 
the purpose of evaluating whether the measure is subject  to the disciplines of Article II or Article III is 
the event or condition that gives rise to the enforcement of the law or regulation.   
Response of the European Communities (WT/DS339) 
 442. It would seem that outside the concept of duties  and/or charges , this language is only used 
under provisions indirectly related to this case i. e. Articles I and XI GATT.  Article II:1(b), second 
sentence refers to "in connection with the importa tion" but only in respect of "other duties or 
charges".  If this is the context of the question i.e.  the Panel seeks to know the view of the Parties on a 
law or regulation that enforces the payment of other duties or charges in connection with the 
importation of a product as opposed to a law or regula tion that is enforced "on the importation", the 
European Communities refers to the differe nce between the first and second sentence of 
Article II:1(b).  A law or regulation that is enfo rced "in connection with the importation" can only 
enforce "other duties or charges"  not "ordinary customs duties". 
443. Reference is also made to the reply given to question 87 and the examples provided there 
under. 
Response of the United States (WT/DS340) 
 
444. The first phrase – "on their importation" – is narrower in scope than "in connection with 
importation."  Aside from this view, however, the Un ited States is not aware of any issue in this 
dispute with regard to laws and regulatio n which relates to this distinction.    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-101 
  
  Response of Canada (WT/DS342) 
 
445. As Article II applies only to charges, the word s "on the importation" in that Article are only 
relevant to laws or regulations to the extent that they impose charges. In that context, the difference 
between a law and a regulation is as set out in answ er to Question 97.  A law or regulation connected 
to the language of Article II:1(b) must relate, by de finition, to an "ordinary customs duty" or "other 
duty or charge" or it would not be covered under this Article. Simply put, if not related to an "ordinary 
customs duty" or "other duty or charge", a law or regulation would not fall within the scope of 
Article II:1(b). Accordingly, there should be no ta ngible difference to interpreting "on importation" or 
"in connection with importation" when speaking of border charges imposed on importation solely 
with respect to this provision.  
100. ( All parties ) Please explain whether, and if so, how, the phrases "on importation" or "in 
connection with importation" as indicated in the second sentence of Article II:1(b), second 
sentence are respectively relevant in defining the scope of "ordinary customs duties" under 
Article II:1(b), first sentence. 
 
Response of China 
 
446. For the reasons that China has explained in response to questions 96 and 97, China does not 
believe that the "in connection w ith" language in Article II:1(b), second sentence, is relevant in 
defining the scope of "ordinary customs duties" under Article II:1(b), first sentence.  Ordinary 
customs duties are the ad valorem  or specific duties that a Member has bound in its Schedule of 
Commitments under the column heading of "bound rate ," and that the Member is allowed to impose 
on the products of other Members by reason of the importation of that product into its customs 
territory.  The event or condition that gives rise to the Member's right to impose the ordinary customs 
duty, and the importer's obligation to pay it, is the importation of the product into the Member's 
customs territory. 
Response of the European Communities (WT/DS339) 
 
447. The first sentence of Article II:1(b) only re fers to "on importation" whereas the second 
sentence of Article II:1(b) refers to both "on impor tation" and "in connection with importation".  The 
prohibition to impose ordinary customs duties in exce ss of those set forth in the Schedule applies "on 
importation" whereas the prohibition to impose "other duties and charges" applies also to situations 
"in connection with importation".  A position such as China's that the 25 % duty imposed on imported automotive parts is an "ordinary customs duty" but imposed "in connection with importation" would 
seem contradictory on the face of the text of Article II:1(b) of the GATT 1994. In other words, 
"ordinary customs duties" cannot be imposed "in connection with importation".  
Response of the United States (WT/DS340) 
 
448. As the United States explained in its response to  Question 84, the United States submits that it 
is significant that the drafters of the GATT matche d "upon importation" to "ordinary customs duties", 
while the broader phrase "in connection with importati on" is matched to "other duties and charges".  
This matching indicates that there is a tighter  nexus between "ordinary customs duties" and 
importation than between "other duties and charges" and importation.   WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-102 
  
  Response of Canada (WT/DS342) 
 
449. Both phrases relate to "other duties and charges"  in the second sentence of Article II:1(b), not 
"ordinary customs duties" referred to  in the first sentence.  Accordi ngly, "ordinary customs duties" are 
not applied "in connection with im portation" as understood in Article II:1(b), second sentence.  This 
interpretation has been confirmed in the Understanding on the Interpretation of Article II:1(b) of the 
GATT 1994 , and by the Appellate Body and panel in Chile – Price Band .
74 
450. The phrase "on their importation", read in cont ext, is the one that qualifies how products 
described in Part I of a Member's Schedule are exempt from "ordinary cust oms duties" in excess of 
those set out in the Schedule itself. The second sente nce of Article II:1(b) specifically precludes the 
application of "other duties or charges" either on (at the time of) or in connection with  (linked to, 
although perhaps not contemporaneous with, the ph ysical act of importation) the goods being 
imported, in excess of a limited class of permissible charges into which the measures clearly do not 
fall.     
101. ( All parties )  In the parties' view, could different aspects of the measures be respectively 
considered as either internal measures or border measures? In other words, could one part of 
the measure be a border measure while the other part be an internal measure?   Also, would the fact that CKD and SKD kits  can be exempted from the measures at 
issue under Article 2 of Decree 125 be relevant to this consideration in any manner?  Likewise, 
would charges levied under Article 29 of Decree 125 be relevant to this consideration in any 
manner?  Response of China 
 451. There is no question that different aspects of th e same measure can be respectively considered 
as either internal measures or border measures.  Th e Appellate Body has considered that a "measure" 
is an act or instrument of a Member "containing rules or norms."
75  It is self-evident that, in any 
measure, some of the rules and norms may pertai n to the implementation of a Member's rights and 
obligations under Article II, while other rules and nor ms in the same measure may pertain to internal 
matters that are subject to the disciplines of Ar ticle III.  As China suggested in response to 
question 85, what is relevant, in China's view, is whether the particular rule or norm at issue is 
germane to the administration and enforcement of an action that the Member is allowed to take (such 
as the imposition of a customs duty) by reason of th e importation of a product from another Member.  
Such rules or norms within a measure are subject to the disciplines of Article II of the GATT.   
452. With respect to CKD/SKD kits, China does not c onsider that the possibility of "dividing" a 
measure into border elements and internal elements is relevant to this dispute, as it is beyond doubt 
that CKD/SKD kits are properly classified as motor vehicles under GIR 2(a).  With respect to charges 
levied under Article 29 of Decree 125, China has stated  in response to question 92 that the application 
of duties to imported auto parts that are already in  free circulation within the customs territory of 
China is conceptually different, for the purpose of an alysis under Article II, from the application of 
duties to auto parts that the auto manufacturer imports directly. 
                                                      
74 While not resolving the issue of what exactly would constitute an "other duty or charge", both the 
panel and Appellate Body in Chile – Price Band  recognized there is a difference between the two. See 
paras. 273-287 of the Appellate Body Report and paras. 7.103-7.108 of the Panel Report. 
75 US – Corrosion-Resistant Steel Sunset Review , at para. 82.    WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-103 
  
  Response of the European Communities (WT/DS339) 
453. In principle this would be possible.  Howeve r, the measures would seem to be written as a 
whole and splitting their provisions into separate parts is difficult.  Nevertheless, the option given 
under Article 2 of Decree 125 to ma nufacturers that import CKD or SKD kits to conduct the clearance 
procedure and pay duties at the Customs office where the manufacturer is located and thus avoiding 
the further application of the measures could be  singled out as a matter to be examined under 
Article II of the GATT while the rest of the measures would be subject to the TRIMs Agreement  and 
Article III of the GATT.  In contrast, Article 29 of Decree 125 is not a provision that can be separated 
from the other provisions of the measures.  This is  a general provision that applies to automobile 
manufacturers that purchase automotive parts from suppliers and/or do not use the imported parts within a year from importation.  Article 29 uses  the general language of  the measures on "deemed 
whole vehicles" and is directly connected with th e overall logic of the measures according to which 
the classification of the imported parts depends on their in ternal use in China.  Th is is an intrinsic part 
of the mechanism set up by the measures to discrimina te against the use of imported auto parts in the 
manufacture of complete vehicles, and ensures in this way the development of the Chinese vehicle 
and auto parts industry. 
Response of the United States (WT/DS340) 
 
454. In principle, it is possible that the same measure would impose both internal taxes and 
customs duties.   
455. As the United States has noted, where an importe r declared a CKD at the border and paid a 25 
per cent tax, this aspect of the measure would appe ar to be a customs duty, to be examined under 
Article II.   
456. As noted in the US oral statement, China app ears to concede that Article 29 (in so far as it 
applies to parts sourced from manufacturers in China) imposes an internal charge that is inconsistent 
with Article III:2.   
457. It bears repeating that, in the view of the United States, any
 charge imposed by China's 
measures above the 10 per cent duty owed (and for wh ich a bond is posted) on imported parts is an 
internal charge, not just the additional charge imposed on parts sourced from manufacturers pursuant 
to Article 29.   
Response of Canada (WT/DS342) 
 
458. A measure may be applied at a Member's border, but that is not determinative of whether that 
measure affects internal trade in a manner understo od in Article III. Canada considers that charges 
under the measures (as they apply to Deemed Whole Vehicles) are properly characterized as internal 
charges – a position that China concedes except w ith respect to imports directly by vehicle 
manufacturers. The only exception to this could be with regard to CKDs and SKDs that, as presented 
at the border in a single shipment, contain all or  nearly all of the parts necessary to assemble the 
vehicle. Nonetheless, as discussed in response to Question 61, China has committed in its Working 
Party Report to apply a tariff rate of no more th an 10% for CKDs and SKDs. Any charge over this 
rate results in less favourable tr eatment than China is obliged to provide Canada for CKDs and SKDs, 
and is therefore inconsistent with Article II of the GATT.   
 Also, would the fact that CKD and SKD kits  can be exempted from the measures at 
issue under Article 2 of Decree 125 be relevant to this consideration in any manner?  Likewise, WT/DS339/R/Add.1 
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  would charges levied under Article 29 of Decree 125 be relevant to this consideration in any 
manner?  
459. No, as CKDs and SKDs are not actually exempt from the application of the measures.  They 
are only "exempted" to the extent an importe r is willing to accept their classification under 
Article 21(1) as a Deemed Whole Vehicle, which effectively means the measures apply to them.  As noted in the answer to the first part of Questi on 101 above, the measures could be seen as applying a 
"border charge" only to the extent that CKDs and SKDs are classified when, as presented at the border 
in a single shipment, they contain all or nearly all of the parts necessary to constitute a motor vehicle. 
In all other instances, and for all auto parts, the a pplication of the measures results in internal charges 
that are inconsistent with Article III. 
460. In respect of Article 29, the charge applied to  imported auto parts can only be considered a 
border charge to the extent it represents the appli cable tariff rate for auto parts listed in China's 
Schedule. The charges of 15%, if a vehicle manuf acturer provides evidence that the parts supplier 
already paid the parts duty owed, and of 25%, if such documentation cannot be produced, are internal. 
In the latter case, the charge is not only internal, but both punitive and completely unrelated to the 
actual importation of the original auto parts. 
102. ( China )  Please explain why the 60% threshold criterion under Article 21(3) of 
Decree 125 would not constitute a local content requirement. 
 
Response of China 
 
461. As China explains in response to question 117 below, the value of imported parts and 
components in relation to the value of the finished article is one factor that customs authorities 
consider in applying the essential character test under GIR 2(a).  China provides specific examples of 
this practice in response to question 117.  The 60 per cent threshold criterion under Article 21(3) of 
Decree 125 reflects this aspect of the essential charact er test.  China considers that a collection of 
imported parts and components that meets this threshold will necessarily be recognizable as a motor vehicle, and therefore have the essential character of  a motor vehicle.  It is not a local content 
requirement.   
Comments by the United States on China's response to question 102 
462. In its response, China claims: "As China expl ains in response to question 117 below, the 
value of imported parts and components in relation to the value of the finished article is one factor 
that customs authorities consider in applying the essential character test under GIR 2(a).  China 
provides specific examples of this practice in r esponse to question 117.  The 60 per cent threshold 
criterion under Article 21(3) of Decree 125 reflects this aspect of the essential character test." 
463. This statement by China mischar acterizes the application of Article 21(3) of Decree 125 to 
importers because it treats value of imported parts as 1 of 3 methods that automatically triggers the 
conclusion that the parts constitute complete vehicl es.  This is not an essential character test, but a 
strict value threshold.  Article 21(3) of Decree 125 is not a factor in determining "essential character" but is the sole factor used by China that results in a local content requirement.   
464. Further, the examples provided by China in Exhibits CHI-16, CHI-42, and CHI-45, do not 
support the use of value as a sole criterion for establishing essential character.  Exhibit CHI-16 (NY M83114) clearly states that: "[t]he nature of the item,  its bulk, quantity, or value may be looked to in a 
determination of essential character.  It is our be lief that the 34-piece Glock 17 model parts kit  WT/DS339/R/Add.1 
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  proposed to be imported, absent the receiver com ponent, constitutes the aggregate of distinctive 
component parts that establish its identity as what it is, a complete or finished pistol."  The United 
States did not rely on value to determine "essentia l character" under GIR 2(a), but instead it relied on 
the fact that the kit was "imported without the frame but with all other necessary parts" as an 
unfinished, unassembled pistol.   
465. In Exhibit CHI-42 (HQ 086555), the United States recognizes, in the context of GIR 2(a), 
that: "The nature of the item, its bulk, quantity, or  value may be looked to [to determine an article's 
essential character.  However, such a determinati on varies between different types of merchandise. 
[citing to Explanatory Note (VIII) to GIR 3(b) and not to ENs for GIR 2(a)]."  In that ruling, the 
United States stated that an incomplete or unfin ished backhoe excavator would be classified as an 
excavator, if it has the essential character of an ex cavator.  The incomplete or unfinished excavator 
must be easily recognizable as an excavator.  In  that case, the United States concluded that the 
propelling base of an excavator imparted the essen tial character because it was substantial enough 
within the meaning of GIR 2(a).  The US did not  rely on value to determine "essential character" 
under GIR 2(a), but examined the nature of the item.   
466. In Exhibit CHI-45, a US customs ruling descr ibes an intermodal railway car missing certain 
components that would make it a stand-alone railway  freight car designed to carry certain size truck 
trailers.   As part of its facts, the ruling noted  that the percentage value of the imported product 
compared to the completed article.  In its "Law a nd Analysis" section, the ruling cites to GIR 2(a) and 
concludes that the article as imported constituted an unfinished railway or tramway freight car.  The 
ruling simply does not provide any reasoning or set forth a basis for its conclusion, and thus does not support China's allegations that US Customs u ses value-added tests as a basis for classification 
decisions.  
103. ( Complainants ) Do you agree with the statement made by China in paragraph 41 of its 
first written submission that the Panel must at the outset decide on whether the measures 
concerned are border or internal measures.  If not, why? 
 
Response of the European Communities (WT/DS339) 
 
467. As the European Communities stated already in paragraphs 13 and 21 of its oral statement, 
the TRIMs Agreement  does not require a preliminary assessment as to whether a measure is a "border 
measure" or an "internal measure".  Furthermore, the fact that a given measure might be generally 
described as a "border measure" in the sense of being enforced "on or in connection with importation" 
does not necessarily preclude an analysis under Article III of the GATT.  In any event, the European 
Communities is of the view that the measures at issue in this case are subject to the TRIMs Agreement  
and Article III.  This suggests that the measures ar e generally rather "internal measures" than "border 
measures" even if they are contained in customs language. 
Response of the United States (WT/DS340) 
 
468. As the United States emphasized in its oral st atement, the United States does not agree.  
China's measures are plain breaches of Article III: 4, Article III:5, and the TRIMs Agreement, 
regardless of whether the charges ar e internal ones subject to Article III:2 or customs duties subject to 
Article II. WT/DS339/R/Add.1 
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  Response of Canada (WT/DS342) 
 
469. As discussed in response to Question 85, Cana da agrees that charges under the measures are 
either internal or border charges (and China has conced ed that all charges except those paid by vehicle 
manufacturers for parts they import directly are internal) but that the measures' administrative 
requirements do not need to be characterized as "border" or "internal" at the outset.  
104. ( China )  Please comment on the complainants' position that one of the ways in which the 
measures modify the "conditions of competition" is by subjecting a manufacturer using any 
imported auto parts to a burdensome administra tive regime.  (e.g. Canada's first written 
submission, paragraph 102) 
 
Response of China 
 470. As China explained at the first meeting of  the Panel, what the complainants have 
characterized as a "burdensome administrative regime" is the customs process that China has 
established to determine whether an auto manufact urer imports and assembles a collection of auto 
parts that, in its entirety, has the essential charact er of a motor vehicle.  China has explained in 
response to several questions, principally question 1 34, that the purpose of the customs process that 
China has put in place is to establish the rela tionship among multiple shipments of parts and 
components for the purpose of assessing duties that apply to the complete article.   
471. China does not consider that the process it h as established for this purpose is any more 
"burdensome" than the customs processes that Memb ers have adopted to deal with other complex 
issues of customs administration, such as inwa rd processing and duty drawback regimes.  
Article VIII:1(c) of the GATT 1994 explicitly recogni zes that customs processes can be complex.  
The mere fact that these processes can be comple x does not mean that they are subject to the 
disciplines of Article III.   
105. ( Complainants )  Are the charges levied in relation to imports of CKD and SKD kits 
under the second paragraph of Article 20 of De cree 125 "border charges"?  If so, do such 
charges come within the disciplines of Article II of the GATT?  If so, are they "ordinary 
customs duties" within the meaning of GATT Article II:1(b), first sentence, or "other duties or 
charges" under GATT Article II:1(b), second sentence?  
Response of the European Communities (WT/DS339) 
 
472. The European Communities understands that refe rence is made to the second subparagraph of 
Article 2 of Decree 125 and not Article 20.  If this is the case, the European Communities is of the 
view that if the importer uses the option under Artic le 2 of Decree 125 to declare CKD and SKD kits 
to customs under standard customs procedures and the classification is made on the basis of standard 
customs rules i.e. according to the objective charact eristics of the products as presented, the charges 
imposed are "border charges" under Article II of th e GATT.  China has indicated that the charges 
would be "ordinary customs duties".  In view of th e fact that the charges imposed on such kits have 
not been recorded in China's Schedules of con cessions in accordance with paragraph 1 of the 
Understanding on the Interpretation of  Article II:1(b) of the GATT 1994, the charges cannot be "other 
duties of charges".  Therefore, th e European Communities can agree w ith China that in this specific 
instance the charges would be  "ordinary customs duties".  WT/DS339/R/Add.1 
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 Page A-107 
  
  Response of the United States (WT/DS340) 
 
473. The United States understands this question to refe r to Article 2 (not 20) of Decree 125.  As 
the United States explained in response to Question 80,  this would appear to be an ordinary customs 
duty.   
Response of Canada (WT/DS342) 
 
474. As discussed in response to Question 33, the charges may only be considered border charges 
to the extent that they are applied to parts which a rrive at the border in one shipment and, as presented 
at the border, have the essential ch aracter of a whole vehicle.  In such instances, the charges may be 
considered as border charges.  As discussed in response to Question 61, those parts should then be 
charged ordinary customs duties at a rate of 10%.  Of course, the assessment of the parts would have to be consistent with applicable tariff lines and interpretative rules, su ch that a mere collection of parts 
itself would not be sufficient to constitute a C KD or SKD if further processing is required.   
106. ( Complainants )  If the charges levied in relation to imports of CKD and SKD kits under 
the second paragraph of Article 2 of Decree 125 are "border charges" un der Article II of the 
GATT, would the Panel have to still decide on the claims under Article III:4 and III:5 of the GATT and Article 2 of the TRIMs Agreement? 
 
Response of the European Communities (WT/DS339)  
475. Provided that China confirms that 
− only the normal general customs procedures ar e applied in the context of the second 
paragraph of Article 2 of Decree 125 and 
− a CKD or SKD kit consists of all the parts necessary to manufacture a vehicle presented 
to customs at the same time and in a single consignment 
it would be sufficient for the Panel to decide whet her it is in accordance with China's Schedule of 
commitments to apply to such kits generally and in all cases the duty on complete motor vehicles in 
the case of the second subparagraph of Article 2. This re ply is to be understood in the light of the fact 
that the European Communities has not made a separate claim under paragraph 93 of China's 
Accession Protocol.  Response of the United States (WT/DS340)  
476. Yes, these claims would still apply, because  – as the United States has explained – an 
ordinary customs duty can be a pplied inconsistently with Ar ticle III:4, III:5 and the TRIMs 
Agreement if the level of the duty depends on local content or local mixing requirements.  
Response of Canada (WT/DS342) 
 
477. As discussed in response to Questions 85 and 101, other than charges on CKDs and SKDs as 
defined by the complainants, the measures ap ply "internal charges", and impose additional 
administrative burdens which must be considered under GATT Article III:2, III:4, III:5 and Article 2 
of the TRIMs Agreement . 
107. ( Complainants )  In paragraph 20 of its written oral statement, China interprets the word 
"commerce" in GATT Article II:1(a) "to be sy nonymous with 'imports.'"  Do you agree?  
Please explain you answer. WT/DS339/R/Add.1 
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Page A-108 
  
   
Response of the European Communities (WT/DS339)  
478. It is not clear to the European Communiti es why China wishes to interpret the word 
'commerce' to be synonymous with "imports". The ordinary meaning of "commerce" is "buying and 
selling; the exchange of merchandise or services, esp ecially on a large scale" (Shorter Oxford English 
Dictionary). 
Response of the United States (WT/DS340) 
 479. The United States does not agree – "commerce" is a broader term than "imports".  In fact, the 
United States understands that Members may bind in their schedules export duties as well as import duties.   
Response of Canada (WT/DS342) 
 480. While the two are related, Canada notes that "c ommerce" is the more general concept, which 
includes "imports" as a sub-component. The Shorter Oxford English Dictionary  defines "commerce" 
as "buying and selling; the exchange of mercha ndise or services, esp. on a large scale".
76 Thus, while 
related, it would not be appropriate to limit "commerce" simply to "im ports", which is but one part of 
overall "commerce".  
108. China has stated that "the charges that  China imposes under the challenged measures 
relate back to a condition that attached at the time of importation.  That condition is that when 
the auto manufacturer fulfils its stated intention to import and assemble parts and components 
that have the essential character of a motor vehicl e, it will be obligated to pay the applicable 
duty rate for motor vehicles, just as if it had imported those parts and components in a single 
shipment" (paragraph 31 of its first oral statement).    
(a) ( China )  Could China clarify whether the products at issue cannot cross the border 
unless the condition as described by China is fulfilled;  Response of China 
 481. As China has explained in response to question 55, there is an important distinction in 
international customs practice, as reflected in the Revised Kyoto C onvention, between the completion 
of customs formalities in relation to an import and the release of that import.  Imported products are 
frequently released – i.e., placed at the disposition of  the importer at the border – before they have 
completed "clearance."  Goods released on this basi s may be subject to add itional customs procedures 
to ensure compliance with the releva nt customs laws and regulations.   
482. Consistent with these international customs prac tices, auto parts and components that an auto 
manufacturer imports for a registered vehicle model are "released" to the auto manufacturer at the border, but remain subject to a customs procedur e, secured by a bond, to ensure compliance with 
China's tariff rates for motor vehicles.  This pro cedure ensures that the importation and assembly of 
multiple shipments of parts and components receives the same tariff treatment under GIR 2(a) without 
regard to whether the parts and components enter Ch ina in one shipment or in multiple shipments.  
The obligation to pay the applicable duty rate for mo tor vehicles arises as a "condition" of – that is, by 
                                                     
 
76 Shorter Oxford English Dictionary , 5th ed. (Oxford: Oxford University Press, 2002), at p. 459 
(Exhibit CDA-7).  WT/DS339/R/Add.1 
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 Page A-109 
  
  reason of – the importation of auto parts and components that China would have classified as a motor 
vehicle had they entered China in a single shipment.   
Comments by the United States on China's response to question 108(a) 
483. China's response to this question from the Pane l suggests that because auto parts may be 
released into the control of an importer prior to the completion of all customs procedures that the 
"condition" of the auto parts upon importation may also be determined based on their use in the 
domestic market after release into the custody of the auto manufacturer.  Under the Harmonized System, the condition of the good when the shipment  is entered into China is the condition of the 
good upon importation regardless of when all customs procedures may be completed.  Accordingly, 
the United States disagrees with China's implication that it has a right to classify imported auto parts 
"without regard to whether the parts and compone nts enter China in one shipment or multiple 
shipments."    
(b) ( China )  Please explain how the charges can be considered as "a condition attached at 
the time of importation" when there are no  qualifications in its tariff Schedule;  
 
Response of China 
 
484. China has answered this questi on in response to previous questions, principally questions 27 
and 54.  In brief, China does not consider that  it was required to inscribe a "term, condition or 
qualification" in its Schedule of Concessions in order to interpret and enforce its Schedule of 
Concessions in accordance with the rules of the Harmonized System.  The "condition" of the auto 
parts and components at the time of importation is that  they form part of a collection of imported auto 
parts and components that, in their entirety, have the essential character of a motor vehicle.  This condition is established by the prior evaluation of  the vehicle model to which those parts and 
components relate, and by the declaration of the importer at the time of importation.  The auto 
manufacturer is obligated to pay the applicable duty rate for motor vehicles when it joins that 
shipment of auto parts and components with othe r shipments of imported auto parts and components 
to assemble a vehicle model that it has previously registered as meeting one or more of the thresholds set forth in Decree 125.   
(c) ( China ) China stated during the first substantive meeting that the determination of 
whether certain auto parts should be characte rized as complete vehicles is made prior to 
importation.  In light of this statement, plea se explain how the condition as described by China 
above can be considered as "a condition a ttached at the time of importation"; and 
 
Response of China 
 
485. As described in response to the previous qu estion, and in responses to question 134, the 
purpose of the prior evaluation and verification is to establish the relationship among multiple 
shipments of parts and components for the purpose of assessing duties that apply to the complete article.  This evaluation and verification establishe s whether multiple shipments of auto parts and 
components are related to each other through their common assembly into a vehicle model that China 
would have classified as a motor vehicle had th e parts and components entered China in a single 
shipment.   
486. As China explained in response to question 5,  once a manufacturer has registered a vehicle 
model as meeting one or more of  the thresholds in Article 21 of  Decree 125, the manufacturer must 
thereafter import parts for that vehicle model separat ely from other auto parts, and must declare the WT/DS339/R/Add.1 
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Page A-110 
  
  imported parts as parts of a registered vehicle model.  Because the auto manufacturer has imported 
parts and components that, in their entirety, have the essential character of a motor vehicle, it is 
required to pay the applicable duty rate for motor vehicles as a condition of – that is, by reason of – 
the importation of these related parts and components.   
(d) ( China )  China has also stated during the first substantive meeting that the "intention" 
of importers is irrelevant to the interpretation of General Interpretative Rule 2(a) and what is relevant for the purpose of tariff classification  is the determination of whether the parts 
concerned have the essential character of a complete  article (i.e. complete vehicle in this case).  
How does China reconcile this position with it s statement cited above that the condition 
attached at the time of importation is relat ed to the determination of whether the auto 
manufacturer fulfils its stated intention to impo rt and assemble parts and components that have 
the essential character of a motor vehicle. 
 
Response of China 
 
487. There are two different notions of "intention" at issue here.  China's point in relation to 
GIR 2(a) is that there is no considera tion under GIR 2(a) of whether the importer intends  to assemble 
parts and components into the finished article – th at intention is presumed.  Thus, if an importer 
imports a completely unassembled motor vehicle in a single container with the intention of selling the 
various parts and components as replacement parts, th is intention is irrelevant to the classification 
determination – the customs authorities should classi fy the entry as a complete motor vehicle in 
accordance with GIR 2(a).   
488. As China has explained in response to previous  questions, the purpose of the prior evaluation 
and verification of specific vehicle models is to  establish whether the auto manufacturer has the 
practice or intention of importing multiple shipments  of parts and components that, in their entirety, 
have the essential character of a motor vehicle.  As  explained, the auto manufacturer is obligated to 
pay the applicable duty rate for motor vehicles fo r these imports.  Under the customs procedure that 
China has established for this purpo se, the auto manufacturer pays th e applicable customs duties after 
it has assembled the multiple shipments of parts and co mponents into the registered vehicle model.   
Comments by the United States on China's response to question 108(d) 
489. In its response, China states: "China has expl ained in response to previous questions, the 
purpose of the prior evaluation and verification of sp ecific vehicle models is to establish whether the 
auto manufacturer has the practice or intentio n of importing multiple shipments of parts and 
components that, in their entirety, have the essential ch aracter of a motor vehicle.  As explained, the 
auto manufacturer is obligated to pay the applicab le duty rate for motor vehicles for these imports.  
Under the customs procedures that China has establis hed for this purpose, the auto manufacturer pays 
the applicable customs duties after it has assembled  the multiple shipments of parts and components 
into the registered vehicle model."   
490. This practice by China ignores the proper application of the Harmonized System, which 
provides that merchandise should be classified in its condition as presented without regard to what occurs to the merchandise after importation.  
109. ( All parties )  Do you agree, and why, with the following argument contained in 
paragraph 14 of Australia's third party oral statement, which was made in relation to China's claim that a charge imposed after the time or poin t of importation can still be a border charge if 
it relates to a condition of liability that attached at the time of importation :  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-111 
  
   
"Presumably, in an attempt to establish a nexus with importation, the measures at issue include a declaration made at the time of importation.  However, this 
declaration appears to be entirely focu sed on the way in which the imported 
parts will be used internally within China, rather than on the contents of a consignment upon importation.  ... Therefore ... the liability attaches internally , 
after the vehicle has been manufactured." (emphasis added) 
Response of China 
 491. China has answered this question in response to question 78.   
Response of the European Communities (WT/DS339) 
 
492. The European Communities entirely agrees w ith the argument made by Australia in 
paragraph 14 of its oral statement. See also reply to question 78. 
Response of the United States (WT/DS340) 
 
493. Please see the United States response to Question 78.   
Response of Canada (WT/DS342) 
 
494. Canada agrees with Australia's statement, and in  that regard refers the Panel to paragraphs 65 
and 66 of Canada's first written submission as an ill ustration of how liability attaches internally under 
the measures.  
C. A
RTICLE II OF THE GATT  1994 
110. ( All parties )  Rule 2(a) of the General Interpretative Rules states, inter alia , that " Any 
reference in a heading to an article shall be taken to include a reference to that article 
incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article."  Please explain what " as presented " 
means as referred to in Rule 2(a)? 
 
Response of China 
 495. China considers that the term "as presented" in GIR 2(a) is, on its own, susceptible to 
different interpretations when applied to unassemb led or disassembled articles that are imported in 
multiple shipments.  However, in light of the in terpretation adopted by the WCO, discussed below, 
China considers that the term should be read to in clude "as presented in a customs declaration," or "as 
presented in light of the facts and circumstances surrounding the import transaction." 
496. Under the Harmonized System Convention , the General Interpretative Rules are a part of the 
Harmonized System.  Accordingly, China considers that it is appropriate to interpret GIR 2(a), 
including the term "as presented", in accordance with Article 31 of the Vienna Convention .  China 
believes that there are two relevant points, in this respect. 
497. First, GIR 2(a) uses the term "as presented" in  the context of resolving the tariff classification 
relationship between complete articles and parts of articles.  With respect to unassembled and 
disassembled articles, GIR 2(a) resolves this classifi cation relationship by establishing that parts and WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-112 
  
  components are classified as the complete article if, "as presented," they have the essential character 
of that article.  In this context, it would be arbitr ary to conclude that the same collection of parts and 
components, used to assemble the sa me finished article, should obtain a different classification result 
based solely on whether the parts and components are contained in one shipment or in multiple 
shipments.  This interpretation would vitiate the ru le's resolution of the relationship between parts and 
wholes, because it would leave the resolution of that question entirely at the discretion of the 
importer.  It would, moreover, violate the general principle that substance should prevail over form in 
the administration of customs laws.   
498. The second relevant element of analysis under the Vienna Convention  is Article 31(3)(a), 
"any subsequent agreement between the parties re garding the interpretation of the treaty or the 
application of its provisions."  As the Panel is aw are, and as explained in response to question 112, the 
Harmonized System Committee has interpreted GIR 2(a) specifically as it pertains to "the classification of goods assembled from elements orig inating in or arriving from different countries."  
The interpretation of the HS Committee, as adopted by  the WCO, is that the application of GIR 2(a) 
in this circumstance is a matter "to be settled by  each country in accordance with its own national 
regulations."  This interpretation necessarily bear s upon the understanding of the term "as presented."  
If the term "as presented" were limited to the cont ents of a single shipment, there would be no scope 
for members of the Harmonized System to apply the principles of GIR 2(a) to goods assembled from 
multiple shipments.  The fact that the WCO has found that members of the Harmonized System may 
apply the principles of GIR 2(a) to goods assemble d from multiple shipments can only mean that the 
term "as presented" is not limited to single shipments. 
499. These considerations support the conclusion that the term "as presented" must be interpreted 
to allow national customs authorities to apply the principles of GIR 2(a) to goods that are assembled 
domestically from multiple shipments of imported part s and components.  As discussed in response to 
question 112, any such application of GIR 2(a) re mains constrained by the principles of GIR 2(a) 
itself.   
Response of the European Communities (WT/DS339) 
 
500. When goods are classified in the Harmonised System it is always done on the basis of the 
objective characteristics of the product at the time of importation, that is, as imported and presented to 
Customs on a shipment-by-shipment basis.  The inte ntions of the importer and differing duty rates are 
irrelevant.  This is the essence of th e words "as presented" in Rule 2(a). 
Response of the United States (WT/DS340) 
 
501. For purposes of Rule 2(a), "as presented" refers to  the condition of the article at the time of its 
importation.  Under US Customs law, it is well se ttled that classification is based upon the condition 
of goods at the time of importation.   
Response of Canada (WT/DS342) 
 
502. The assessment of whether an incomplete or unf inished article has the "essential character" of 
the complete or finished article must be made based  on the objective characteristics of that article, and 
solely that article, in the state it is pres ented to customs officials at the border (i.e ., the "snapshot"). 
That is the meaning of "as presented" in Rule 2(a). In EC – Chicken Cuts , the Appellate Body 
confirmed that classification must be based on the objective characteristics of an article as presented 
when it quoted the WCO statement that "[w]hen goods are classified in the Harmonized System, it is  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-113 
  
  always done on the basis of the objective characteristics of the product at the time of importation".
77 
No consideration is to be given to separate consi gnments arriving at different  times, end-use or value 
of the article, but simply to objective characteristics of the product as presented at the border.  
Comments by the United States on China's response to question 110 
503. China defines the term "as presented" under GIR 2(a) as meaning, "in light of the facts or 
circumstances surrounding the import transaction."  For the purposes of China's "anti-circumvention" 
measures, these facts and circumstances include the post importation assembly of imported auto parts into finished motor vehicles.  This proposed inte rpretation of the term "as presented" undermines the 
very uniformity that the Harmonized System was d esigned to protect because China disregards the 
actual form of the shipment of the goods in favor of  a future condition of the goods as integrated into 
a whole motor vehicle.  This future condition does not exist at the time of importation of the auto part.   
504. The United States disagrees with China's claim th at the term "as presented" is not limited to 
single shipments because of the language of the Harmonized System "decision" described in 
paragraph 10 of Annex IJ/7 to Doc. 39.600.
78   This "decision" is not entitled to any additional weight 
based on Article 31(3)(a) of the Vienna Convention,  which provides that in the interpretation of a 
treaty, there shall be taken into account "any subseq uent agreement between the parties regarding the 
interpretation of the treaty or application of its provisions."  The original comment was by the Nomenclature Committee, which w as responsible for the interpreta tion of the Customs Cooperation 
Council Nomenclature (the predecessor to the Ha rmonized System).  As the "decision" was only 
reflected in the report of the Committee and no ame ndments were made to the Explanatory Notes nor 
was a Classification Opinion adopted, paragraph 10 has little weight, as it is not an enforceable 
decision of the Harmonized System Committee.   
505. Furthermore, the "decision" was not adopted by  the WCO.  The "decision" also does not not 
mean that a member customs administration can abrogate the requirements of the General 
Interpretative Rules by regulation at the domestic leve l.  Nor is the "decision" an interpretation of the 
meaning of "as presented."  In fact, the "d ecision" does not in any way address the phrase "as 
presented."  
506. Indeed, China's theory of the meaning of "as presented" is contrary to a decision of the 
Nomenclature Committee during its 42nd session in 1979 .  This decision adopted the proposal of the 
Danish Delegation that "the word "imported" in  the English version of the nomenclature of the 
Harmonized System be replaced by "presented" in or der to align the French and English versions and 
so that the English version would also be  applicable to exported goods when necessary.
79  T h i s  
substitution was also made in the context of GIR 2(a) for purposes of consistency.  "As presented" 
means the condition of the good when it is importe d, and the reason why "as presented" replaced 
"imported" in the context of GIR 2(a) is editorial, not substantive.   
507. This interpretation is, in fact, supported by  a letter issued by the Nomenclature and 
Classification Directorate in October of 1989, wherein it explained that "the replacement of 'imported' 
by 'presented' was in fact an editorial amendment, adopted to make it quite clear that the provisions of 
                                                      
77 EC – Chicken Cuts , Appellate Body Report, at para. 230 (emphasis added). 
78 Exhibit CHI-29 
79 See Annex F/2 to Doc. 25.300E (Exhibit US-1). WT/DS339/R/Add.1 
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  the Rules concerned apply for a given article in  the state in which it is presented for Customs 
clearance."
80   
508. Goods are presented for customs clearance at th e time of importation.  Even if customs 
clearance is not completed until some time thereafter , assembly that occurs after the presentation is 
not a condition that existed when the goods were pr esented for customs clearan ce (at the time of their 
importation).  Accordingly, China' s interpretation of "as presented" (which includes post-importation 
assembly in the domestic market) is incorrect.  For the aforementioned reasons, "as presented" is the 
condition of the good up on importation..   
111. ( Complainants )  Please comment on China's statement in paragraph 160 of its first 
written submission and in paragraph 13 of its or al statement in relation to the WCO affirmed 
decision concerning Rule 2(a) of the General Inte rpretative Rules.  In particular, please clarify 
the legal status of this WCO decision, including whether it is binding on the parties to the WCO or the WTO Members. 
 
Response of China 
 
509. The Decision of the Harmonized System Committ ee is, by its terms, an interpretation of 
General Interpretative Rule 2(a).  Under Article 7 of the Harmonized System Convention, one of the 
functions of the Harmonized System Committee is "to prepare recommendations to secure uniformity 
in the interpretation and application of the Harmoni zed System."  As described by the WCO, the HS 
Committee "is the single international body which can  provide authoritative advice with regard to 
tariff classification."
81  Under Article 8 of the Harmonized  System Convention, any "advice on the 
interpretation of the Harmonized System and recommendations to secure uniformity in the 
interpretation and application of the Harmonized System" that the HS Committee adopts are "deemed 
to be approved" by the WCO if no member objects to its adoption within a specified period.   
510. As a consequence of these provisions, the d ecision of the HS Committee is an authoritative 
interpretation of GIR 2(a) adopted by the member s of the WCO.  It reflects the WCO's official 
interpretation of GIR 2(a) as applied to the classi fication of articles that are assembled from multiple 
shipments of parts and components.  The decision of the WCO is that this particular application of 
GIR 2(a) is a matter "to be settled by each country in accordance with its own national regulations."  
This interpretation of GIR 2(a) dates back to a decision taken by the Nomenclature Committee when 
GIR 2(a) was first drafted in the early 1960s.82  The 1995 decision of the HS Committee merely 
reaffirmed this longstanding interpretation of GI R 2(a) in the context of the Harmonized System. 
511. The General Interpretative Rules are part of the Harmonized System and are binding on the 
members of the WCO.  Logically, this should incl ude authoritative interpretations of the General 
Interpretative Rules adopted by the WCO.  But the question of whether the decision of the HS 
Committee is formally "binding" on  the WCO members is not relevant to the present dispute.  In 
finding that the application of GIR 2(a) to multiple shipments is a matter to be resolved under national 
laws and regulations, the WCO has necessarily in terpreted GIR 2(a) as containing no prohibition on 
this particular application of the rule, and has found that this application of the rule is not otherwise 
                                                      
80 Letter from Nomenclature and Classification Directorate dated 2 October 1989, with annexes 
(Exhibit US-1). 
81 WCO, The Harmonized System: The language of international trade , JE-36 
82 See WCO, Harmonized System Committee, Doc. 39 .235 (8 February 1995) at para. 28 ("The 
Secretariat has set out below a decision taken by th e Nomenclature Committee when General Interpretative 
Rule 2(a) and its accompanying Explan atory Note were drafted …").    WT/DS339/R/Add.1 
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  inconsistent with the Harmonized System.  By its nature, this is not an interpretation that would 
"bind" the WCO members; it is an interpretation th at leaves this matter within the authority of each 
WCO member
.83 
512. As discussed in more detail in response to ot her questions, the Appellate Body has repeatedly 
affirmed the importance of the Harmonized System to the interpretation of WTO Members' Schedules 
of Concessions.  This includes the General Interpretive  Rules.  As it pertains to the present dispute, 
the importance of the interpretation adopted by th e WCO is that WTO Memb ers have been aware, 
since at least 1995, that the Harmonized System allo ws Members to classify multiple imports of parts 
and components in accordance with the principles of GI R 2(a).  This is part of the context in which 
WTO Members have negotiated and entered into tari ff concessions, and it is part of the context in 
which China negotiated its Schedule of Concessions with other WTO Members in connection with its 
accession to the WTO.  Under Article 31 of the Vienna Convention , the decision of the WCO 
concerning the interpretation of GIR 2(a) is therefor e relevant context to the interpretation of China's 
tariff provisions for motor vehicles.   
Response of the European Communities (WT/DS339) 
 
513. In general, the WCO's decisions do not bind the contracting parties of the WCO.84 
514. Exhibit CHI-29 to which reference is made  in paragraph 160 of China's first written 
submission must also be put in its proper context. Paragraphs  1 to 8 of the decision have nothing to do 
with the issue of "split consignments ".  Paragraphs 1 to 8 relate to the judgment of the European Court 
of Justice in case C-35/93 Dr Eisbein  (ECR 1994, p. I-02655) where the issue was the relevance of 
the complexity of the assembly operation in the co ntext of rule 2 (a) of the Harmonised System. 
515. As a completely separate issue the committe e decided to include the Nomenclature 
Committee's decision relating to split consignments in to its report. However, Rule 2 (a) has not been 
amended in any way pursuant to the discussion in  the committee. Therefore China's submission that 
the decision of the committee would somehow affect the "as presented" criterion under Rule 2 (a) in 
the context of split consignments is entirely without merit. 
Response of the United States (WT/DS340) 
 
516. In the context of the Harmonized System, a decision taken by the Harmonized System 
Committee is not legally binding on its members.  Decisions of this committee are considered advice 
and guides to the interpretation of the Harmonized System.  US Customs considers that these decisions often provide valuable insight into how the Harmonized System Committee views certain 
provisions.  In rendering its decisions, the Harm onized System Committee "also usually decides 
whether the decision merits an amendment to the [E xplanatory Notes], the issuance of a classification 
opinion to be added to the Compendium, or to merely report the decision in the report of the session.  
If the decision results in amendmen ts of the [Explanatory Note] or goes into the Compendium, it, then 
should receive considerable weight.  . . . . Decisi ons of the [Harmonized System Committee] that are 
                                                     
 
83 To put the matter differently, the decision adop ted by the WCO precludes a WCO member from 
arguing that another WCO member is not allowed to apply GIR 2(a) to multiple shipments, even if the 
complaining WCO member does not itself apply GIR 2(a) in th is manner.  In this sense, the decision of the HS 
Committee is "binding."   
84 Even the most authoritative WCO's acts i.e. classification opinions are not binding in the EC legal 
order and this has been confirmed by the European Court of Justice in case C-206/03, Commissioners of 
Customs & Excise v SmithKline Beecham plc (E uropean Court reports 2005 Page I-00415). WT/DS339/R/Add.1 
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  merely given in the report should be given little we ight."  See Treasury Decision (T.D.) 89-80, which 
sets forth the US position as to the proper guidance on  the use of certain documents for interpretation 
of the Harmonized System.  Since its implementa tion of the Harmonized System in 1989, the US 
Customs administration has cited this T.D. in  almost every administrative ruling on tariff 
classification matters.   
517. There were two "decisions" taken by the WCO as  reflected in Annex IJ/7 to Doc. 39.600 
(HSC/16- Report).  The first decision taken was to remove the reference to "simple assembly" in the 
Explanatory Note to General Interpretative Rule 2(a) .  In regards to the first "decision", US Customs 
gives this decision considerable weight and has classified goods in accordance with the WCO's 
decision to remove the reference to "simple assembly". 
518. The second "decision" described in paragraph 10 of  Annex IJ/7 to Doc. 39.600 is merely a 
discussion of the contracting parties as to how the Harmonized System Committee views "split shipments".  The original comment was by th e Nomenclature Committee.  The Nomenclature 
Committee was responsible for the interpretation of the Customs Cooperation Council Nomenclature 
(CCCN), which was predecessor to the Harmonized Sy stem.  As the "decision" was only reflected in 
the report of the Committee and no amendments were made to the Explanatory Notes nor was a Classification Opinion adopted, US Customs finds that paragraph 10 has little weight.  Also, 
paragraph 10 does not mean that a member administration can abrogate the requirements of the 
General Interpretative Rules by regu lation at the domestic level.   
Response of Canada (WT/DS342) 
 
519. A WCO decision is not binding on WCO or WTO Members. The General Interpretative 
Rules, Section and Chapter Notes, including Subheading Notes, are binding on signatories to the Harmonized System. The Explanatory Notes, while not  binding, constitute the official interpretation 
of the Harmonized System at the international le vel and are an indispensable complement to the 
System. No similar guidance is provided for other non-binding instruments such as WCO decisions. Such decisions, particularly those that do not re flect a consensus of the WCO membership, must be 
accorded less weight in the interpretative hierar chy of the Harmonized System, after the General 
Interpretative Rules, Section and Chapter Notes and Explanatory Notes. 
Comments by the United States on China's response to question 111 
520. In its first sentence of its response, China clai ms that: "The Decision [Exhibit CHI-29] of the 
Harmonized System Committee is, by its terms, an inte rpretation of General Interpretative Rule 2(a)."  
This is not an accurate interpretation of what Exhibit CHI-29 actually re presents.  As the United 
States noted in its initial response to this question,  there were two "decisions" taken by the WCO as 
reflected in Annex IJ/7 to Doc. 39.600 (HSC/16-  Report).  The first "decision" taken was an 
agreement by the Harmonized System Committee (HSC) to remove the reference of "simple 
assembly" to the Explanatory Note to General Inte rpretative Rule 2(a).  In regards to the first 
"decision", the United States Customs Service giv es this decision considerable weight and has 
classified in accordance with the WCO's decision to remove the reference of "simple assembly". 
521. In its response to this question, China states that: "As a consequence of these provisions, the 
decision of the HS Committee is an authoritative in terpretation of GIR 2(a) adopted by the members 
of the WCO.  It reflects the WCO's official interp retation of GIR 2(a) as applied to the classification 
of articles that are assembled from multiple shipment s of parts and components.  The decision of the 
WCO is that this particular application of GIR 2( a) is a matter 'to be settled by each country in 
accordance with its own national regulat ions.'  This interpretation of GIR 2(a) dates back to a decision  WT/DS339/R/Add.1 
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  taken by the Nomenclature Committee when GIR 2( a) was first drafted in the early 1960s." This 
statement is not accurate.  At its 16th Session, th e Nomenclature Committee specifically decided that 
the Explanatory Notes for the new GIR that: "No provision would be made for application of the Rule 
to parts and split consignments of unassembled or disassembled articles."
85 
522. China further states: "[S]ince at least 1995, th at the Harmonized System allows Members to 
classify multiple imports of parts and components in accordance with the principles of GIR 2(a)."  In 
short, the portion of the document that China builds its case around is nonbinding on HS contracting parties and deserves little or no weight in the WTO pr oceeding.  The basic "decision" is a comment by 
the Nomenclature Committee inte rpreting the Customs Cooperation Council Nomenclature, to which 
the US was never a party.  The incorporation of that comment in the HSC/16 report merely indicates that neither the status of split consignments nor  the classification of goods assembled from imported 
goods of various origins are within the jurisdiction of the HS Convention nor the HS Committee.  The 
"decision" taken in the HSC does not interpret GIR 2(a).  In fact, it is taken in the midst of a 
discussion on how simple assembly and further manufact uring relate to the application of GIR 2(a).
86  
In subsequent sessions, the HS Committee stated th at industrial production with the use of machine 
tools was beyond the scope of allowable assembly contemplated by GIR 2 (a).87   
523. Thus, the "decision" that China relies on has no direct impact on the interpretation of 
GIR 2(a).  It in no way diminishes China's obliga tions under the HS Convention.  China must still 
classify goods as presented, using the entire nomenclat ure, rather than classify goods by effectively 
eliminating from use many headings of chapters 84 and 85.  China cannot abrogate its responsibilities 
to an international agreement through domestic regulation.  
112. ( All parties )  How should General Interpretative Rule 2(a) be interpreted in light of this 
decision?  
Response of China 
 
524. The decision of the HS Committee acknowledges the arbitrary classification results that can 
occur when a set of related parts and components is  broken into multiple shipments.  This can occur 
when a single import transaction is broken into "split  consignments," usually for reasons of shipping 
and often without the prior knowledge of the impor ter, or when a manufacturer imports parts and 
components in multiple shipments and assembles th em domestically.  In these circumstances, the 
same collection of imported parts and components can obtain a different classification based solely on 
the form in which the parts and components are impor ted.  This is inconsis tent with the general 
principle that substance should prevail over form in international customs practice. 
525. As explained in response to question 111, the Nomenclature Committee of the Customs 
Cooperation Council (the precursor to the WCO) rec ognized the existence of this issue when it first 
drafted GIR 2(a) in the early 1960s.  It was at th at time that the Nomenclatu re Committee agreed that 
the application of GIR 2(a) to split consignments and multiple shipments was a matter "to be settled 
                                                     
 
85 See Annex E to Doc. 13.450 E (NC/16/Apr. 1966) (Ex. US-2).   
86 The United States notified the public regarding its position on the various Harmonized System 
documentation that is available through the WCO. See T. D. 89-80, 54 FR 35127 (1989) (Exhibit US-4). Within 
that notice, the United States indicated that a decision by the HSC that is me morialized merely by a reference in 
an HSC report is accorded little weight. That T.D. is routinely cited in Head quarters rulings issued by the United 
States.   
87 See Annex H/25 to Doc. 40.600E (HSC/18- Report),  citing to paragraph 15 of Doc. 40.447 (HSC/18) 
(Exhibit US-3).   WT/DS339/R/Add.1 
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  by each country in accordance with its own nationa l regulations," an interpretation that the HS 
Committee reaffirmed in the context of the Harmonized System in 1995.   
526. In light of these decisions, GIR 2(a) must be interpreted to allow national customs authorities 
to apply the principles of GIR 2(a) to goods that  are assembled domestically from multiple shipments 
of imported parts and components.
88  Any such application of GIR 2(a) must still conform to the 
principles of GIR 2(a), in that any collection of parts and components that customs authorities classify 
as a complete article must have the essential character of that article.  In add ition, this a pplication of 
GIR 2(a) remains constrained by the limits of GIR 2(a) itself, which pertains only to the classification 
of unassembled or disassembled parts and compone nts that can be assembled by means of the 
assembly methods specified in Explanatory Note VII to GIR 2(a).   
527. The fact that the WCO has specifically inte rpreted GIR 2(a) to allow members of the 
Harmonized System to apply the principles of that rule to multiple shipments of parts and components 
is highly relevant to the interpretive issue before the Panel.  In EC – Chicken Cuts , the Appellate 
Body considered the application of GIR 3(a) to the interpretation of the relevant portions of the EC's 
Schedule of Concessions.  GIR 3(a) concerns the circumstance in which "goods are prima facie  
classifiable under two or more headings."  In c onsidering whether the panel erred in finding that 
GIR 3(a) was not applicable to the facts of that case, the Appellate Body noted that "nothing on the 
Panel record indicates how the term ' prima facie ' has been interpreted by the WCO's Harmonized 
System Committee, or the WCO itself."89  It is implicit in this statement that, if the WCO had 
interpreted the term " prima facie " in GIR 3(a), this interpretation would  have been relevant to the 
panel's consideration of whether GIR 3(a) was applicable to the facts of that case.   
528. In the present dispute, unlike in EC – Chicken Cuts , the WCO has interpreted the relevant 
General Interpretative Rule in a respect that is direct ly relevant to the interpretation of the term "motor 
vehicles" in China's Schedule of Concessions.  As the Appellate Body's statement in EC – Chicken 
Cuts makes clear, the interpretation of GIR 2(a) a dopted by the HS Committee and approved by the 
WCO is relevant to the application of GIR 2(a) to th e facts of this dispute.  What this interpretation 
demonstrates is that the measures challenged in th is dispute are consistent with GIR 2(a) and the 
Harmonized System.  Under GIR 2(a), as interprete d by the WCO, China can apply the classification 
principles of GIR 2(a) to multiple imports of parts and components that are assembled into a complete 
article.  That is what the challenged measures do.   
Response of the European Communities (WT/DS339) 
 
529. That decision has no influence on the interpretation of GIR 2(a). 
Response of the United States (WT/DS340) 
 
530. The WCO decision removed the reference to "simple assembly" from the Explanatory Notes 
from General Interpretative Rule 2(a).  As an e xplanatory note can neither expand nor restrict the 
terms of the Harmonized System, US Customs believes that the interpretation of General 
                                                      
88 The decision of the HS Committee refers to "goods assembled from elements originating in or 
arriving from different countries."  There is no reason to believe that the decision of the HS Committee is not 
equally relevant to goods assembled from elements originating in or arriving from a single country.  The number and identity of the countries from which the parts originat ed would only be relevant, if at all, for purposes of 
applying rules of origin.  As pointed out in paragraph 6 of the HS Committee decision, the General 
Interpretative Rules pertain solely to classification under the Harmonized System, and have no bearing on rules of origin.   
89 EC – Chicken Cuts  at para. 234 n. 443.  WT/DS339/R/Add.1 
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  Interpretative Rule 2(a) has been unaffected.  In applying General In terpretative Rule 2(a), it suggests 
that customs officials can see the entir e article at the time of entry.  If an article is not classifiable by 
General Interpretative Rule 2(a), then General Inte rpretative Rule 1 requires the separate classification 
of the components.   
Response of Canada (WT/DS342) 
 
531. A WCO decision that is not adopted in the form  of a modification or addition to the General 
Interpretative Rules or included in, or as an Explan atory Note to, the General Interpretative Rules may 
provide guidance but cannot be determinative of ho w to apply the General Interpretative Rules. Any 
discretion that might be afforded to Members on how  to classify split shipments must naturally be 
limited so as not to violate tariff commitments. As  a result, this decision should have no bearing on 
the interpretation of Rule 2(a). 
Comments by the United States on China's response to question 112 
532. Please see the above comments on China's respon se to question 111.  Contrary to China's 
claim in its response that "[i]n light of these decisions, GIR 2(a) must be interpreted to allow national customs authorities to apply the principles of GIR 2( a) to goods that are assembled domestically from 
multiple shipments of imported parts and components," the only impact of the HSC/16 report is that the reference to "simple" for assembly should be  removed.  Any other interpretation would be 
contrary to the proper application of the Harmonized System.   
113. ( Complainants )  Please comment on China's position that Note VII of the Explanatory 
Notes to Rule 2(a) of the General Interpretative Rules is relevant in delineating the boundary 
between complete articles and parts of those articles (paragraph 100 of China's first written 
submission).  
Response of the European Communities (WT/DS339) 
 
533. Note VII of the Explanatory Notes to Rule 2 (a) is generally releva nt in delineating the 
boundary between complete articles and parts of t hose articles provided that the basic conditions of 
Rule 2 (a) are respected.  However, as China fundame ntally disregards the basic elements of Rule 2 
(a) and in particular the "as presented" condition, the way in which China u ses Note VII is necessarily 
fundamentally erroneous. 
534. China also struggles to apply Note VII even under the erroneous terms China wishes to give 
it. Under paragraph 101 of its  first written submission China states  that the separate tariff heading for 
parts therefore encompasses the importation of part s "other than for the purposes of assembling a 
complete article from imported parts" This statement is difficult to square with  the fact that under the 
measures parts that are imported for the purposes of assembling a complete car are classified as parts 
if the necessary local content is ensured. 
535. Furthermore, as explained already under ques tion 39 the description provided by China of 
judgment of the Court of Justice of the European Communities in case 165/78 Michaelis  under 
paragraphs 102 and 103 of its firs t written submission is misleading and taken out of context. 
Response of the United States (WT/DS340) 
 536. General Interpretative Rule 2(a) provides for the classification, at the time of entry, of 
complete unassembled motor vehicles as if they  were assembled under the same heading.  WT/DS339/R/Add.1 
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  Explanatory Note (VII) to General Interpretative Rule  2(a) gives guidance for situations where if the 
component parts are in excess of the number required for that article when complete, that the component part should be classified separately.  General Interpretative Rule 2(a) does not refer to 
"split shipments" nor does it purport to create th e authority for allowing split shipments.  The 
Explanatory Notes for General Interpretative Rule 2(a) infer that the goods are presented as a single 
shipment.   
Response of Canada (WT/DS342) 
 
537. As set out in response to Question 111, Canada agrees that Explanatory Notes in the 
Harmonized System are to be followed when ap plicable. However, China has misapplied this 
Explanatory Note and has ignored its proper use in the Harmonized System.  
538. First, China has ignored the hierarchy of appli cation of the General Interpretative Rules. As 
stated in the WCO Handbook, the six General Interpretative Rules
90 "are applied in a hierarchical 
fashion, i.e. Rule 1 takes precedence over Rule 2, Rule 2 over Rule 3, etc." This means that, following 
General Interpretative Rule 1, products must be properly classified first in their appropriate heading. 
As noted in Canada's Oral Statement at paragra ph 19, this includes intermediate products, notably 
"chassis with engines". While China seeks to rely on Explanatory Note VII to Rule 2(a), it suggests 
that it can ignore the equally authoritative Explan atory Notes for heading 87.06, which sets out what 
constitutes a "chassis with engine", and makes clear that many combinations of Assemblies that the 
measures Deem Whole Vehicles at most should be cl assified under heading 87.06 (and consequently 
charged a duty rate of 10%). 
539. Further, China has misapplied this Explanatory Note. As discussed in answer to Question 39, 
it covers situations where all parts arrive at the border in one shipment. In such situations, all parts 
that are necessary to form the article are classified together if they have the "essential character" of 
that complete or finished article as presente d, while any excess parts not required to form that article 
contained in the same shipment can be classified as parts.  
540. China also fails to address the fact that E xplanatory Note VII states "no further working 
operations" can be considered when determining whether an article, as presented, has the essential 
character of a complete or unfinished article. Ind eed, the measures specifically provide in Article 24 
that Assemblies and key parts that are substantially  transformed (and which, therefore, must have 
undergone further working operations) are still deemed to be imported under the measures. 
114. ( Complainants )  In the complainants' view, do the General Rules for the Interpretation 
of the HS constitute context for the interpretation of a term in a Member's Schedule within the meaning of the Vienna Convention on the Law of Treaties ?   
 
                                                     
 
90 The Rules (without interpretative notes) are att ached for ease of reference as Exhibit CDA-8.  WT/DS339/R/Add.1 
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  Response of the European Communities (WT/DS339) 
 
541. Yes. This has been confirmed by the Appellate Body e.g. in EC – Chicken Cuts 
(paragraph 199) where it stated that "the above circ umstances confirm that, prior to, during, as well as 
after the Uruguay Round negotiations, there was broad consensus among the GATT Contracting 
Parties to use the Harmonized System as the basis for thei r WTO Schedules, notably with respect to 
agricultural products.  In our view, this consensu s constitutes an "agreeme nt" between WTO Members 
"relating to" the WTO Agreement that was "made in connection with the conclusion of" that 
Agreement, within the meaning of Article 31(2)(a) of the Vienna Convention . As such, this agreement 
is "context" under Article 31(2)(a) for the purpose of interpreting the WTO agreements, of which the 
EC Schedule is an integral part. In this light, we consider that the Harmonized System is relevant for 
purposes of interpreting tariff commitments in the WTO Members' Schedules." 
542. The European Communities considers that th e Harmonised System could also fulfil the 
criteria in Article 31(3)(c) of the Vienna Convent ion as a "relevant rule[] of international law 
applicable in the relations between the parties". 
Response of the United States (WT/DS340) 
 
543. This indeed was the finding of the Appellate Body in EC – Chicken Cuts  (Appellate Body 
Report, at para.199).  As an initial point, the United States notes that the United States is not a party to 
the Vienna Convention, but that the United Stat es does accept that the Vienna Convention reflects 
customary rules of interpretation of public interna tional law.  More importantly, the United States 
notes that although the Appellate Body found that the HS provides context for interpretation of a 
Member's schedule, the Appellate Body did not fu lly explain its reasoning and the United States does 
not agree with this Appellate Body finding.  
544. In fact, during the EC – Chicken Cuts  proceeding, the United States disagreed with the 
proposition that the HS qualifies as "context" under Ar ticle 31(2).  The HS is neither an agreement 
relating to the WTO Agreement that all the Member s made in connection with the conclusion of the 
WTO Agreement, nor an instrument made by one or more Members in connection with the conclusion of the WTO Agreement and accepted by the other Members as an instrument related to the 
WTO Agreement.  The United States does consider th at the HS and its Explanatory Notes could be 
deemed as part of the "circumstances of the conc lusion" of China's accession negotiations within the 
meaning of Article 32 of the Vienna Convention a nd, therefore, could be used as a "supplementary 
means of interpretation" of China's Schedule.   
Response of Canada (WT/DS342) 
 
545. Yes. See EC – Chicken Cuts .
91  
115. ( Complainants )  If the charges at issue were considered as tariff duties, do the 
complaining parties agree that Rule 2(a) of th e General Interpretative Rules is relevant context 
for the interpretation of the term "motor vehicles" in China's Schedule?  Response of the European Communities (WT/DS339) 
 546. Rule 2(a) is not relevant in interpreting a Member's Schedule from a general point of view 
unless one singles out a very specific product that is assu med to have been presented to the customs. It 
                                                     
 
91 EC – Chicken Cuts , Appellate Body Report, at para.199.  WT/DS339/R/Add.1 
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  is a rule that assists the Customs in specific instances where a given incomplete or unfinished article 
as presented to customs appears to have the essen tial characteristics of the complete or finished 
article. It should also be kept in mind that Chap ter 87 of the Harmonized System contains a specific 
chapter note, which according to Explanatory notes IV and VIII is a specific application of Rule 2 (a) 
in the context of the chapter. In  accordance with Rule 1, the Chap ter Notes take precedence over the 
more general formulation of Rule 2 (a). 
Response of the United States (WT/DS340) 
 
547. Please see the response to Question 114. 
Response of Canada (WT/DS342) 
 
548. As set out in response to Questions 111, 113 and 114, Rule 2(a) is broadly relevant to the 
extent that it may apply, in certain limited inst ances, within the Harmonized System to interpreting 
China's Schedule. Rule 2(a) is not context on its ow n. It can only be taken into consideration after 
applying Rule 1, which requires a determination of whether a particular automotive product "as 
presented" at the border is an auto part, an intermediate product or a complete vehicle. 
549. China attempts to argue the interpretative issue is "motor vehicles" to confuse the issue when, 
instead, Rule 2(a) applies to that article "as presented". An "auto part", not a "motor vehicle", is the 
"article" presented at the border. Accordingly, si nce the objective assessment of "essential character" 
is based on a single shipment of an auto part or parts, not a collection of separate shipments, the 
correct term to interpret is "auto part".  
116. ( Complainants )   Please comment on China's statement in paragraph 147 of its first 
written submission in relation to Rule 2(a) of the General Interpretative Rules.  In particular, with respect to your own policies, do the complain ants agree with the statements made by China 
on the policy practices of other Members in the last three bullet points in paragraph 147? 
 Response of the European Communities (WT/DS339)  
550. No, because China's statement mixes corre ct and incorrect information on customs 
classification together with its position on the rele vance of anti-dumping rules.  For instance China 
refers erroneously to multiple shipments in connecti on with anti-circumvention.  In the EC GIR 2(a) 
applies only to goods presented at the same time and place. As stated on numerous occasions, the EC 
is of the view that anti-dumping measures have nothing to do with tariff classification. 
Response of the United States (WT/DS340) 
 
551. The United States has not applied the interpretive rules of General Interpretative Rule 2(a) to 
classify multiple shipments of parts and components as having the essential character of the complete article.  Instead, US Customs has found that bulk shipments for inventory purposes are not covered by 
General Interpretative Rule 2(a), as bulk shipme nts for inventory are not for the convenience of 
packing, handling or transport.  
552. Duty liability arises at the time of importation.  The assessment of duties is not based on the 
actual use of the merchandise after importation.  Th e Harmonized Tariff Schedule of the United States 
does contain a very limited number of provisions known as "actual use provisions," but these provisions classify the good as entered based on the st ated intention of the importer.  Under these 
provisions, the importer may claim a reduced rate of duty if the importer claims that the good will be  WT/DS339/R/Add.1 
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  used only for a specific purpose.  For goods classified under actual use provisions and entered for 
consumption, any use contrary to that which is speci fied in the HTSUS provision is contrary to law.  
553. With respect to its own policies, the United States has not "adopted measures that track the 
final use of imported parts and components as a means of evaluating whether the parts and 
components were imported for the purpose of circumve nting duty liability on the complete article."  
The United States has not adopted any such measures because duty liability is based upon the classification of the article in its condition as im ported.  Once an article has been entered for 
consumption into the United States, its subsequent use is not relevant for pu rposes of duty liability.  
For example, it is not considered a circumvention of duty liability when parts of a machine, subject to 
a lower rate of duty than the final machine, are separately imported in different shipments into the 
United States (and entered at their respective lowe r rates of duty) for subsequent assembly or 
manufacture into the final machine.      
554. China also alleges in paragraph 147 that "Member [sic] have imposed bonding or other 
security requirements to ensure collection of any duty liability on the completed article" into which 
"parts and components were imported for the purpose of circumventing duty liability on the complete 
article."  As explained above, given that the United States does not specifically track the post-importation usage of goods classifiable as part s or components, there are no bonding or other 
security requirements based on the classification and corresponding rate of duty of a completed article 
into which a part or component could be integrated. 
Response of Canada (WT/DS342) 
 
555. No. China's statement attempts to collapse different legal ideas and practices into one 
unrelated whole to which it would apply Rule 2(a) out of context.  
556. The Appellate Body has found that to establish a "subsequent practice" within 
Article 31(3)(b) of the Vienna Convention , the following two elements must be shown: 1) there must 
be a common, consistent, discernible pattern of acts or pronouncements; and 2) those acts or 
pronouncements must imply agreement among WTO Members.
92 China cannot point to "acts or 
pronouncements" of WTO Members, with respect to the three points it attempts to argue constitute 
"subsequent practice". A single act of one WTO Member cannot constitute subsequent practice. 
557. With respect to the third last bullet in para graph 147 of China's first written submission, 
suggesting that Members have applied Rule 2(a) to  classify multiple shipments to avoid payment of 
duties, China has in fact only presented one example to  support this alleged subsequent practice.  That 
example is Canada's furniture memorandum (Exhibit CH I-22), discussed in response to Question 124.    
558. With respect to the second last bullet, China has presented no evidence of any WTO Member 
charging ordinary customs duties above the rates set out in a Member's Schedule based on 
"conditions" applied at the border.  As discu ssed extensively in response to Question 32,  the examples 
China gives of customs laws of other countries merely reinforce the ev idence that WTO Members 
impose ordinary customs duties based upon the state of the goods as they arrive at the border.  Similarly, China's attempt to rely upon progr ams that result in the imposition of charges lower than 
those set out in a Member's Schedule based upon s ubsequent activity within a Member is clearly 
misplaced.  
                                                     
 
92 Appellate Body  Report , US – Gambling , WT/DS285/AB/R, adopted April 20, 2005, at para. 192. WT/DS339/R/Add.1 
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  559. With respect to the final bullet, Canada cannot see any evidence th at China has presented 
relating to the measures requiring tracking the final u se of imported parts.  However, other than the 
examples discussed above, the only practices to whic h Canada believes China has referred are those 
of the EC and the United States relating to true "anti-circumvention in the anti-dumping context, 
which is legally irrelevant. 
117. ( All parties )  The European Communities explains in  paragraph 262 of its first written 
submission that a situation foreseen under Articl e 21(2)(a) of Decree 125, namely importation of 
both an engine assembly and a body assembly together, is far away from the categories foreseen 
by the Chinese tariff schedule examined in the light of the general Explanatory Notes for 
Chapter 87 whereby an incomplete or unfinished ve hicle may be classified as the corresponding 
complete or finished vehicle provided it has the essential character of the latter. 
 
(a) Do you consider that the two examples of incomplete or unfinished vehicles in the 
General Notes for Chapter 87 correspond to any of the criteria set out in Article 21 of 
Decree 125?; and 
 
Response of China 
 
560. As China discusses in response to question 131 , the two examples provided in the Chapter 
Notes for Chapter 87 are simply examples of the app lication of GIR 2(a) to motor vehicles.  As the 
EC's own classification practice demonstrates, these two examples do not define the boundaries of the 
application of the essential character test to motor vehicles.   
561. With respect to the first example, "a motor vehi cle, not yet fitted with the wheels or tyres and 
battery," China considers that this is at least an "SKD kit," and could be classified simply as a motor 
vehicle.  Wheels, tyres, and batteries are all consumable items, and are commonly added to the 
vehicle in the domestic market. 
562. With respect to the second example, "a motor ve hicle not equipped with its  engine or with its 
interior fittings," this would likely correspond to Article 21(2)(b) of Decree 125, as it constitutes a 
"body … plus at least three other assemblies." 
Response of the European Communities (WT/DS339) 
 563. The criteria set out in Article 21 of Decree 125 are, in essence, totally different from the 
examples of incomplete or unfinished vehicles in  the general notes for chap ter 87. For each of the 
different criteria under Article 21 of Decree 125, the EC has established that the measures require that 
parts are classified as complete vehicles and im pose on them the 25% duty on complete vehicles in 
breach of China's schedule of concessions and Article  II of the GATT (see first written submission of 
the European Communities, paragraphs 237 to 281). 
564. First, parts which were imported at different ti mes, from different origins and by different 
importers will be combined for classification as complete vehicles, which is in direct contradiction with the "as presented" rule. In that respect, if  CKD and SKD kits may in some circumstances be 
assimilated to the examples in the notes, this may only be if 100 % of the parts are presented to 
customs at the same time. A pre-determination as under Article 21(1) of the Decree 125 that CKD and 
SKD kits will in all circumstances be classifi ed as a complete vehicle breaches this rule. 
565. Second, the measures also require classifying as complete vehicles a combination of parts 
which is far from having the essential character of a co mplete vehicle.  In each of the combinations  WT/DS339/R/Add.1 
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  provided for under Article 21(2) of Decree 125, importe d parts will be classified as complete vehicles 
even though parts, or "assemblies" essential for the functioning of a vehicle will be missing in the 
combination of imported parts. This is further aggrav ated by the fact that 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 th resholds set out in the measures. Under Article 22 
of Decree 125, it is sufficient that a certain number of key parts, or value of key parts are imported and incorporated in one "assembly" to treat th at "assembly" as imported and count it against the 
thresholds of Article 21(2) of Decree 125. This me ans that the import of a relatively limited quantity 
or value of parts is sufficient to impose the classification of those parts as complete Vehicles. Thus, 
for a class M1 vehicle, 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 (see Exhibit EC - 1). Further, from July  1, 2008 and the entry into force of the class A/B 
distinction, the imports of, e.g., one door, one e ngine hood, one engine bloc k and one cylinder head 
will be sufficient to make the vehicle body an d the engine Deemed Imported Assemblies (see 
Exhibit EC - 2). To put these figures in context, the average number of parts in a complete vehicle is in the thousands. 
566. In respect of Article 21(3) it is clear that the examples of incomplete or unfinished vehicles in 
the General Notes for Chapter 87 do not operate on the basis of the aggregate price of the parts, which 
is an entirely alien concept to customs classificati on. It is therefore impossible even to begin any 
reasonable comparison between the examples of chapter 87 of the HS system and Article 21(3) of 
decree 125 because they are based on completely different criteria the latter having nothing to do with customs rules. 
Response of the United States (WT/DS340) 
 
567. The criteria set out in Article 21 of Decree 125 for determining when parts are Deemed 
Whole Vehicles in most cases go far beyond what can appropriately considered to be parts with the "essential character" of a motor vehicle, under the Harmonized System (including application of the Chapter note to Chapter 87).  There might be a few combinations of parts Deemed Whole Vehicles by 
Article 21 that could conceivably properly be  classified under the Harmonized System as whole 
vehicles if presented together in one shipment at  the border. For example the body, chassis-frame, 
transmission, steering system and both axles (which  would be one "Main Assembly" and four other 
"Assemblies" within the meaning of Article 21) mi ght appropriately under the Harmonized System be 
classified as a whole vehicle, based upon the Gene ral Chapter Note example ("a motor vehicle not 
equipped with its engine"). Howeve r, that would require an individual assessment that the additional 
Assemblies and other parts were e nough to constitute the "essential character" of a motor vehicle. But 
in the vast majority of cases, parts Deemed Whole Vehicles under Article 21, even if they were  
presented together at the border, could only be classified as intermediate products or parts.  
568. With respect to Decree 125, three options to de termine if an article constitutes an incomplete 
vehicle were established. These are: 
Option 1: body and engine 
Option 2: body or engi ne plus three more other assemblies (chassis-frame, steering 
system, transmission, brake system, drive axle, and non-driving axle). 
Option 3: five or more other assemblies. 
 
569. Taking into account Examples A and B of an in complete vehicle in the General Explanatory 
Notes to Chapter 87, neither Option 1 nor Option 3 would meet the requirements of either example. WT/DS339/R/Add.1 
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  570. In the case of Option 2, if the article comprised the body, chassis-frame, transmission, 
steering system and both axles it would satisfy Example B which reads: "A motor vehicle not equipped with its engine or with its interior fittings." 
Response of Canada (WT/DS342) 
 
571. The criteria set out in Article 21 of Decree 125 go far beyond what can appropriately be 
considered to be parts with the "essential character" of a motor vehicle. As set out in more detail in 
answer to Question 128, CKDs/SKDs described in Article 21 could conceivably be classified under 
the Harmonized System as whole vehicles. Of course , that would only be relevant were those parts 
presented together in one shipment at the border. At that point, an individual assessment of the parts 
should be made, without cons ideration of end use.  
572. With respect to Decree 125, three options to de termine if an article constitutes an incomplete 
vehicle were established. These are: 
Option 1: Body and engine; 
Option 2: Body or engine plus three more other assemblies (chassis-frame, steering 
system, transmission, brake system, drive axle, and non-driving axle); and 
Option 3: Five or more other assemblies. 
573. Using examples A and B of an incomplete vehicle in the General Explanatory Notes to 
Chapter 87, neither Option 1 nor Option 3 would meet  the requirements of either example. Example B 
describes the case of a "motor vehicle not equipped with its engine or with its interior fittings". It may 
be possible that most assemblies (but not all), t ogether with the body or engine, could take on the 
essential character of a motor vehicle. That determination is, however, in the abstract. Article 21 is not exhaustive, is broad enough to capture any number of imported parts combinations, and has nothing to 
do with presentation of those parts at the border. In the vast majority of cases, parts that are Deemed 
Whole Vehicles under Article 21, even if they were  presented together at the border, could only be 
classified as intermediate products or parts. It is not for the complainants to determine where that 
threshold, in the light of the broad scope of Decree 125, should be set.  
Comments by the United States on China's response to question 117(a) 
574. In examining the examples in the General E xplanatory Notes to Chapter 87, China asserts 
that: "With respect to the second example, 'a motor vehicle not equipped with its engine or with its 
interior fittings,' this would likely correspond to Article 21(2)(b) of Decree 125, as it constitutes a 
'body … plus at least three other assemblies.' "  The United States submits that this conclusion is 
unsupported because China has not established wh ich types of assemblies would constitute an 
incomplete or unfinished motor vehicle.   
(b) In your view, what auto part products, ot her than those referred to in the general 
Explanatory Notes for Chapter 87, would qualif y as an "incomplete or unfinished vehicle 
having the essential character of a complete or finished vehicle"?  Please explain by referring to specific examples. 
 
Response of China  
575. There are a variety of factors that customs authorities consider in evaluating whether an 
incomplete or unfinished article has the essential char acter of a complete or finished article.  With 
respect to machines, such as motor vehicles, a principal consideration is whether the incomplete or  WT/DS339/R/Add.1 
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  unfinished article is recognizable  as that type of machine in its assembled condition.  Three examples, 
drawn from US customs practice, illustrate this consideration: 
− In HQ 086555 (16 April 1990) (CHI-42), the US Customs considered whether incomplete 
backhoe excavators from Japan had the essential character of a backhoe excavator.  The 
missing components included the bucket, the arm, the boom, and the cab assembly.  In 
essence, the imported article was the propelli ng base to which the cab and the operating 
extensions of the excavator would be attached .  The US Customs found that this incomplete 
backhoe was recognizable as a backhoe, and therefore had the essential character of a 
backhoe.   
− In HQ 084896 (18 October 1989) (CHI-43), the US Customs considered the classification of a 
luxury four-wheel drive motor vehicle that was missing its engine and transmission.  Notwithstanding the fact that this vehicle was clearly not operational as a motor vehicle, the US Customs found that it had the essential character of a motor vehicle. 
− In NY H80093 (4 May 2001) (CHI-44), the US Customs considered the classification of a 
centrifuge imported with the bowl, gearing, and base of the centrifuge, but without the motor, 
valves, and the various electronic elements and controls.  Because this  item was recognizable 
as a centrifuge, the US Customs found that it had the essential character of a centrifuge. 
576. As these classification rulings demonstrate, th e essential character test does not require the 
presence of every component that is "essential" to th e use or operation of the machine in its finished 
form.  This important aspect of the essential ch aracter test is further illustrated by the EC 
classification determination of incomplete pick-up tr ucks that China has already submitted (CHI-14).  
Thus, for example, while a method of propulsion is clearly an essential element of a finished motor 
vehicle, neither the engine nor the transmission mu st be present for an incomplete motor vehicle to 
have its essential character.   
577. Another factor that customs authorities apply in evaluating the essential character of an 
incomplete or unfinished article is the value of the incomplete article in relation to the value of the 
finished article.  This consideration has already b een seen in CHI-16, the US tariff classification of 
incomplete, unassembled pistol kits from Austria.  As  the US Customs observed in that decision, "the 
nature of the item, its bulk, quantity, or value  may be looked to in a determination of essential 
character."  Among the relevant facts in that de termination was that the unassembled, incomplete 
SKD pistol kit constituted 94.5 per cent of the import cost of the finished pistol.  Value was also a 
relevant fact in the backhoe excavator determina tion described above; the various combinations of 
backhoe components that the US Customs classified  as a complete backhoe represented as little as 87 
per cent of the total value of the excavator.  In ye t another classification determination, concerning an 
incomplete railway car, the US Customs classified th e incomplete article under the applicable heading 
for railway cars, and not the corresponding provisions for parts, even though the imported components represented only 57 per cent of the finished railway car
.93 
578. These factors and examples demonstrate that, contrary to the EC's position at the first 
substantive meeting, the two examples set forth in the general Explanatory Notes to Chapter 87 do not 
define the range of possible applications of the es sential character test to parts and components of 
motor vehicles.  China considers that the different  combinations of auto parts and components set 
forth in Articles 21 of Decree 125 all result in an incomplete article that is plainly recognizable as a 
                                                      
93 HG 081691 (18 January 1989) (CHI-45).   WT/DS339/R/Add.1 
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  motor vehicle.  These combinations therefore ha ve the essential character of a motor vehicle under 
GIR 2(a).   
Response of the European Communities (WT/DS339) 
579. It is possible that an SKD kit and even a CKD kit under Article 21(1) of Decree 125 could in 
some instances be considered as "an incomplete or  unfinished vehicle having the essential character of 
a complete of finished vehicle" if the kits consis t of all the parts necessary to assemble a vehicle and 
provided only assembly operations are involved.  Ho wever, such a determination must be made on a 
case by case basis and not be required in all cases as is the case with the Chinese measures. 
Response of the United States (WT/DS340) 
 
580. US authorities have found the following goods c onstitute "incomplete or unfinished vehicles 
having the essential character of a complete or finished vehicle":  
Four-wheel drive luxury motor vehicle imported without the engine, transmission, as well as 
other minor components described as "minor elements of design" was classified under 
heading 87.03 as having the essential character of a complete vehicle by application of 
General Interpretative Rule 2(a).  
 
A dump hauler cab with instruments, front frame portion, front axle and suspension, diesel 
engine, transmission, differential gear, plus electrical and hydraulic system was classified 
under heading 87.04 as having the essential character of a complete vehicle by application of 
General Interpretative Rule 2(a) because it contained both the motive power source and the 
cab from which the vehicle is operated, as we ll as the transmission which reduces the speed 
between the crankshaft and the  rear drive axle  and the hydraulic braking system for the entire 
vehicle.  
 
Cab assemblies consisting of the basic shell (inc luding doors), certain glass (e.g., windshield 
and windows), windshield wipers, headlights, a nd parts of the dashboard (steering column, 
signal indicator, possibly the steering mechanism) was classified as having the essential 
character of a cab under heading 87.07 by app lication of General Interpretative Rule 2(a), 
because they possess the aggregate of distinc tive component parts which establish their 
identity as driving cabs.  The parts or components added after importation are in the nature of 
accoutrements which furnish or otherwise outf it the cab assemblies who se identity is already 
clearly established.  
 
Motor chassis with enclosed cabs for dump tr ucks or dumper cab chassis and dumper bodies 
that were disassembled prior to shipment, w as classified under heading 87.04 by application 
of General Interpretative Rule 2(a) as the cab  chassis are complete subassemblies clearly 
dedicated to receiving dumper bodies.  
 
581. US authorities have found that the following types of goods do not  constitute incomplete or 
unfinished motor vehicles of chapter 87 by appli cation of General Interpretative Rule 2(a):  
Bulk parts consisting of panel parts, frame, engine assembly, transmission assembly, trim 
parts, chassis parts (other than the frame), and other miscellaneous parts (nuts, bolts, washers, 
bushings and similar miscellaneous fasteners and pins), shipped in  unequal numbers and 
shipped either together or at different times to  be put into inventory for eventual assembly  WT/DS339/R/Add.1 
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  with US components and components produced in a foreign trade zone.  The United States 
determined that parts imported in bulk and principally used for inventory purposes do not 
impart the essential character of a motor vehicle as the imported components were not 
advanced to the point that they were recognizab le as a motor vehicle.  Further there was no 
evidence that any of these components were inte nded to be assembled into a specific motor 
vehicle, nor was there any evidence that th ey constitute something other than discrete 
components intended for inventory for a manufacturing operation.  
 
The United States determined that parts importe d in bulk and principally used for inventory 
purposes do not impart the essential character of finished cab assemblies and that the 
components needed to be individually classified, regardless of whether the shipment of cabs, 
frames assemblies, and miscellaneous parts we re entered on the same day or entered on 
different dates. 
 
Response of Canada (WT/DS342)  
582. There are thousands of parts incorporated in to various assemblies and sub-assemblies. As a 
result, there are numerous potential combinations  that would have the essential character of a 
complete vehicle and would have to be assessed on a case-by-case basis. Canada notes that in most cases combinations of parts could be classified as eith er a chassis with engine (87.06) or body (87.07). 
Therefore, to have the essential character of a comple te vehicle a shipment of parts presented together 
at the border would have to include at a minimum the body, the chassis and most other parts of the 
vehicle (though not necessarily the engine). 
Comments by the United States on China's response to question 117(b) 
583. China cites to three examples of US customs prac tices in Exhibits CHI-42,  43, and 44.  Of the 
three examples, only one (Exhibit CHI-43) is directly  on point to the panel's question, which asks for 
examples of auto parts products that would qualify as an "incomplete or unfinished vehicle having the 
essential character of a complete or finished vehi cle."  Exhibit CHI-43 was also identified by the 
United States along with several other rulings in  its original response to this question.   
584. China also asserts in its respon se that "Value" should be taken in to consideration.  In regards 
to whether "value" criterion constitutes the essential character of these assemb lies, the United States 
respectfully refers the Panel to the above US co mment on China's response to Panel question 102.   
118. ( European Communities )  The European Communities has stated in paragraph 270 of its 
first written submission that CKD and SKD kits cannot be classified as complete vehicles because nothing or very little is fitted or equippe d in he case of CKD kits and because SKD kits 
will not attain the necessary degree of  fitting and equipping to be classified as complete vehicles.   
 (a) In light of this statement, what degree of  fitting or equipping of auto parts do you 
consider as necessary for such part s to be classified as complete vehicles within the meaning of 
the General Notes for Chapter 87?; and  Response of the European Communities (WT/DS339)  
585. The European Communities has not  stated in paragraph 270 of its first written submission 
what question 118 states.  Paragraph 270 concerns  only CKDs whereas SKDs are considered under 
paragraphs 272 and 273 of the first written submission.  However, it is  true that in respect of CKDs WT/DS339/R/Add.1 
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  the European Communities has in its first written s ubmission taken the view that the lack of "fitting 
and equipping" is an obstacle for classifying a C KD as a complete vehicle.  This is a borderline 
question where the presence of all the parts necessary to assemble a vehicle must be weighed against a 
product that is more advanced from the point of vi ew of "fitting and equipping" but may lack some 
minor parts when presented to customs.  The questi on therefore is whether the quantitative element of 
having all the parts necessary presented at the sa me time can outweigh the lack of the qualitative 
element i.e. the "fitting and equipping".  The Eur opean Communities is prepared to accept that in 
some instances this can be the case and a CKD co uld be classified as a complete vehicle provided 
only assembly operations are involved. However, such a determination must be made on a case by 
case basis and taking into account inter alia  the technical complexity of the vehicle type. 
586. With regard to SKDs the position of the Europ ean Communities is more refined than what the 
question suggests.  This position is explained in paragraph 272 and 273 of the first written 
submission. The determination whether an SKD can be classified as the complete vehicle must also be 
made on a case by case basis.  In th is respect the European Communiti es would like to correct the first 
sentence of paragraph 273 of its  first written submission, which should read "SKDs will often
 not 
attain the necessary degree of fitting and equipping to  be classified as complete vehicles".  The word 
"often" was accidentally omitted from the sentence, which seems relatively evident on the basis of 
paragraph 272 that discusses the various possible scenarios. 
587. A measure that requires to systematically classify CKDs and SKDs as complete vehicles 
would therefore be in breach of Article II of the GATT. 
(b) Please elaborate on your response in light of Rule 2(a) of the General Interpretative 
Rules and the Panel's statement in Indonesia – Autos  that "It appears that, in order to avoid 
paying 200 per cent duties on CBU passenger cars, EC and US car producers ship to Indonesia 
virtually complete CKD kits that are effectively " cars in a box ".  Accordingly, we believe that 
they can properly be considered to have charac teristics closely resembling those of a complete 
car." (Panel Report, para. 14.197,emphasis added). 
 
588. See reply to point (a). 
119. ( European Communities )  In paragraph 277 of its first written submission, the European 
Communities states that a criterion of 60 per cent 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.  Please explain, in the European Communities' 
view, what auto parts could be considered as "important parts"?  Response of the European Communities (WT/DS339) 
 589. This statement in paragraph 277 of the first written submission is made from a general point 
of view. Missing parts that consist of 40 % of the aggregate price of all the parts must mean in any 
possible configuration that the combination of pa rts would not have the e ssential character of a 
complete or finished vehicle. In a complete ve hicle, all parts are important for its functioning. 
590. As an illustration, the Panel can refer to the ex ample provided by China in paragraph 19 of its 
first written submission, in which the body (14,25  %), the engine (15,32 %), the transmission 
(10,02 %), and the non-driving axle (1,17 %) consist of 40,76 % of the aggregate price of all the parts. 
120. ( European Communities )  China states in paragraph  89 of its first written submission 
that the European Communities contradicts the application of Rule 2(a) of the General  WT/DS339/R/Add.1 
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  Interpretative Rules to the term "motor vehicl es" by stating that there is a clear separation 
between complete vehicles and the parts and co mponents thereof.  Please comment on this 
statement. 
 
Response of the European Communities (WT/DS339)  
591. China's tariff schedules and chapter 87 of the Ha rmonised System contains a clear separation 
between complete motor vehicles (headings 87.01 to  87.05) and the parts and accessories of the motor 
vehicles of headings 87.01 to 87.05 (heading 87.08).  The headings or their interpretative notes do not 
contain any language that would provide a basis for blurring this clear distinction in the way China 
does. This clear general categorisation must be sep arated from an application of the schedules and the 
HS system in the context of an individual shipme nt as presented to the Customs. Of course, there are 
exceptional situations such as CKDs and SKDs wh ere the borderline between complete vehicles and 
parts thereof may be difficult to draw and must be made on a case by case basis. However, this is a 
different matter from the general question as to wh ether the schedules provide for a clear separation 
between complete motor vehicles and parts thereof. 
121. ( Complainants )  Do you agree with China's illustration of the relationship between 
substance and form of importing activities in pa ragraph 97 of its first written submission?  If 
not, why? 
 
Response of the European Communities (WT/DS339)  
592. This illustration is given by China in a contex t where China tries to apply GIR 2 (a) of the 
Harmonised System without respecting the "as pre sented" condition there under. This amounts to  
disregarding the very basic rule of  tariff classifica tion, i.e. that when goods are classified in the 
Harmonised System it is always done on the basis of  the objective characteristics of the product at the 
time of importation, that is, as imported and presented to Customs on a shipment-by-shipment basis. 
593. The example is also alien to reality. The industry does not function in the way the 
"illustration" in paragraph 97 suggests. Different au tomotive parts are manufactured in different parts 
of the world and are genuinely shipped to the cust omers in separate shipments. Completely different 
parts such as windscreens, navigation systems, batteries, tyres or screws are manufactured by 
completely different companies located in different countries. To suggest that the manufacturer orders 
all of the parts from one company, then separates the parts into different containers in order to benefit 
from the lower duty rates in China for parts is comp letely alien to reality. However, even if such 
practices would exist, they would not circumvent the rules on customs classification. Furthermore, 
even in a simple vehicle type there are thousands of parts. An example of a motor vehicle that consists 
of 10 components has nothing to do with reality. 
594. The example is also totally alien to the meas ures. Except under Article 21(1) of Decree 125 
(to the extent that CKDs and SKDs are defined as kits including all pa rts necessary to build a 
complete vehicle), there is no need under the measur es to import all parts to have them classified as 
complete vehicles and attract the 25% duty. Under Article 21(2) of Decree 125, the combination of 
some assemblies will be sufficient. In fact, the im port of some parts will suffice as Article 22 deems 
assemblies imported if a certain number of key parts, or value of parts were imported and incorporated in the assembly (see EC FWS, paras. 40 et seq). Under Article 21(3), it will be sufficient 
to import parts for 60% of the complete vehicle price. WT/DS339/R/Add.1 
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  Response of the United States (WT/DS340) 
 
595. As an initial matter, the United States again notes that China's example – premised on 
separating CKDs into split shipments – has nothing  to do with the measure that China actually 
adopted.  China's measure applies to all automotiv e manufacturing operations – including operations 
that import bulk components from all over the world to produce vehicles in China.   
596. The United States does not agree with the illustration stated in paragraph 97 as it overly 
simplifies the number of components and sub-assembli es that comprise a complete motor vehicle.  
The illustration as presented also appears to breach the obligations of cont racting parties to the 
Harmonized System to apply the General Interp retative Rules 1 and 2(a), because it ignores the 
specific tariff headings set out in China's schedule, and applies GIR 2(a) to separate shipments at the 
whim of China's authorities, without any regard to how the goods were presented to Customs authorities.    
Response of Canada (WT/DS342) 
 
597. No. China's measures instead result in form prevailing over substance, since they apply 
completely arbitrary thresholds contrary to proper classification under the Harmonized System. China's example is a gross oversimplification of the commercial reality of auto parts trade and 
automobile production. In normal manufacturing, part s are shipped at different times from different 
suppliers and undergo complex manufacturing processes at different plants in China or abroad before 
they are ready to be incorporated into a motor vehicle. 
598. With respect to China's illustration in paragraph 97 of its first written submission, as set out in 
answer to Questions 32 and 33, separate shipments of parts do not have the "essential character" of a "motor vehicle" as presented at the border. Furthe rmore, as set out in more detail in answer to 
Question 128, even if, arguendo , it were permissible to assess multiple shipments, the thresholds 
under the measures would still be meaningless sin ce they have no relationship to the proper 
classification of auto parts. Except perhaps in respect of Article 21(1) of Decree 125, to the extent that 
imported CKDs or SKDs may have all or nearly all of the parts needed to manufacture a motor 
vehicle, an auto manufacturer may import far fe wer than 100% of the parts for a vehicle and still 
suffer from China's form over substance distinction.   
122. ( China )  In relation to your statement in paragraph 97, does China consider that the 
processes required for the assembly of vehicles using CKD or SKD kits are different from those required for the assembly of vehicles using auto parts other than CKD or SKD kits?  Please explain your position in terms of speci fic factors, including cost and time. 
 
Response of China 
 
599. The short answer to this question is "no".  The process to assemble a puzzle is the same 
whether the pieces of the puzzle are in one box or in several boxes.  The same is true of motor 
vehicles:  Once the necessary parts and components ha ve arrived at the point of assembly, the process 
for assembling them into a complete vehicle is th e same, regardless of when and how the parts and 
components arrived.  (These assembly processes are detailed in response to question 71.)  The same 
answer applies to SKD kits.  An SKD kit is a CKD kit at a more advanced stage of assembly.  In 
effect, it reflects a decision to undertake part of the assembly operations at one location, and the 
remainder of the assembly operations at another location.   Other than the fact that the vehicle is at a 
more advanced stage of assembly when it arrives at its final point of assembly, structuring the import 
transaction in this manner does not affect the nature of the assembly process.    WT/DS339/R/Add.1 
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  123. ( China )  Regarding the EC decision provided in Exhibit CHI-18, please comment on the 
fact that in that decision, "all parts were present including engine and gearbox". 
 
Response of China 
 
600. China submitted the Binding Tariff Information (BTI) in CHI-18 to demonstrate that the 
European Communities, like customs authorities all over the world, classifies completely 
unassembled or disassembled motor vehicles as "motor vehicles," and not as "parts" of motor 
vehicles.  This practice by the EC is contrary to  its position in its first written submission that a 
"complete set of parts … remain[s] parts until they  are fitted and processed together as a complete 
vehicle."
94  The EC appears to have abandoned this pos ition during the first substantive meeting of the 
Panel, and now acknowledges that the correct classification of a completely unassembled or 
disassembled motor vehicle under GIR 2(a) is as a "motor vehicle."  The fact that "all parts were 
present including engine and gearbox" simply establishes that, in this particular instance, the vehicle 
in question was a completely disassembled motor vehicle (and not, for example, an incomplete set of disassembled parts and components that nonetheless ha d the essential character of a motor vehicle). 
124. In respect of the tariff classification d ecision by the Canada Border Services Agency, 
 
(a) ( China )  Referring to the CBSA's determination in paragraph 119 of its first written 
submission, China submits that this determinat ion by the CBSA is indistinguishable from 
China's interpretation of its own Schedule of Concessions relevant to the present case.  Please 
elaborate on this statement in relation to the criteria under Article 21 of Decree 125. 
 
Response of China 
 601. As China noted in paragraph 119 of its firs t written submission, one of the principal 
differences between the CBSA determination and Decr ee 125 is that Decree 125 specifies, in detail, 
the precise thresholds at which China will cons ider a collection of imported auto parts and 
components to have the essential character of a moto r vehicle.  This is the purpose of Article 21 of 
Decree 125.  The CBSA determination, by contrast , refers only to determ ining the "commercial 
reality" of a series of import transactions.  The CBSA determination, for example, refers to "what was 
actually purchased by the importer: complete furnitu re or unrelated parts," without elaborating upon 
the meaning of "unrelated parts".  Presumably, this refers to imported parts that are not, in fact, assembled with other imported parts and components in to complete furniture.  This is suggested by 
the next paragraph of the determination, which stat es that "[a]rticles that are imported specifically 
either as replacement parts or to be incorporated with domes tic components in the manufacture of 
domestic furniture will be classified in their own right under the appropriate Harmonized System 
heading."  This statement implies that, at a certa in threshold, Canada would no longer consider a 
collection of imported furniture parts to have the essential character of complete furniture, without 
specifying where that threshold is. 
602. The fact that China has provided detailed thres holds in Article 21 of Decree 125 makes these 
measures more transparent and predictable to importe rs.  As China noted throughout the first meeting 
of the Panel, if importers believe that the applica tion of these thresholds to a particular set of facts 
results in an incorrect tariff classification, there are both domestic and international procedures to challenge these determinations.  However, as the CB SA determination illustrates, the application of 
GIR 2(a) to multiple shipments of parts that are ass embled domestically is not inconsistent with the 
Harmonized System. 
                                                     
 
94 EC first written submission at para. 270.   WT/DS339/R/Add.1 
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  (b) ( Canada )  Please explain in detail how the CBSA furniture decision can be distinguished 
from the measures at issue, including with resp ect to when the decision of whether a good has 
the essential characteristic has been made by the Canadian customs office in that case; and 
 
Response of Canada (WT/DS342) 
 
603. In the case of disassembled furniture imported on the basis of a split shipment, the furniture 
has been completely manufactured and only disasse mbled for ease of transport. The furniture is 
purchased as a complete unit by a retailer. The Canadian rule does not apply to furniture 
manufacturers. It imposes no reporting requirements fo r importers of furniture parts relating to their 
sale within Canada. 
604. To determine if the importing retailer is in f act importing complete furniture in disassembled 
form, Canadian customs officials examine the pur chase orders and import documentation in order to 
ascertain that the imported goods are covered under the same purchase order. There is no assumption 
of a violation: if an importer declares that it is im porting furniture parts, in the absence of contrary 
evidence obtained by Canadian customs officials, th ey are charged at the parts rate. If there is 
evidence that finished furniture has been purchased by a retailer but shipped disassembled, Canadian 
customs officials are not required to charge furniture  parts at the finished furniture tariff rate but, 
instead, are afforded discretion whether such a determination is warranted.  
605. In contrast, the measures apply to multiple  shipments between different exporters and 
importers throughout the supply chain. Auto parts imported by parts manufacturers that process the 
imported articles before they are sold on the Chinese market to other parts manufacturers or to vehicle 
manufacturers are covered. A vehicle manufacturer is deemed to be circumventing Chinese law unless it can supply a very detailed parts audit trail to  establish the domestic content of the completed 
vehicle. Further, customs officials must assess part s that are Deemed Whole Vehicles at the complete 
vehicle rate, with no discretion to do otherwise. In  sum, the measures are in most material aspects 
completely different from Canada's rule s on classification of furniture parts. 
(c) ( Canada )  With respect to the part of the CBSA decision that "articles imported to be 
incorporated with domestic components in th e manufacture of domestic furniture will be 
classified in their own right under the appropri ate Harmonized System heading", could Canada 
explain whether there is any threshold level of domestic components that need to be 
incorporated into domestic furniture to satisfy this standard. 
 
606. No, there is no threshold level of domestic cont ent. Paragraph 7 of the Memorandum does not 
apply to imported furnitur e that is manufactured abroad and re-assembled in Canada, but rather it 
applies to domestic furniture manufactured in Ca nada. Canadian-manufactured furniture is not 
covered by this Memorandum since it is only meant to cover imported furniture that is dissassembled 
and subject to re-assembly in Canada. 
125. ( Canada )  In respect of Canada's reference to  "snapshot" during the substantive 
meeting regarding the determination of whether a good has the essential characteristic has to be made on importation: 
 
(a) Could Canada explain its reference to "snaps hot" in the context of Rule 2(a) of the 
General Interpretative Rules; 
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  Response of Canada (WT/DS342) 
 
607. The "snapshot" refers to the product as presen ted at the border. That is, the "essential 
character" of the product is established with the phy sical act of importation, in a single shipment. The 
"essential character" is determined on the basis of the objective characteristics of that good, in the 
light of any information provided by the importe r and with reference to the importing Member's 
Schedule. Tariff liability attaches on the basis of that sn apshot at the border. No consideration is to be 
given to other shipments with which the product may later be incorporated, the end use of the product, 
or the value of the good. Assessment is only based on that product as presented. See also Canada's 
response to Question 110. 
(b) When does the customs' appreciation start and end?; and 
 
608. Customs appreciation starts when the article arrives at the border and ends once customs 
officials have objectively classified that article based on its state as presented at the border. Thus, 
appreciation must occur during the physical act of importing a good, and cannot happen once goods are "imported" (clear customs). In cases where a good is transported to a bonded zone upon its arrival, 
appreciation must occur before that good clears cu stoms and is released from that zone to the 
importer.  
609. The WCO has confirmed, which fact has been noted by the Appellate Body,
95 that the 
appreciation is based on the assessment of the essentia l character of a good at the time of importation, 
and cannot be done so as to reflect the handling of the goods after importation. Such assessment may be on the basis of a visual inspection of the product, including indications on the packing, 
accompanying documentation or laboratory analysis. Rega rdless, it is always done on the basis of the 
objective characteristics of the produc t at the time of importation and on the basis of the terms of the 
Harmonized System headings and any related Section or Chapter Notes. 
(c) In Canada's view, can subsequent pr ocessing beyond the border be taken into 
consideration for the tariff classification purpo se?  Could Canada relate its answer to this 
question to the example of the CBSA's tariff cla ssification decision on furniture imports as 
referred to by China in paragraph 113-119 of China's first written submission.  In particular, to what extent does the information required by Canada from the importer at the point of 
importation differ from that required by China under the measures at issue.  
610. Subsequent processing that occurs after importa tion cannot be taken into consideration for 
purposes of product classification related to a Memb er's Schedule.  As set out in response to 
Question 124, Canada's tariff classification practi ce for furniture does not relate to subsequent 
processing, nor to manufacturers of either finished fu rniture or furniture parts.  It applies only to 
finished furniture that has been disassembled  before shipping.  No information is required from the 
retailer regarding subsequent use of the furniture. No tracking is required of imported furniture parts 
purchased as parts.  Classification based on acc ompanying documentation (e.g., invoice) is an 
accepted form of objective classification, as stated by the WCO in its answers to panel questions in EC – Chicken Cuts .
 96  
                                                      
95 EC – Chicken Cuts , Appellate Body Report, at para. 230, ref. Questions 1 and 7 of the WCO's 
response to questions posed by the panel. 
96 Ibid., Panel Report, Annex C-12, WCO response to Question 1, "The determination of the essential 
character of a product can be done in several ways. The most obvious is through a visual inspection of the WT/DS339/R/Add.1 
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  126. ( United States )  The final determination on imported "Large Newspaper Printing 
Presses and Components" as provided in Exhibit CHI-25 states, inter alia , that "to facilitate the 
Department's performance of the value test, all foreign producers/exporters and US importers 
in the LNPP industry shall be required to provide various information as indicated in the notice 
"on the documentation accompanying each entry" from Germany and Japan of elements pursuant to a LNPP contract."  Please explain the exact point in time "each entry" in this notice is referring to.  In other words, when do export ers and importers have to provide information to 
the DOC? 
 
Response of the United States (WT/DS340) 
 
611. There are several reasons why the US anti-dum ping duty orders on large newspaper printing 
presses (LNPPs) from Germany and Japan, wh ich were revoked effective 1999 and 2001, 
respectively, are irrelevant to this  dispute.  As an initial matter, in its response to Question 67 above, 
and in response to Question 140 below, the United States explains at length why "circumvention" in the antidumping context is not relevant to this dispute.  The United States also has the following 
comments that are specific to the an tidumping duties imposed on LNPPs.   
612. First, unlike automobiles, which are routinel y imported fully assembled, it is not feasible to 
import fully assembled LNPPs, which must be housed  in significantly sized buildings.  Given the 
unique nature of this product, and to ensure the ef fective administration of the anti-dumping order, the 
US Department of Commerce developed the product c overage of the LNPPs investigations to include 
LNPP systems, additions and the five major press system components, whether assembled or unassembled, that are capable of printing or otherwise manipulating a roll of paper more than two pages across.  Because even the five major co mponents were typically imported unassembled, the 
Department of Commerce provided for the "value test " cited by China in its first written submission.  
Specifically, if the sum of the value of elements imported to fulfill a LNPP contract was at least 50 per cent of the value, measured in terms of the cost of manufacture, of any of the five named 
components covered by the scope into which they ar e incorporated, then the imported elements were 
covered products.   
613. Second, while the potential of circumvention of an anti-dumping duty order always exists and 
was referred to by the Department of Commerce in the LNPPs determination, the value test was 
actually part of a process the Department of Commerce provided so that importers could demonstrate that their merchandise was not subject to the anti-dumping duty order.  In other words, the requested entry documentation was required if producers or impor ters intended to demonstrate that the relevant 
entries should not be subject to the anti-dumping duty order.  If such documentation was provided no 
later than 75 days prior to the intended date  of entry, the Department of Commerce could 
preliminarily determine that such merchandise wa s outside the product coverage of the order and 
instruct the US Customs Service to suspend liquidati on at a zero deposit rate.  Under the  Department 
of Commerce's procedures, this ruling would become  final unless subjected to administrative review.  
127. ( China )  China submits in paragraph 133 of its first written submission that the value-
based test adopted by the US Commerce required the US Commerce to wait until after all of the 
elements comprising the LNPP component are im ported and the LNPP component is produced 
before making a determination as to whether the imported parts were within the scope of the 
order.   
                                                                                                                                                                    
 
product, including indications on the packing. Reference can also be made to accompanying documents. In 
some cases, however, laboratory analysis may be required".  WT/DS339/R/Add.1 
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  To the extent that such value-based-test adopted by the US were to be considered as serving the 
same purpose as China's measures, could China explain what is the rationale behind certain procedural requirements under Decree 125 that are imposed on auto manufacturers prior to the 
importation of auto parts, including self-eval uation and the Verification Center's review? 
 
Response of China 
 
614. As China has explained in response to several questions, principally questions 38 and 78, the 
purpose of the evaluation and verification process is  to determine whether multiple shipments and 
parts and components are related to each other through their common assembly into a motor vehicle 
model that China would have classified as a "motor vehicle" had those parts and components entered China in a single shipment.  This determination is made in advance of importation principally so that 
China can impose an appropriate customs procedur e on these related shipments of auto parts and 
components to ensure compliance with China's customs laws.   
128. ( Complainants )  Please explain under which specific tariff headings of China's Schedule 
should the categories of auto parts under paragr aphs (1), (2) and (3) of Articles 21 of Decree 125 
fall? 
 
Response of the European Communities (WT/DS339) 
 615. Even a simple motor vehicle that does not contain modern electronics would consist of 
thousands of parts, which in addition are separated  into different specific tariff headings depending on 
the vehicle type. It is therefore not possible to pr ovide an exhaustive answer . Furthermore, automotive 
parts are rarely imported in the form of the 'assemb lies' foreseen under Article 21 of Decree 125. The 
"assemblies" often consist of many parts imported separately and the "assemblies" normally become 
such only after manufacture. Furthermore, an "asse mbly" can be deemed imported when actually only 
a certain number of key parts, or value of parts were imported and incorporated in the "assembly" 
(Article 22 of Decree 125). The notion of "assemblies" is a creation of the contested measures, and is 
not foreseen by the Chinese schedules and the HS syst em. This demonstrates very concretely how the 
Chinese measures operate internally in China and de pending on the use of the parts after importation. 
616. However, some general indications at the four digit level can be given: 
Article 21(1):  
 SKDs and CKDs may in some circumstances be classified as the complete vehicle if all the parts necessary to assemble a vehicle are presented to Customs at the same time and provided only 
assembly operations are involved. In such a case the kits would be classified under headings 87.01 to 
87.05 depending on the specific vehicle type in question. If the conditions for classification as a complete vehicle are not fulfilled in casu , the parts that were presented to customs would be classified 
separately under the specific headings  for automotive parts. The most relevant four digit headings are 
87.08, 84.07, 84.08, 84.09, 84.83 and 85.11 but also ot her headings may be relevant depending on the 
vehicle type. In the case of an SKD, also headings  87.06 and 87.07 may be relevant depending on the 
level of "fitting and equipping". 
 Article 21(2):   Complete engines (the "engine assembly") are cl assified under headings 84.07 and 84.08 and parts 
thereof under heading 84.09 at the four digit level.  WT/DS339/R/Add.1 
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  Complete bodies (the "body assembly") are classi fied under heading 87.07 and parts thereof under 
heading 87.08 at the four digit level.  
The other "assemblies" under Decree 125 do not have  a specific heading under the Chinese Schedules 
and the HS system because the "assemblies" are a creation of the measures not foreseen by the 
schedules and the HS system. In most cases the part s that make up the "assemblies" after manufacture 
would upon importation be classified under the releva nt headings for parts (most relevant four digit 
headings are 87.08, 84.07, 84.08, 84.09, 84.83 and 85.11). However,  heading 87.06 "chassis fitted 
with engines" is relevant in many combinations  foreseen by Article 21(2) because a "chassis fitted 
with engines" is according to the explicit terms of  the heading "a motor vehicle without bodies". In 
other words, a motor vehicle without its body but c ontaining other parts already fitted and equipped is 
for the purposes of the Chinese Schedules and the HS system a "chassis fitted with engines", not a 
complete motor vehicle. A more detailed analys is has been provided under paragraph 255 to 260 of 
the first written submission of the EC. 
 
Article 21(3):  This paragraph foresees that any configuration of parts in a random order as long as the aggregate 
price of the imported parts attains 60 % of the comp lete vehicle parts is classified as the complete 
vehicle. The applicable headings are therefore th e headings of all the parts that make up a given 
vehicle type. The most relevant are headings 87.08,  84.07, 84.08, 84.09, 84.83 and 85.11 at the four 
digit level. 
 
Response of the United States (WT/DS340) 
 617. Paragraph (1) of Article 21 of Decree 125 pr ovides that "imported automotive components 
fulfill the characteristics of a whole vehicle . . . [w]hen completely knocked-downs (CKD) or semi-knocked-downs (SKD) are imported to assemble vehicles."  In this category, if the imported 
articles were truly vehicle CKD or SKD kits, meani ng that all of the essential parts and components of 
the vehicle were included in the import shipment  and the only difference between the CKD and SKD 
designation was the state of disassembly, with CKD being completely disassembled and SKD being 
only somewhat disassembled, and if only assembly operations were involved in producing a complete 
vehicle, then the shipments could fall under the headings for motor vehicles, i.e., HS 8703 or 
HS 8704. 
618. Subparagraph (2)(a) of Article 21 of Decree 125 provides that "imported automotive 
components fulfill the characteristics of a whole vehi cle . . . [w]hen the two main assemblies, i.e., 
vehicle body (including driver's cabin) and engine , are imported to assemble the vehicle."  Under 
longstanding classifications by Customs authorities ar ound the world as well as the tariff classification 
experts at the World Customs Organization, a vehicle body and an engine for a motor vehicle, even if 
shipped together, would have to be separately cl assified.  The vehicle body would be classified under 
HTS 8707 and the engine would be classified under e ither HS 8407 (petrol) or HS 8408 (diesel).  A 
vehicle body and an engine inheren tly could never be classified together as a single article.  Neither a 
vehicle body nor an engine would ever be properly considered to have the "essential character" of a 
motor vehicle, nor would the theoretical combin ed article of a vehicle body and an engine.  
619. Subparagraph (2)(b) of Article 21 of Decree  125 provides that "imported automotive 
components fulfill the characteristics of a whole vehicle . . . [w]hen either one of the two main 
assemblies, i.e., vehicle body (including driver's cab in) and engine, as well as 3 or more than 3 other 
assemblies (systems) are imported to assemble the vehicle."  This subparagraph presents the same 
situation as subparagraph (2)(a).  Decree 125 defies the longstanding conventions and principles of  WT/DS339/R/Add.1 
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  classifying imported articles in their condition at th e time of importation, as set forth in the General 
Interpretive Rules and their explanatory notes.  A ve hicle body or an engine combined with any 3 of 
the other specified assemblies could never be prop erly classified as an article with the essential 
character of a complete motor vehicle.  For exampl e, a vehicle body with brakes, a steering system 
and drive axle, but no engine simply is not a motor vehicle.  It is an odd assortment of automotive parts.  The same holds true for any other combin ations envisioned by subparagraph (2)(b).  Proper 
classification of any combination of the imported assemblies would be according to the individual 
assembly in its condition at the time of importation,  with each assembly separately classified, even if 
all assemblies were shipped together. 
620. Subparagraph (2)(c) of Article 21 of Decree 125 provides that "imported automotive 
components fulfill the characteristics of a whole vehi cle . . . [w]hen the two main assemblies, i.e., 
vehicle body (including driver's cabin) and engi ne not being imported, 5 or more than 5 other 
assemblies (systems) are imported to assemble the vehicle."  Classifying the specified assemblies 
without a body or an engine as a complete motor ve hicle or more specifically as having the "essential 
character" of a complete motor vehicle takes the we ll-established principles a nd conventions of tariff 
classification even further afield.  None of these asse mblies, even if impossibly classified together as a 
single article, would ever be considered to have the "essential character" of a complete motor vehicle 
and, therefore, could never be classified as such. 
621. Paragraph (3) of Article 21 of Decree 125 pr ovides that "imported automotive components 
fulfill the characteristics of a whole vehicle . . . [w]hen the aggregate price of imported components 
attains 60% or more of the complete vehicle price for the vehicle model in question." No imported articles are ever properly classified according to th eir value.  The General Interpretive Rules do not 
provide for this way of classification.  Classification addresses the physical qualities and sometimes the function of the article without any regard to its va lue or its relative value with respect to the nature 
or purpose of the finished good.   
Response of Canada (WT/DS342) 
 
622. Article 21(1)  of Decree 125 considers that parts imported as CKDs and SKDs are Deemed 
Whole Vehicles. As set out in answer to Question 33,  if imported parts are imported in one shipment 
and have the essential character of a whole vehicle th ey could appropriately be classified as complete 
vehicles under the appropriate vehicle heading (87.01 to 87.05 inclusive). If the parts do not have the 
essential character of a complete vehicle, each article of the importation would be classified separately under the appropriate heading (e.g ., 87.08, 87.06, 87.07, 84.07).  
623. Article 21(2)  of Decree 125 considers that parts in a vehicle are Deemed Whole Vehicles if a 
certain number of Assemblies are Deemed Imported (an assessment made separately under Article 22, 
based on three separate thresholds: 
(a) Two Main Assemblies.  These should be classified separately (i.e., the body under 
heading 87.07 and the engine under heading 84.07); 
(b) One Main Assembly and three other Assemblies . If the Main Assembly is the 
engine, these combinations could at best c onstitute a chassis with engine of heading 
87.06, and then only if the chassis was one of the other Assemblies. In all other 
combinations, each article of the importation should be classified separately (i.e ., the 
body under heading 87.07, the engine under heading 84.07, and the other assemblies 
under heading 87.08); and WT/DS339/R/Add.1 
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  (c) Five or more of the other Assemblies . Regardless of the combinations, each article 
should be classified separately under the appropriate subheading of heading 87.08. 
624. Article 21(3) of Decree 125 considers that parts used in a vehicle are Deemed Whole 
Vehicles if they constitute more than 60% of the valu e of all parts used in manufacturing the vehicle. 
The value of imported content is properly used onl y for determining origin of imported products; not 
for determining their tariff classification. As a result, the 60% by value threshold category is 
erroneously applied to classification of parts,  which in most cases should be classified under 
heading 87.08.  
129. ( All parties )  In light of the fact that imports from other WTO Members can only be 
subject to ordinary customs duties and terms, conditions or qualifications as set forth in a 
Member's Schedule under Article II:1(b), to what extent is Rule 2(a) of the General Rules for 
the Interpretation of the HS relevant in interpreting a Member's Schedule?  
Response of China 
 
625. As China has explained in detail in response to other questions, the Appellate Body has 
repeatedly affirmed the importance of the Harmonize d System to the interpretation of WTO Members' 
Schedules of Concessions.  The Harmonized System, by  its terms, includes the General Interpretative 
Rules, including General Interpretative Rule 2(a).  Moreover, as China has explained in response to 
question 112, the Appellate Body has specifically recognized the relevance of interpretive decisions 
adopted by the HS Committee and the WCO in eval uating the scope and app lication of the General 
Interpretative Rules.   
626. The Harmonized System is not a "term, conditio n, or qualification" to a Member's Schedule 
of Concessions.  Rather, as the Appellate Body recognized in EC – Computer Equipment  and EC – 
Chicken Cuts , the Harmonized System is the basis upon which Members have negotiated and 
scheduled their tariff commitments.  The Harm onized System therefore provides context under 
Article 31(2)(a) of the Vienna Convention for the purpose of interpreting a Member's Schedule of 
Concessions.
97  It would not be consistent with these findi ngs by the Appellate Body to conclude that 
Members may interpret their Schedules of Con cessions in accordance with the rules of the 
Harmonized System, including the General Interpretativ e Rules, only if they have scheduled a specific 
"term, condition, or qualification" for this purpose.   
Response of the European Communities (WT/DS339) 
 
627. Rule 2(a) assists the Customs in  instances where a given incomp lete or unfinished article as 
presented to customs  appears to have the essential characteristics of the complete or finished article. 
This is different from examining the Member s' schedules from a general point of view. 
628. The European Communities also notes that Chin a's Schedules do not contain any restriction 
on the use of parts in China. 
Response of the United States (WT/DS340) 
 
629. GIR 2(a) could be of some use in clarifying the treatment set out in China's schedule with 
respect to a collection of unassembled parts as presented  to China's customs officials at the border.   
                                                      
97 EC – Chicken Cuts,  at para. 199.  WT/DS339/R/Add.1 
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  630. GIR 2(a), however, cannot be used to interpret the provisions of the GATT itself.  Thus, GIR 
2(a) cannot be instructive on what is, or is not, an "ordinary customs duty" for the purpose of GATT 
Article II.  Thus, if, as China contends, GIR 2(a) allowed for customs duties to be assessed on the use 
of a part in manufacturing operations, and with th e rate of duty based on the local content of the 
complete vehicle, the resulting charge could not be an ordinary customs duty under GATT Article II, 
regardless of the content of GIR 2(a).   
631. Likewise, GIR 2(a) cannot be used to impose a "term, condition, or qualification" on China's 
tariff bindings set out in its schedule that would be inconsistent with GATT obl igations.  For example, 
even if GIR 2(a) contained explicit local cont ent requirements (such as contained in China's 
measures), this would not provide a defense to the breach of Article III and the TRIMs Agreement 
resulting from the local content requirement.   
Response of Canada (WT/DS342) 
 
632. See Canada's response to Question 112. A Member is strictly bound by those ordinary 
customs duties and terms, conditions or qualifications  listed in its Schedule. Since there are no "terms, 
conditions or qualifications" specifically set out in  China's Schedule allowing the principle of Rule 
2(a) to be applied more broadly to  products in separate shipments a nd based upon their internal use in 
China, China cannot supersede the cl ear tariff concessions applicable to, e.g., auto parts in its 
Schedule.  
130. ( All parties )  If the measures at issue did not exist, how would the combinations of auto 
parts under Article 21(2) of Decree 125 be classified under China's Schedule of Concessions upon their importation into China?  Please provide your answer based on specific tariff 
headings under China's Schedule of Concessions. 
 
Response of China  
633. China interprets this question to  ask how China would classify the combinations of auto parts 
under Article 21(2) of Decree 125 if th ey were to enter China in a single shipment.  The answer is that 
China would classify these combinations as having  the essential character of a motor vehicle under 
GIR 2(a).  The purpose of the challenged measures is to ensure that this classification result does not 
change based solely on the manner in which the auto  manufacturer structures its imports of parts and 
components.   
Response of the European Communities (WT/DS339) 
 
634. Reference is generally made to th e answer given to question 128. 
635. Complete engines (the "engine assembly") are classified under headings 84.07 and 84.08 and 
parts thereof under heading 84.09 at the four digit level. 
636. Complete bodies (the "body assembly") are cla ssified under heading 87.07 and parts thereof 
under heading 87.08 at the four digit level. 
637. The other "assemblies" under Decree 125 do no t have a specific heading under the Chinese 
Schedules and the HS system because the "assemblies" are a creation of the measures not foreseen by 
the schedules and the HS system. In most cases the parts that make up the "assemblies" after 
manufacture would upon importation be classified under the relevant headings for parts (most relevant 
four digit headings are 87.08, 84.07, 84.08, 84.0 9, 84.83 and 85.11). However, heading 87.06 "chassis WT/DS339/R/Add.1 
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  fitted with engines" is relevant in many combina tions foreseen by Article 21(2) because a "chassis 
fitted with engines" is according to the explicit te rms of the heading "a motor vehicle without bodies". 
In other words, a motor vehicle without its body bu t containing other parts already fitted and equipped 
is for the purposes of the Chinese Sc hedules and the HS system a "chassis fitted with engines", not a 
complete motor vehicle. A more detailed analysis has been provided under paragraphs 255 to 260 of 
the first written submission of the EC. 
Response of the United States (WT/DS340) 
 
638. Please see the following table:   
Description (per Decree 125) 
Tariff Heading (per China's 
Schedule of Concessions) Duty Rate (per China's 
Schedule of Concessions) 
Engine  Petrol Diesel 8407.31 - .338408.20.10 10%9% 
Vehicle Body 8707.10 or .90 10% 
Gear Box Assemblies 8708.40 10% 
Drive Axle Assemblies 8708.50 10% 
Drive Axle Assemblies  
(non-drive axle) 8708.60.30 - .90 10% 
Frame Assembly  Not clear Not more than 10%  
Steering System 8708.94 10% 
Braking System 8708.31 or .39 10% 
Passenger Vehicles  8703 25% 
 
Response of Canada (WT/DS342) 
 
639. See Canada's response to Question 128. 
131. ( China )  The European Communities states in paragraph 258 of its first written 
submission that ""a chassis fitted with engin es", which is classified under the tariff heading 
87.06, falls within the scope of Article 21(2)(b) and (c) of Decree 125..."  Please comment on this 
statement.  
Response of China 
 
640. The EC's "chassis fitted with engine" argume nt is premised on the assumption that the 
Explanatory Note to heading 87.06 is binding as to what constitutes the essential character of a motor 
vehicle.  But as the Appellate Body has noted, the Explanatory Notes do not form part of the Harmonized System and are not binding at all, le t alone as to what constitutes the essential character 
of a motor vehicle.
98 
641. It is interesting to note, in this regard, that the EC itself has classified as a complete motor 
vehicle an incomplete and unassembled vehicle that  was missing substantially more than the "tyres 
and battery" referred to in the example provided in the Chapter Notes to Chapter 87.99   In its first 
written submission, the EC invoked the Chapter No tes to Chapter 87 – which form part of the 
Harmonized System – to support its contention that there are only "very exceptional situations" in 
                                                      
98 EC – Chicken Cuts , at para. 214, n. 416.   
99 CHI-14.    WT/DS339/R/Add.1 
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  which incomplete vehicles are classified as motor vehicles, and yet its own classification practice is 
not in accordance with this example.
100 
132. ( European Communities )  Please comment in detail on China's argument in 
paragraph 126 of China's first written submis sion that the European Communities' anti-
circumvention measures as embodied in EC Re gulations No. 384/96 are indistinguishable from 
the challenged measures. 
 
Response of the European Communities (WT/DS339) 
 
642. The European Communities' or any other WTO Member's rules on AD circumvention are not 
subject to the present Panel. 
643. Without prejudice to its position that China's measures fall within the scope of Article III of 
the GATT and the TRIMs Agreement , the European Communities considers that the AD 
circumvention rules cannot be relied upon to estab lish a subsequent practice relevant to the 
interpretation of China's obligations under Article  II of the GATT and its schedule of concessions.  
This would totally ignore that AD duties and cust oms duties follow a completely different logic and 
are rooted in 2 different sets of WTO obligations. 
644. AD duties are not Customs duties, or other du ties or charges falling within the scope of 
Article II of the GATT.  This is explicitly provided  for in Article II:2 of the GATT and was confirmed 
by the AB in Chile – Price Band System , which distinguished between Customs duties, other duties or 
charges and AD duties (para. 276).  As an excep tion to Article II of the GATT and to the MFN 
principle, AD duties may be imposed after an investigation establishing that dumped imports are causing injury. AD duties aim at re-establishing fair  trade conditions between the dumped imports and 
the domestic like products and protecting the domestic industry from the injury caused by the 
dumping.  They are subject to detailed obligati ons defined in Article VI of the GATT and the 
Agreement on implementation of Article VI of the GATT  1994  ("Anti-Dumping Agreement"). 
645. Anti-Circumvention rules on AD measures find th eir legitimacy in Article VI of the GATT, 
the Anti-Dumping Agreement and the Ministerial Declar ation on this issue.  They enforce and relate 
to a different set of rights and obligations, and are not relevant to the interpretation of the rights and 
obligations of WTO Members under Article II GATT. 
646. In contrast, customs duties are defined in the country's schedule of concessions. They are 
levied on the basis of the classification of the pro duct in that schedule and the various interpretative 
notes thereof.  A country may also introduce reservations or qualifications in its schedule, but in the absence of such reservations or qualifications, the purpose for which the merchandise is imported is 
not relevant for the tariff classification. 
647. The purpose of the rules set out in Art. 13(2) of the EC anti-dumping regulation 384/96 (as 
amended by regulation 461/2004) is to act against shipments of parts which are either assembled in 
the Community or in a 3rd country if these shipment s of parts replace the shipment of products which 
had previously been found dumped and shipped in an assembled form.  All this is linked and must 
take place in the context of an AD measure on th e assembled product with a view to undermining the 
remedial effect of these duties. 
                                                     
 
100 EC first written submission at para. 251.   WT/DS339/R/Add.1 
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  648. The Chinese measures are totally different. The le vel of customs duty depends on whether the 
parts end up in an assembled car with sufficient loca l content and/or whether they are used as a spare 
part. China is not acting against imports of parts wh ich have previously been imported in the form of 
assembled cars. The measures act against parts as such  with a view to increasing local content and 
developing a domestic industry for au to parts and complete vehicles. 
649. EC's anti-circumvention measures do not change the customs classification. Applied to the 
example of AD measures against bicycles from Chin a and the anti-circumvention measures against 
imports of major bicycle parts, this would mean th at the imports of parts would be subject to an AD 
duty for bicycles, but the customs duty will remain th e one applicable for bicycle parts.  This is 
explicitly stated in Article 13(5) of regulation 384/96. 
650. The anti-circumvention duty is never applied on products leaving the assembly factory in the 
EC.  Rather, an investigation is carried out and if it is found that the imports of parts constitute 
circumvention, the Antidumping Duty is extended to the parts. 
133. ( All parties )   In the parties' view, does the treatm ent accorded to the products at issue 
under China's measures correspond to China's concessions for the tariff rates for these 
products that the WTO Members negotiated at the time of China's accession to the WTO? 
 Response of China  
651. Yes.  China negotiated a Schedule of Concessions that contains a higher bound rate for motor 
vehicles than the bound rate for parts and assemblie s of motor vehicles.  The essence of the dispute 
before the Panel is that each side  believes it is at risk of being depr ived of the benefit of the tariff 
concessions that it negotiated.  The complainants be lieve that the difference in tariff rates between 
motor vehicles and parts of motor vehicles allowe d their exporters to arbitrage the tariff rate 
difference by importing parts and components in multip le shipments, even if China could properly 
classify the imported parts and components as a motor vehicle if they were to enter China in a single shipment.  China, on the other hand, considers that the importation and assembly of parts and 
components in multiple shipments deprives it of th e revenue and market access benefits that it 
obtained when it negotiated a higher bound tariff rate for motor vehicles. 
652. The question before the Panel is how to resolv e these conflicting claims.  China considers that 
the rules of the Harmonized System, as interprete d by the HS Committee and the WCO, provide the 
most relevant context for the resolution of this inte rpretive issue.  Those rul es, as they existed at the 
time of China's accession to the WTO, and as they exis t today, have a specific rule for determining the 
relationship between a tariff provision for a complete article (such as a motor vehicle) and a tariff rate 
for parts of that article (such as auto parts and assembli es of auto parts).  That rule is GIR 2(a).  Long 
before China's accession to the WTO, the WCO had interpreted GIR 2(a) to allow members of the 
Harmonized System to apply its principles to the importation and assembly of parts and components in multiple shipments.  As members of the Harmoni zed System, the complainants were aware of this 
interpretation, which, as China has noted previously , dates back to the adoption of GIR 2(a) in the 
early 1960s.  Moreover, this application of GIR 2( a) to multiple shipments is indistinguishable from 
the manner in which the United States and the Eu ropean Communities, at least, have sought to 
address the circumvention of anti-dumping duties that apply to complete articles, including prior to 
China's accession to the WTO.   
653. These were the circumstances surrounding China' s accession to the WTO, and the negotiation 
of the specific tariff provisions that are now the subj ect of this dispute.  In China's view, the decision 
of the WCO concerning GIR 2(a), and its general r ecognition that substance should prevail over form  WT/DS339/R/Add.1 
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  in the administration of customs duties, establishes the baseline against which to evaluate the tariff 
concessions that the parties negotiated concerning mo tor vehicles and parts of motor vehicles.  If the 
complainants had a different expectation – that Ch ina would not be allowed to apply GIR 2(a) as 
interpreted by the WCO, or that China would be requi red to give effect to the form of a manufacturer's 
import transactions over their substance – it was in cumbent upon the complainan ts to negotiate this 
result.  It is the complainants'  interpretation of the term "motor vehicles" – not China's – that is 
contrary to the rules and decisions of the WCO against which these tariff concessions were 
negotiated. 
654. To state the matter differently, there is an im portant question here concerning the burden of 
proof.  The Appellate Body has stated that "the party who asserts a fact, whether the claimant or the respondent, is responsible for providing proof thereof."
101  China has provided evidence to support its 
position that the Harmonized System permits China to  interpret the term "motor vehicles" as it has 
done in the challenged measures.  On the other ha nd, the complainants' argument under Article II of 
the GATT rests on the proposition that China is not allowed to interpret the term "motor vehicles" as 
it has done in the challenged measures.  The compla inants have provided no evidence to support this 
fact. 
Response of the European Communities (WT/DS339) 
 
655. No. The European Communities has provide d the details how China breaches its 
commitments in its first written submission rela ting to Article II of the GATT (paragraphs 237 
to 281). 
Response of the United States (WT/DS340) 
 
656. The United States submits that China's measur es impose an internal charge, over and above 
the 10 tariff rate for automotive parts negotiated at the time of China's accession to the WTO.  The 
United States thus views the additional charge as a br each of Article III:2, as opposed to Article II.   
657. However, if the Panel were to determine th at China's measures imposed "ordinary customs 
duties" within the meaning of Article II, then Chin a would not be providing the tariff rate negotiated 
for parts.   
658. In addition, the United States submits that China,  in paragraph 93 of the working party report, 
agreed to provide a 10 per cent rate of duty on CKDs and SKDs.  Because China's measures impose a 
25 per cent rate of duty on CKDs and SKDs, the United States does not consider China to be 
providing the tariff rate negotiated at the time of accession for these items.   
Response of Canada (WT/DS342) 
 
659. No. Canada negotiated a tariff ra te of 10%, generally, for all imported auto parts, including 
intermediate products.  The measures deem auto part s to be whole vehicles based on their end-use and 
subject them to a 25% tariff rate.  This denies Cana da the tariff rate it negotiated for auto parts. In 
respect of CKDs and SKDs, China is obligated to provi de Canada with a tariff rate of 10% as a result 
of the commitment it made in paragraph 93 of the Working Party Report. 
134. ( China )  Does China consider that how imported products are going to be used can be 
considered for the customs classification purpose ?  If so, how do you reconcile your position 
                                                      
101 US – Wools Shirts and Blouses , at p. 14.   WT/DS339/R/Add.1 
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  that the measures are "border" measures with the fact that a consideration of factors such as 
how products are used in the domestic market is  related to the events that take place in the 
importing country's internal market after importation? 
 
Response of China 
 
660. China does not consider that the challenged measures base a tariff classification on "how 
imported products are going to be used," or on "e vents that take place in the importing country's 
internal market after importation."  As China has sought to explain and document, any customs 
procedure that seeks to address the importation and assembly of parts and components through 
multiple shipments needs some process to determ ine whether different shipments of parts and 
components are related to each other through their common assembly into a single finished article.  
Any such process necessarily entails an examinat ion of the importer's practice or intention of 
assembling multiple shipments of parts a nd components into a finished article. 
661. There are different ways in which customs aut horities approach this determination of whether 
multiple shipments of parts are related to each ot her through their common assembly into a single 
finished article.  At the first meeting of the Panel, Canada referred to this pr ocess as an "investigation" 
in describing its treatment of imported furniture pa rts.  The EC, in the context of its anti-dumping 
measures, makes a presumption that all imported parts and components from the subject countries or 
exporters will be assembled into the complete article , but grants "certificates of non-circumvention" to 
importers who can demonstrate that they do not import and assemble parts and components above the 
thresholds specified by the EC in its measure.  Under this system, importers who can present a "certificate of non-circumvention" are not assessed the applicable anti-dumping duties.  The United 
States, because it has a retrospective system of duty assessment, can suspend the customs liquidation 
of entries and later determine, in the context of an administrative review, whether multiple shipments 
of parts and components were actually assembled  into the complete article. 
662. Whatever one calls this process, and however it is structured, its purpose is to establish the 
relationship among multiple shipments of parts and components for the purpose of assessing duties that apply to the complete article.  As described in response to previous questions, it is a form of 
customs procedure under which the goods remain subject  to customs control in order to complete the 
customs formalities related to those imports.  This type of customs procedure is provided for in the 
Kyoto Convention , and gives effect to an application of GIR 2(a) that is consistent with the rules of 
the Harmonized System.  It is a border procedure.   
663. To be clear, this type of procedure cannot be invoked for any purpose, and does not justify 
tariff classification determinations that are impermissibly based on the end use of the product.  For 
example, a WTO Member could not defer the tariff classification of lumber to see whether it was used 
to manufacture furniture or to manufacture toys, an d then base the tariff classification accordingly.  
The type of customs procedure at issue in this di spute relates only to the importer's obligation to pay 
the duty rate for the complete article when it im ports parts and components that have the essential 
character of that article.  It seeks to establish what was imported , not how it was used .   
Comments by the United States on China's response to question 134 
664. China's practice of determining the identity of  an imported good based on its post importation 
use is not a border measure.  According to China, its process of "establish[ing] the relationship among 
multiple shipments of parts and components for assessi ng duties that apply to the completed article" is 
permissible because "[I]t seeks to establish what was imported, not how it was used."  However, for 
tariff classification purposes (and under GRI 2(a) specifically) the identity of the good that is imported  WT/DS339/R/Add.1 
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  must be demonstrable by the good in its condition "a s presented" for entry into the customs territory, 
that is, at the time of importation.  Shipments of other parts and components with which the good will 
be assembled in the importing country's internal market cannot be considered in the classification of 
the good because there is no assembly of the good a nd the other parts and components at the time that 
the good is imported.   
665. Even though customs formalities may not be co mpleted until some time period after imported 
goods have entered the country's customs territo ry, any domestic assembly, which transpires during 
this interim period between importation and completi on of customs formalities, is not a basis for 
classification under the Harmonized System.   
666. China postulates that the United States has the authority to implement similar measures while 
United States customs formalities are ongoing.  Speci fically, China asserts that the United States 
could conduct administrative reviews after the im portation of goods to determine "whether multiple 
shipments of parts and components were actually asse mbled into the completed article."  The United 
States, howver, does not
 conduct such administrative reviews, for the simple reason that the United 
States does not classify multiple shipments of diffe rent parts and components as a completed article 
for the purpose of assessing duties that apply to the completed article. 
135. ( China )  In relation to Article II:1(b), first sentence, please elaborate on your position 
that duties imposed under the measures are related to the importation  of the merchandise into 
China, as evidenced by the fact that the measures themselves do not impose any duty, fee or 
charge, but rather serve to classify these merc handise under the correspondent tariff provisions. 
(first written submission of China, para. 44). 
 
Response of China 
 667. China has explained that Decree 125 is a cu stoms procedure to ensure the correct tariff 
classification of multiple shipments of parts and co mponents that are related to each other through 
their common assembly into a particular vehicle model.   This is a procedure to apply the classification 
rules of GIR 2(a) to multiple shipments of parts a nd components, consistent with the interpretation of 
GIR 2(a) adopted by the WCO.  Nothing in Decr ee 125 establishes or imposes any type of duty or 
charge.  Rather, as stated in Article 28 of Decr ee 125, the Customs General Administration makes 
classification determinations and collect duties under this measure in accordan ce with the applicable 
customs laws and regulations of China.   
136. ( European Communities and the United States ) Please comment on the EC and the US 
regulations allowing classifying multiple shipment s as a single entry as referred to by China in 
paragraphs 157-159 of its first written submission.  
 
Response of the European Communities (WT/DS339) 
 
668. In the EC (and we understand also in the US) the customs authorities allow the importer of 
multiple shipments to choose between the applicati on of ordinary tariff classification rules (each 
shipments is classified alone at the time of impor tation as presented to customs) and special rules 
designed to favor importers who prefer that the goods at issue should be considered and classified as 
if they were presented to customs at the same time and place. WT/DS339/R/Add.1 
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  Response of the United States (WT/DS340) 
 
669. Paragraph 157 of China's first written submissi on references 19 U.S.C. § 1484(j)(1) and the 
publication in the Federal Register of the Final Rule  for the regulation that implements the statute, 19 
C.F.R. § 141.58, 71 Fed. Reg. 31, 921 (June 2, 2006).  Under the limited circumstances set forth therein, the United States permits the single en try of unassembled or disassembled entities imported 
on multiple conveyances. As explained in the Fede ral Register publication, "[a]n unassembled or 
disassembled entry consists of merchandise which is  not capable of being transported on a single 
conveyance, but which is purchased and invoiced as a si ngle classifiable entity.    By necessity, due to 
its size or nature, the entity is placed on multiple conveyances, which arrive at different times at the 
same port of entry in the United States.  The subj ect arriving portions are consigned to the same 
person in the United States."   
670. China interprets the United States law as permitting an importer to "import a vehicle in 
unassembled or disassembled condition in multiple sh ipments, and still have the combined entries 
classified as a complete vehicle, even if no one sh ipment would satisfy the essential character test for 
the complete vehicle."  At a prima facie level, an automobile imported in unassembled or disassembled condition in multiple shipments does not meet the requirements for single entry 
treatment under the United States regulation because an automobile is capable of being transported on 
a single conveyance.  Under the regulation, the si ze or nature must necess itate shipment in the 
unassembled or disassembled condition.  Contrast au tomobiles with fiber production plants, which 
would likely be eligible for single entry treatment when imported on separate conveyances in unassembled or dissembled condition because of their s ubstantial size.  Often times the components of 
automobiles are sourced from many different c ountries, and such would disqualify them from 
eligibility for single entry treatment.  As stated in the Federal Register publication, it is the position of 
the United States that "the legislation [19 U.S.C. § 1484(j)(1) was intended to apply to the 
components of articles with a single point of origin which are shipped from the same port of export at approximately the same time." 
671. China interprets 19 C.F.R. § 141.58 as being "necessarily based on an understanding of the 
'condition as imported' rule that looks beyond the cont ents of a single import entry, and that rests 
instead on the stated intention of the importer to assemble the separate sh ipments into a complete 
article."  First, as cited in the Federal Register publication, the United States does not believe that 
single entry treatment for unassembled or di sassembled entities imported on multiple conveyances 
"should act as a means to control an importer's i nventory or manufacturing processes."  Second, the 
"stated intention of the manufacturer to assemble th e separate shipments into a complete article" must 
be manifest from the documents presented at the time of entry.  The Federal Register publication 
notes that "[w]hen making a determination as to whethe r to approve or deny a particular application, 
the port director must rely on the information that is supplied on the application."  The decision to grant single entry treatment and classify unassembled or disassembled merchandise imported on multiple conveyances is made on the basis of the inform ation available at the time of importation.  We 
also note that all of the multiple  conveyances intended to qualify fo r single entry treatment must be 
imported within a maximum of 25 days of each other. 
672. Paragraph 158 asserts "it was the practice of the US customs [sic] author ities to combine 'split 
shipments' for tariff classification purposes."  In  support of this assertion, China relies upon the 
decision of the Court of International Trade's (CIT ) decision in Zomax Optical Media, Inc. v. United 
States, 366 F. Supp. 2d 1326 (2005), wherein China alleges that the CIT "has observed that this 
practice represented a departure from the prior pract ice of basing tariff classification determinations 
strictly on the condition of merchandise 'as imported.'"   The split shipments and practice referred to by 
the CIT in that case are codified at 19 U.S.C. § 1484(j)(2), which provides for single entry treatment  WT/DS339/R/Add.1 
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  of merchandise that is purchased and invoiced as a single entity but …is shipped in separate 
shipments due to the inability of the carrier to in clude all of the merchandise in a single shipment (at 
the instruction of the carrier)."  See 19 C.F.R. § 141.57. 
673. This provision covers "split shipments," which "c onsist [] of merchandise that is capable of 
being transported on a single conveyance, and that is delivered to and accepted by a carrier in the 
exporting country as one shipment under one bill of la ding or waybill, and is thus intended by the 
importer to arrive as a single shipment. However, the shipment is thereafter divided by the carrier into 
different parts which arrive in the United States at different times, often days apart."  68 Fed. Reg. 
8713 (Feb. 25, 2003).  Single entry treatment for sp lit shipments is also limited to very narrow 
circumstances, is at the election of the importer,  and certification that the entry was split at the 
election of the importer must be made when the goods are imported.  19 C.F.R. § 141.57. 
137. ( All parties )  Please clarify whether, and if so, how, a new tariff line can be de facto 
created.  
Response of China 
 
674. China does not consider that a Member can create a new tariff line " de facto ".  The process of 
creating a new tariff line involves amending the Memb er's tariff schedule to include the new tariff 
line.  As it pertains to paragraph 93 of the Work ing Party Report, the relevant consideration is that 
China is allowed to classify CKD/SKD kits in acco rdance with GIR 2(a) and the customs practices of 
other WTO Members, unless and until it decides to do otherwise through the creation of a new tariff 
line for CKD/SKD kits.   
Response of the European Communities (WT/DS339) 
 675. A tariff commitment can be created when a member, which committed itself to provide 
certain tariff treatment if it creates a tariff line for a specific good in effect  does so by enacting a 
measure that pronounces how that good is to be treat ed. The European Communiti es also refers to the 
more detailed reply provided by Canada. 
Response of the United States (WT/DS340) 
 
676. The United States understands this question to re fer to China's obligati ons under paragraph 93 
of the Working Party report, and to China's defense that it did not  breach those obligations because 
China did not create a new tariff line for CKDs/SKDs.   The United States submits that paragraph 93, 
in context, shows that Members were concerned with tariff treatment
 of CKDs/SKDs, and that those 
Members wanted to ensure that Ch ina did not change its classification policies or practices so as to 
apply a whole-vehicle rate to those items.  Although China did not create a de jure  new tariff line, 
China achieved the same result by specifying in  Decree 125 that CKDs/SKDs would be deemed 
whole vehicles, and assessed at the whole-vehicle rate.  Thus, China adopted a measure – whether 
labeled a de facto  tariff line or anything else – that is cont rary to the obligations China assumed with 
respect to the tariff treatment of CKDs/SKDs.   
Response of Canada (WT/DS342) 
 
677. See Canada's answer to Question 61(b). WT/DS339/R/Add.1 
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  138. ( All parties )  The Harmonized System Committee Decision on the interpretation of 
General Interpretative Rule 2(a) (Exhibit CHI-29) refers to the questions of "split consignments" and "the classification of good s assembled from elements originating in or 
arriving from different country" in paragraph 10.  Please explain differences between these two 
situations. 
 
Response of China 
 
678. In relevant part, a "consignment" is generally  understood to mean a set of goods handed over 
to the custody of a transport carrier for delivery, whether those goods are packed in one container or 
in multiple containers.  A consignment is "split"  when the carrier break s the consignment into 
multiple modes or stages of delivery (e.g., it loads the containers making up the consignment onto two 
different vessels).  There are a variety of reasons w hy this could occur, such as the need to balance 
loads (a consideration that is partic ularly relevant in air transport) or an opportunity to take advantage 
of costs savings in shipment.   
679. The classification of "goods assembled from elements originating in or arriving from different 
countries" refers to the classification of goods  assembled from imported parts and components (or 
"elements") that arrive in the cust oms territory in multiple shipments.
102  This circumstance is, in the 
context, distinguished from a "split consignment," in  that the imported parts and components were not 
necessarily part of a single consignment.   
Response of the European Communities (WT/DS339) 
 
680. These are inter-related issues that concern trade fa cilitation. In the context of some very large 
or complex machinery that are difficult to trans port in one single consignment the importer may wish 
to declare the product as a single product irrespective of  the fact that the elements of the product are 
split into different consignments and may not be presented to customs precisely at the same time. In 
some instances an element of the product may need  to be transported from two or more countries or 
may originate from two countries. The classification of split consignments as the complete product 
even when some elements arrive from diffe rent countries is an option for the importer . 
Response of the United States (WT/DS340) 
 681. The context of the decision identified in pa ragraph 10 of the Harmonized System Committee 
Decision on the Interpretation of General Interpreta tive Rule 2(a) (Exhibit CHI-29) does not include a 
definition of "split consignments" or "the classifi cation of goods assembled from elements originating 
in or arriving from different countries."   
682. US Customs authorities have not formally defi ned "split consignments".  A consignment, 
generally speaking, is a shipment of goods that is  imported by or for a consignee who will sell or 
deliver the goods to or for benefit of a consignor  after the importation of the goods into the United 
                                                     
 
102 As China noted above, the reference to "different  countries" cannot, in the context, mean that the 
decision of the HS Committee applies only in the case of goods assembled from parts and components that arrive from more than one exporting country.  The numb er and identity of the exporting country or countries 
would only be relevant, if at all, for the purpose of a pplying Rules of Origin – a matter that is not within the 
scope of GIR 2(a).  Moreover, there is no reason why the classification of goods assembled from parts and components that arrive from a single exporting country should be any different than the classification of goods 
assembled from parts and components that arrive from more than one exporting country.  WT/DS339/R/Add.1 
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  States.  A consignment may also refer to a ship ment of goods in the custody of a shipper and 
transported on behalf of another party.   
683. Presumably, "the classification of goods assembled from elements originating in or arriving 
from different countries" refers to the determinati on of the country of origin of imported goods when 
such goods consist of parts or components that originated in more than one country."   
Response of Canada (WT/DS342) 
 
684. As discussed in response to Question 112, any di scretion that might be afforded to Members 
on how to classify split shipments must naturally be limited to application in a manner that does not 
violate their tariff commitments. It is not uncommon in customs practice to allow  an importer, at its 
discretion , to seek to have split shipments classified toge ther. This could include situations where the 
elements for constitution into some larger product (such as in the case of heavy or complex equipment 
shipped only rarely) originate in different countries.  
Comments by the United States on China's response to question 138 
685. The United States does not agree with China's de finition of "goods assembled from elements 
originating in or arriving from different count ries" in the context of the Harmonized System 
Committee decision on GIR 2(a) contained in Exhibit CH I-29.  According to China, this phrase means  
"the classification of goods assembled from imported parts and components (or 'elements) that arrive 
in the customs territory in multiple shipments."  China's definition is mere conjecture given that 
decision identified in paragraph 10 does not include  a definition of this phrase and China has not 
identified any other documents promulgated by the Committee which would support its interpretation. 
686. China's interpretation also disregards the Comm ittee's reference to "different countries" and 
claims that this reference "cannot mean that the decision of the HS Committee applies only in the case 
of goods assembled from more than one exporting count ry" because this issue would be relevant only 
in the context of the application of the Rules of Orig in.  We agree with China that the Rules of Origin 
are beyond the scope of GIR 2(a).  Consistent w ith this position, the HS Committeee's decision in 
paragraph 10 is an indication that matters involving  goods of mixed origin are beyond the scope of 
GIR 2(a). 
687. Finally, the decision of the Harmonized System Committee cannot be used by China as a tool 
to abrogate its obligation to comply with the GIRs  under the HS Convention.  China must still classify 
goods as presented, using the entire nomenclature, rather than selectively applying the nomenclature 
(headings of the HS) to goods (auto parts) based on a condition that is not existent (assembly into 
motor vehicle) until after the goods are released into the domestic market. 
139. ( Complainants )  The complainants have expressed a view during the first substantive 
meeting that the General Interpretative Rule 2(a) is irrelevant to Article II of the GATT 1994.  
Could you please elaborate on your position.  
Response of the European Communities (WT/DS339) 
 
688. Rule 2(a) is not relevant in interpreting a Member's Schedule generally unless one assumes a 
very specific product that is presented to customs at th e same time. It is a rule that assists the Customs 
in instances where a given incomplete or unfinished  article as presented to customs appears to have 
the essential characteristics of the complete or finish ed article. See also the reply to question 115. WT/DS339/R/Add.1 
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  Response of the United States (WT/DS340) 
 
689. Please see the United States response to Question 129. 
Response of Canada (WT/DS342) 
 
690. Canada agrees that Rule 2(a) is relevant as an  element of the Harmonized System, used so as 
to interpret Members' scheduled commitments. Howeve r, when applied to the instant case, Rule 2(a) 
is irrelevant to China's tariff commitments for auto parts. Generally, Rule 2(a) is not relevant unless 
one is considering incomplete or unfinished articles as presented to customs officials that may have 
the essential characteristics of a finished article. Ru le 2(a) cannot be used independently to trump 
clear obligations to provide a specific duty rate, if a Member later wishes to alter its classification for 
that product. Rule 2(a) does not address, nor can it alter, tariff commitments mutually agreed between 
Members.  
691. If a Member wishes to renegotiate its tariff comm itment because it believes, later in time, the 
common intention reflected an erroneous classi fication, it may do so as provided for under 
Article XXVIII of GATT 1994.  
140. ( Complainants )  China has referenced various antidum ping anti-circumvention decisions 
as support for its contention that Members are p ermitted to treat "parts" of products the same 
as the "whole" to prevent circumvention of its appropriately applied duties.  The complaining 
parties have all said that antidumping practi ce is not relevant to the dispute.  Can the 
complaining parties please give specific reasons why they believe antidumping anti-circumvention practice is distinguishable from the measures concerned?  Response of the European Communities (WT/DS339) 
 692. See reply to question 132. 
Response of the United States (WT/DS340) 
 
693. For several reasons, China cannot justify its measures by invoking the practices by which 
some Members impose anti-dumping duties when they are concerned about circumvention.    
694. First, and most fundamentally, China's GATT Article II obligations, not obligations under 
GATT Article VI, are at issue in this dispute.   In other words, anti-dumping duties and the 
circumvention of such duties are governed by the rules of GATT Article VI and the Anti-Dumping Agreement, not GATT Article II.   In addition, Article VI anti-dumping measures are authorized only 
in certain circumstances, i.e., where the investig ating Member makes findings of dumping, injury and 
causal link (as explained above in response to question 67).  
695. Second, under GATT Article VI and the Anti-Dump ing Agreement, the investigating Member 
is not required to impose anti-dumping duties on the basis of tariff lines and, in fact, investigating Members rarely do it.  Rather, the anti-dumping dut ies are applied to imports of the products under 
investigation, as defined in the scope of the pro ducts covered by the anti-dumping order.  That 
product coverage can be defined in numerous ways.  It can be defined to apply to some but not all 
products that fall under a particular tariff line or to  products falling under or within a variety of tariff 
lines. In addition, the product coverage can apply to finished products or to parts or both.  That is 
what the rules of GATT Article VI and the Anti-Du mping Agreement allow.  The only requirements 
are those set out in the Anti-Dumping Agreement, su ch as findings of dumping, injury and causal link.   WT/DS339/R/Add.1 
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  Thus, in the anti-dumping context, unlike the GATT Article II context, tariff lines and how tariff 
concessions are set forth in a Member's Schedule are not relevant.  
696. Third, while the WTO Agreement does not define circumvention, Members have traditionally 
recognized two patterns of trade which they have cons idered to be circumvention, both of which arise 
in the context of trade remedies applied under Ar ticle VI of GATT 1994, i.e., anti-dumping measures 
and countervailing duty measures.  The first type of trade pattern involves marginal alterations to the 
product itself, and the second involves marginal altera tions in the patterns of shipment and assembly.  
Most Members recognize that circumvention takes place when such marginal modifications or 
alterations of the physical characteristics, production or shipment of merchandise otherwise subject to 
an anti dumping or countervailing duty measure ar e done in a manner which undermines the purpose 
and effectiveness of trade remedies provided for under  the WTO  Agreement.  In addition, the concept 
of circumvention in the antidumping context has also  been recognized in a Ministerial Decision, i.e., 
the Ministerial Decision on Anti-Circumvention , adopted by Members at Marrakesh and forming an 
integral part of the Final Act Embodying the Results of the Uruguay Round Multilateral Trade 
Negotiations .  The Decision acknowledged the problem of circumvention in the trade remedies 
context and recognized the desirability of applying " uniform rules in this area as soon as possible" to 
prevent the evasion of anti dumping and counterva iling measures through circumvention.  The 
Decision confirms that the topic of circumvention fo rmed part of the negotiations which preceded the 
Anti-Dumping Agreement and referred this matter to the Committee on Anti-Dumping Practices for 
resolution.  To fulfil this mandate, the Committee on Anti-Dumping Practices established the Informal 
Group on Anti Circumvention to examine and resolve which rules should apply uniformly to address 
the problem of circumvention.  In contrast, the United States is not aware of any generally held concept of circumvention under GATT Article II. 
697. Fourth, when anti-dumping duties are imposed in  the circumvention context, they are not 
applied in the way that China seeks to apply its GATT Article II "duties" under the measures at issue.  
The investigating Member does not impose the same anti-dumping duties on the products governed 
by a circumvention ruling as it does on the products  that were clearly within the scope of the 
anti-dumping order from the outset.  Indeed, there is not one uniform amount of duty imposed on any of the products within the scope of the anti-dumping order (at least under the US system).  Rather, the 
anti-dumping duties are assessed based on the amount of dumping found for particular transactions 
involving particular products.   
698. In sum, China's analogy to Members' anti-dumpi ng practices is irrelevant in the absence of 
any proceeding initiated by China under the ru les of GATT Article VI and the Anti-Dumping 
Agreement.  Simply put, the rules governing an ti-dumping are different from the GATT Article II 
rules, and therefore they have no relevance to China's measures. 
Response of Canada (WT/DS342) 
 
699. There exists no generally recognized WTO b asis for the application of internal "anti-
circumvention" measures related to tariffs. Anti- circumvention of anti-dumping duties is legally 
recognized. Canada and many other WTO Members onl y use the notion of "anti-circumvention" in 
application to anti-dumping duties. No parallel conc ept applies in respect of tariff concessions.  
700. There is a fundamental difference between an ordinary customs duty and an anti-dumping 
duty. An anti-dumping duty is applied to remedy a situation where imports from another Member are 
being dumped in a Member's internal market and are causing injury to domestic producers of those 
like products. In contrast, an ordinary customs duty does not correct a situation of injury, nor does it 
relate to activity within the inte rnal marketplace. Instead, an ordinary customs duty is in respect of, WT/DS339/R/Add.1 
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Page A-154 
  
  and solely relates to, entry of a product in th e "importation" phase and is not applied with an 
underlying notion to correct "wrongdoing" (i.e ., injury). This lack of "wrongdoing" and the need to 
"correct" such actions is the reason that the con cept of anti-circumvention measures does not apply to 
valid and legitimate customs duties,  and is only spoken of in terms of anti-dumping duties, which by 
their nature are designed to combat actions al ready found to be illegal under a Member's domestic 
law. There is also a separate regime govern ing application of anti-dumping duties under the AD 
Agreement . In fact, as set out in answer to Question 96(b), anti-dumping duties are measures that do 
not qualify as either "ordinary customs duties" or "other duties or "charges". Indeed, there is a 
separate agreement for anti-dumping duties that gove rns their use, and they are not covered under 
Article II of the GATT. 
701. Customs tariffs are applied for the purpose of  affording domestic producers a measure of 
protection from foreign import competition (although in some countries, particularly developing, they 
can also represent an important source of revenue). In  an effort to ensure pr edictability as to tariff 
classification and liability, the Harmonized System  bases the tariff classification of goods on their 
physical description at the time of their importati on and admits of only one heading (or subheading) 
for each product. To countenance China's attempt to increase the tariff on auto parts under the guise of 
enforcing the customs duty on automobiles instead of renegotiating their tariff concession on this item 
under the relevant provisions of the WTO would under mine the predictability and value of WTO tariff 
concessions made by Members on parts, more broadly.   
702. By contrast, anti-dumping duties are special and generally temporary measures that are 
intended to address the injurious effects on a domest ic industry of unfairly traded goods from one or 
more sources. Such duties, which are based on fi ndings resulting from investigations conducted in 
accordance with the AD Agreement  that unfairly traded specified goods from specified sources are 
causing or threatening injury to the domestic industry, are remedial in nature.  
141. ( Complainants )  Do the complainants have any specific procedures and criteria for 
determining whether an antidumping order is be ing circumvented?  Please explain them with 
citations to the relevant legislation or regulations. 
 
Response of the European Communities (WT/DS339) 
 
703. Article 13 of regulation 384/96 as amended by regulation 461/2004 on protection against 
dumped imports from countries not members of th e European Community, which reads as follows: 
"Circumvention  
 1. Anti-dumping duties imposed pursuant to this Regulation may be extended to imports from 
third countries, of the like product, whether sli ghtly modified or not; or to imports of the 
slightly modified like product from the country subject to measures; or parts thereof, when 
circumvention of the measures in force is taking place. Anti-dumping duties not exceeding the residual anti-dumping duty imposed in accordan ce with Article 9(5) of this Regulation 
may be extended to imports from companies be nefiting from individual duties in the countries 
subject to measures when circumvention of the measures in force is taking place. 
Circumvention shall be defined as a change in the pattern of trade between third countries and 
the Community or between individual companies in the country subject to measures and the 
Community, which stems from a practice, process or  work for which there is insufficient due 
cause or economic justification other than the imposition of the duty, and where there is evidence of injury or that the remedial effects of the duty are being undermined in terms of 
the prices and/or quantities of the like product, and where there is evidence of dumping in  WT/DS339/R/Add.1 
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  relation to the normal values previously estab lished for the like product, if necessary in 
accordance with the provisions of Article 2.  
The practice, process or work referred to in paragraph 1 includes, inter alia, the slight 
modification of the product concerned to make it fall under customs codes which are 
normally not subject to the measures, provide d that the modification does not alter its 
essential characteristics; the consignment of the product subject to measures via third countries; the reorganisation by exporters or pr oducers of their patterns and channels of sales 
in the country subject to measures in order to eventually have their products exported to the 
Community through producers benefiting from an individual duty rate lower than that applicable to the products of the manufacturers; and, in the circumstances indicated below under Article 13(2), the assembly of parts by an assembly operation in the Community or a third country. 
 
2. An assembly operation in the Community or  a third country shall be considered to 
circumvent the measures in force where:  (a) the operation started or substa ntially increased since, or just  prior to, the initiation of the 
anti-dumping investigation and the parts concerne d are from the country subject to measures; 
and 
 (b) the parts constitute 60 % or more of the total value of the parts of the assembled product, except that in no case shall circumvention be co nsidered to be taking place where the value 
added to the parts brought in, during the assembly or completion operation, is greater than 
25 % of the manufacturing cost, and 
 (c) the remedial effects of the duty are being undermined in terms of the prices and/or quantities of the assembled like product and there is evidence of dumping in relation to the normal values previously establishe d for the like or similar products. 
 
3. Investigations shall be initiated pursuant to  this Article on the initiative of the Commission 
or at the request of a Member State or any inte rested party on the basis of sufficient evidence 
regarding the factors set out in paragraph 1. In itiations shall be made, af ter consultation of the 
Advisory Committee, by Commission Regulatio n which may also instruct the customs 
authorities to make imports subject to registration in accordance with Article 14(5) or to 
request guarantees. Investigations shall be ca rried out by the Commission, which may be 
assisted by customs authorities and shall be conc luded within nine months. When the facts as 
finally ascertained justify the extension of measu res, this shall be done by the Council, acting 
on a proposal submitted by the Commission, after consultation of the Advisory Committee. The proposal shall be adopted by the Council unless it decides by a simple majority to reject 
the proposal, within a period of one month after its submission by the Commission. The 
extension shall take effect from the date on which registration was imposed pursuant to 
Article 14(5) or on which guarantees were request ed. The relevant procedural provisions of 
this Regulation with regard to initiations a nd the conduct of inves tigations shall apply 
pursuant to this Article.  
4. Imports shall not be subject to registrati on pursuant to Article 14(5) or measures where 
they are traded by companies which benefit from exemptions. Requests for exemptions duly 
supported by evidence shall be submitted with in the time limits established in the 
Commission Regulation initiating the investigation. Where the circumventing practice, process or work takes place outside the Commun ity, exemptions may be granted to producers WT/DS339/R/Add.1 
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Page A-156 
  
  of the product concerned that can show that they  are not related to any producer subject to the 
measures and that are found not to be engage d in circumvention practices as defined in 
Article 13(1) and 13(2). Where the circumventing practice, process or work takes place inside 
the Community, exemptions may be granted to importers that can show that they are not 
related to producers subject to the measures.  These exemptions are granted by decision of  the Commission after consultation of the 
Advisory Committee or decision of the Council imposing measures and shall remain valid for 
the period and under the conditions set down therein. 
 Provided that the conditions set in Article 11(4)  are met, exemptions may also be granted 
after the conclusion of the investigation l eading to the extension of the measures. 
 
Provided that at least one year has lapsed from the extension of the measures, and in case the 
number of parties requesting or potentially re questing an exemption is significant, the 
Commission may decide to initiate a review of  the extension of the measures. Any such 
review shall be conducted in accordance with the provisions of Article 11(5) as applicable to 
reviews pursuant to Article 11(3). 
 
5. Nothing in this Article shall preclude the normal application of the provisions in force 
concerning customs duties." 
 
704. For explanation, reference is made to the reply given to question 132. 
Response of the United States (WT/DS340) 
 
705. The United States has had a statutory provisi on addressing circumvention since 1988.  See 
19 U.S.C. 1677j.  Under this provision, the US Depa rtment of Commerce is authorized to take action 
to prevent or address attempts to circumvent an out standing antidumping or countervailing duty order.  
The statute addresses four particular types of circumvention:  (1) assembly of merchandise in the United States, (2) assembly of merchandise in a thir d country, (3) minor alterations of merchandise, 
and (4) later-developed merchandise.  The Depart ment of Commerce has promulgated implementing 
regulations, found at 19 C.F.R. 351.225 
Response of Canada (WT/DS342) 
 
706. Canada's anti-dumping legislation, the Special Import Measures Act , contains no specific 
criteria for determining whether an anti-dumping orde r is being circumvented, nor does it contain any 
remedy to address possible instances of circumvention.
103 If the authorities identify a practice that 
constitutes a possible fraud or other customs violati on, Canada will resort to the usual civil and 
criminal mechanisms for dealing with such matters. If there is a perceived evasion of an anti-dumping order that involves the importation of goods that are not within the scope of the anti-dumping order, a new anti-dumping investigation is required to est ablish dumping, causality and injury to domestic 
producers of like goods. This would be the only av ailable remedy by which to address instances of 
possible circumvention. 
                                                     
 
103 Special Import Measures Act, R.S. 1985, c. S-15 (Exhibit CDA-9); online at: 
http://lois.justice.gc.ca/en/.  WT/DS339/R/Add.1 
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  142. ( Complainants )  Do the complainants have any specific procedures and criteria for 
determining whether an ordinary customs duty is being circumvented?  Please explain them with citations to the relevant legislation or regulations. 
 
Response of the European Communities (WT/DS339) 
 
707. No. In EC Customs law the concept of "circu mventing a customs duty" does not exist. There 
are situations in which operators could try to a void paying the ordinary customs duties such as for 
instance falsely declaring that the goods they are importing come from a country that has a 
preferential trade agreement with the EC and theref ore such goods are subject to 0% custom duty. 
Such false declaration can give rise to sanctions a nd penalties that are however applied at the national 
level in the EC and they are more related to fraud than to circumvention. 
Response of the United States (WT/DS340) 
 708. Importers may try to avoid the payment of the proper amount of ordinary customs duties  in 
any number of ways, such as the undervaluation of the goods, the fraudulent certification of eligibility 
for duty-free treatment under a free trade agreem ent, or the misclassification of goods under an 
incorrect tariff heading with a lower rate of duty.   
709. There is no legislation or regulation in which the United States sets forth specific criteria and 
procedures for determining whether an importer is avoiding payment of the correct amount of 
ordinary customs duty.  Where there is a suspicion that an importer is attempting to avoid the payment 
of ordinary customs duties owing on imported merchandise, the United States may initiate an audit of 
its records or initiate a criminal investigation.  Depending on the outcome, the United States may then 
impose penalties or file criminal charges against the importer.     
Response of Canada (WT/DS342) 
 
710. Canada has no procedures for determining wh ether an ordinary customs duty is being 
"circumvented". Other than the specific guidance re lating to furniture purchased as one unit at the 
retail level and shipped separately to  which China has already referred, there are no situations where 
attempts to "evade" customs duties by separate ship ments of parts result in those separate shipments 
being treated separately for purposes of increasing du ty beyond the applicable tariff commitments in 
Canada's Schedule. There are no instances where activities taking place after prestentation at the 
border are taken into account in increasing duty beyo nd the applicable tariff commitments in Canada's 
Schedule. 
143. ( United States )  Please comment on China's reference to Temporary Importation under 
Bond ("TIB") in paragraphs 32-35 of its oral stat ement.  Could you also please explain the TIB 
process in the United States with reference to specific legislation, regulations, and/or Customs 
procedures.  
 
Response of the United States (WT/DS340) 
 711. China's statement that a good entered under a TIB entry becomes liable for duty if the 
importer fails to export or destroy the good within the TIB period is not accurate.  The provision that 
appears to be the subject of the statement is s ubheading 9813.00.05, HTSUS.  The TIB period is set 
by US Note 1(a) of subchapter XIII, Chapter 98, HTSUS, and is one year, although that period can be 
extended for up to three years from importation.  Th e procedure for extension is set by 19 C.F.R. 
§ 10.37.  If an importer fails to timely export or destroy the article, an importer becomes liable for WT/DS339/R/Add.1 
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Page A-158 
  
  liquidated damages under the bond contract, but the importer would not incur any liability for duty.  
The goods do not become liable for duty as a result of a failure to export or destroy the goods.   
712. The last sentence in comment 33  that if the importer does not alter or process the good within 
one year, the importer will become liable for duty is not accurate.  So long as there is no evidence that 
the importer negligently or fraudulently made th e TIB entry, the importer would not incur any 
liability, even under the bond contract, if the good w as timely exported or destroyed.  If the importer 
intended to alter or process the goo d but was unable to do so, the fa ilure to execute that on intent 
would not breach the importer's bond obligation or eliminate the importer's entitlement to duty free 
entry. 
144. ( European Communities )  Please elaborate on your statement in paragraph 247 of your 
first written submission that "[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."  Does this statement extend to auto parts used as repair parts?  If this statement were to be accepted, does this mean 
that it can be assumed that all imported part s have only one purpose – i.e. to be used for 
assembling a whole vehicles? 
 
Response of the European Communities (WT/DS339) 
 
713. This statement extends also to spare parts i.e. the word "build" should be understood as 
meaning "be part of".  It is a general considera tion on the nature of automotive parts that have no 
function without being a part of a complete vehicle. 
145. ( Complainants )  China states in paragraph 82 of its first written submission that the very 
nature of General Interpretative Rule 2(a) is to establish that there is never a "clear separation" between a complete article and the parts and components  of that article.  Do the complainants 
agree with this statement?  If not, why?  
Response of the European Communities (WT/DS339) 
 
714. As already touched upon in replies to questions  129 and 139 Rule 2(a) is not relevant in 
interpreting a Member's Schedule generally.  It is a rule that assists the Cust oms in instances where a 
given incomplete or unfinished article as presen ted to customs appears to have the essential 
characteristics of the complete or finished article. 
715. China is attempting to use rule 2(a) for the purposes of blurring the clear basic distinction 
between complete motor vehicles and part thereof at the level of China's schedules. Rule 2 (a) 
operates at a different level namely as tool for assessing situations in casu.  
Response of the United States (WT/DS340) 
 
716. The United States does not agree with the statem ent in paragraph 82 because it is contrary to 
the terms of General Interpretative Rule 2(a) and the structure of the Harmonized System.  The Harmonized System is made up of 96 chapters group ed into 21 sections consisting of approximately 
5,000 article descriptions in the headings and subh eadings.  The Harmonized System is divided into 
categories or product headings beginning with crude and natural products and continuing in further 
degrees of complexity through advanced manufactu red goods.  General Interpretative Rule 2(a) 
requires that customs officials make a determina tion as to whether components entered together 
impart the essential character of a complete or fini shed article.  If not, then the components are to be 
individually classified.  This view is supported by the structure of the Harmonized System itself by  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
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 Page A-159 
  
  specifically naming certain parts in their own headi ngs (e.g., spark-ignition reciprocating or rotary 
internal combustion piston engines of heading 84. 07, transmission shafts of heading 84.83, chassis 
fitted with engines of heading 87.06, bodies (including  cabs) of heading 87.07) or the creation of parts 
headings (e.g., heading 87.08 which provides fo r parts and accessories of the motor vehicles of 
headings 87.01 to 87.05).  To classi fy all parts eventually incorporat ed into complete motor vehicles 
as motor vehicles would empty many headings and subheadings of the goods specified therein.   
Response of Canada (WT/DS342) 
 
717. As discussed in response to Questions 112, 129 and 139, there are limite d circumstances, as 
set out in Rule 2(a),where the determination of th e "essential character" of parts contained in a single 
shipment requires some additional analysis. However, Canada disagrees that there is never  a clear 
separation between a complete article and the parts that may, at some point, make up that article. 
718. Further, Canada does not agree with the thrust of China's argument that the lack of a clear 
separation allows China unfettered discretion to deem parts as whole vehicles. China ignores the 
requirement in Rule 1 first to classify auto parts in  their appropriate category, including intermediate 
categories. See also Canada's response to Question 113. China neglects to mention that Rule 2(a) is 
only used if Rule 1 is not applicable. Parts presen ted at the border as parts should be classified under 
the appropriate parts heading.  
D. A
RTICLE III OF THE GATT  1994 
146. ( China ) If the Panel were to consider the measures at issue as "internal measures", does 
China concede to the specific  arguments advanced by the complainants in relation to their 
claims under Articles III:2, III:4 and III:5 GATT and the TRIMs Agreement? 
 
Response of China 
 
719. For the reasons that China has explained, Chin a does not consider that the measures at issue 
can be characterized as internal measures within the scope of Article III of the GATT and the TRIMs 
Agreement.  If the Panel were to find otherwise, China submits that, at a minimum, the Panel would 
need to evaluate carefully whethe r there are specific aspects or elem ents of the measures that fall 
within the scope of Article II.  As discussed in  response to question 101, different rules or norms 
within the same measure may relate to different righ ts or obligations of a Member, and can be subject 
to different WTO disciplines.  If the Panel were to consider that certain aspects or elements of the 
measures are subject to the disciplines of Article III and the TRIMs Agreement, China considers that 
it would be important, from the standpoint of making recommendations to the DSB, for the Panel to 
identify those specific aspects or elements.   
147. ( China )  China states in paragraph 39 of its oral statement that "[e]ven if the 
complainants were able to demonstrate that the challenged measures result in the imposition of 
excess customs duties when applied to a specifi c combination of parts and components, this 
would not mean that the measures result in the imposition of excess customs duties in all cases " 
(emphasis added).  Please clarify what "in all cases" means. 
 
Response of China 
 
720. There is an important distinction in this dispute between the validity of the challenged 
measures per se  and the validity of the challenged measures as applied to the facts of specific cases.  
China has demonstrated that it is consistent with GIR 2(a), and consistent with the practices of other WT/DS339/R/Add.1 
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Page A-160 
  
  WTO Members under like circumstances, to classify multiple shipments of parts and components on 
the basis of the importer's demonstrated practice of assembling those parts and components into the 
complete article.  As China has explained in r esponse to previous questions, this application of 
GIR 2(a) is constrained by the lim its of GIR 2(a) itself, including the essential character test and the 
types of assembly operations detailed in Explanatory Note VII to GIR 2(a).   
721. As China understands the complainants' position, it is  their view that there is no set of facts to 
which China could apply the challenged measures that  would result in the correct interpretation and 
application of China's tariff provisions for motor vehi cles.  China does not consider that this view can 
possibly be correct.  Because it helps to illustrate th e extreme and absolute character of their position, 
let us consider an extreme example.  Suppose that  an auto manufacturer in China imports 100 per cent 
of the parts necessary to assemble a particular vehicle model.  Further suppose that the auto 
manufacturer imports the parts and components from a single corporate affiliate located in a single country, and that each shipment of parts and compone nts is the subject of a single invoice between the 
manufacturer and its affiliate.  Now suppose that th e auto manufacturer directs its logistics company 
to break each consignment of parts and components in to five separate shipments, and to arrange the 
shipments so that they arrive at the same port, but on different days.  The manufacturer, as the importer of record, declares each shipment as "par ts," and proceeds to assemble them into motor 
vehicles.   
722. Under the complainants' apparent position, the challenged measures would result in an 
incorrect tariff classification even as applied to th ese facts.  China considers that this extreme 
position: (1) is inconsistent with the purpose and in tent of GIR 2(a); (2) is inconsistent with the 
decision of the WCO that the application of GIR 2(a) to this circumstance is a matter to be addressed under national laws and regulations; (3) is inconsistent with how other WTO Members, including the 
complainants, have addressed this ty pe of problem in customs administration; (4) is inconsistent with 
accepted customs practices as they existed at the ti me of China's accession to the WTO; and, most 
importantly, (5) is utterly contrary to the object and purpose of the GATT 1994, as reflected in Article II, to preserve the value of reciprocal  and mutually advantageous tariff concessions. 
723. Thus, when China states that the complainants have not demonstrated that the challenged 
measures result in the imposition of excess customs duties in all cases , what China means is that the 
complainants need to dis tinguish between the measures per se  and the determinations of duty liability 
that result when the measures are applied to specific se ts of facts.  The EC has suggested, for example, 
that it does not agree with where China has drawn the line for purpo ses of the essential character test 
under GIR 2(a).  Canada, for its part, has suggested that the design of the challenged measures is not 
entirely consistent with its "snaps hot" theory of how GIR 2(a) can be applied to multiple shipments, 
although it did not detail the specific points of divergence during the first meeting of the Panel.  The 
parties may have these and other disagreements about how the challenged measures operate in 
specific cases, but the existen ce of these disagreements cannot support the conclusion that the 
measures are inconsistent with China's Article II commitments in all cases to which they might be 
applied.   
148. ( China ) If the Panel were to consider that the measures at issue are "internal measures", 
how would China reconcile the minimum 41% domestic-value requirement in Article 21(3) of 
Decree 125 with Article III:4 GATT or Article 2 TRIMs, in conjunction with paragraph 1(a) of 
the Illustrative List? 
  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-161 
  
  Response of China 
 
724. As discussed in response to question 146, Chin a does not consider that the measures at issue 
are subject to the disciplines of Article III of the GATT or the TRIMs Agreement .   
149. ( Canada and the United States ) The Panel notes that the European Communities has 
submitted an alternative claim under Article III: 2 GATT, second sentence, in the case the Panel 
was to consider that the measures at issue do not violate Article III:2, first sentence GATT.  Canada has explicitly reserved itsel f the right to return to this issue in its rebuttal submission.  
Could Canada and the United States please clarify their positions on this issue? 
 
Response of the United States (WT/DS340) 
 
725. The United States, like Canada, intends to address this matter further in its rebuttal 
submission, including in particular China's argument that GIR 2(a) presents a defense to China's 
breaches of Article II with respect to any char ges imposed under China's measures that might be 
considered "ordinary customs duties" under Article II.   
Response of Canada (WT/DS342) 
 
726. As Canada set out in paragra phs 90 and 91 of its first writte n submission, Canada believes 
that it is clear that the imported and domestic auto parts are "like" products. Canada has heard nothing 
to suggest that China disagrees with this conclusion.   It is therefore not necessary to consider an 
argument under Article III:2, second sentence.  If, ho wever, China seeks to challenge the question of 
"likeness" under Article III:2, first sentence, Canada  has reserved the right to argue in the alternative 
that even if the measures do not apply to "like" produ cts in violation of the first sentence, they violate 
the second sentence. 
150. ( Complainants )  In respect of imported products to be compared to like domestic 
products in the context of Article III of the GATT 1994, 
 
(a) Is it the complainants' view that the impo rted products that should be compared to 
domestic products under Article III:2 GATT are "all imported auto parts" and not "imported 
auto parts characterized as complete vehicles"?; 
 Response of the European Communities (WT/DS339)  
727. Article III:2 GATT requires a comparison between  imported and domestic products that are 
"like".  The European Communities set out in its first written submission that imported and domestic 
auto parts are "like products" within the meani ng of Article III:2 GATT since the only distinction 
made in the measures is on the basis of the origin  of the auto parts (EC's first written submission, 
paras 164 to 167).  Consequently, all imported auto part s are "like" domestic auto parts.  In the view 
of the European Communities, the imported products that should be compared to domestic products under Article III:2 GATT are therefore "all imported auto parts". 
Response of the United States (WT/DS340) 
 
728. With respect to subquestion (a), yes, the Un ited States considers the proper comparison as 
between "all imported auto parts" and domestic parts.   WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-162 
  
  Response of Canada (WT/DS342) 
729. Yes, Canada considers that all imported auto parts are the proper comparator, since the 
measures distinguish on the basis of origin betw een imported and like domestic auto parts. All 
imported auto parts are subject to the administra tive requirements of the measures, and even the 
potential  for a charge on imported parts affects the competitive relationship between imported parts 
and the "like" domestic product, Chinese auto parts.  
(b) Please clarify what imported products a re taxed "in excess of" domestic auto parts 
within the meaning of Article III:2, first sentence; and 
 
Response of the European Communities (WT/DS339)  
730. In its first written submission, the European Communities compared the internal taxation of 
imported and domestic auto parts a nd found that imported auto parts can be subject to the charges 
pursuant to Article 28 of Decree 125 whereas this is  not the case for domestic auto parts (see first 
written submission of the European Communities, pa ragraphs 57 to 58 and 1 68 to 170).  Thus, all 
imported auto parts can be subject to internal ch arges "in excess of those applied (…) to like domestic 
products".  According to Article 28 of Decree  125, these charges are actually imposed, on those 
imported auto parts that were assembled and manufact ured into vehicles with an insufficient level of 
local content. 
Response of the United States (WT/DS340) 
 
731. With respect to subquestion (b), the excess of  charges on imported parts as compared to 
domestic parts, as prohibited by Article III:2, occu rs whenever China characterizes an imported part 
as a having the essential characteristic of a complete vehicle.  
Response of Canada (WT/DS342) 
 
732. Under Article 28 of Decree 125, all imported auto parts may be the subject of internal 
taxation that is not applied to like domestic au to parts, as described in Canada's first written 
submission. All imported auto parts may therefore be  subject to taxes in excess of those applied to 
domestic auto parts, specifically because those importe d parts are used in vehicles that do not have the 
requisite levels of domestic content. 
(c) Is the complainants' position on this issue the same with respect to their claims under 
Article III:4?  Response of the European Communities (WT/DS339) 
 733. With respect to its claim unde r Article III:4, the European Communities equally considers 
that the imported products to be compared with  domestic products are "all imported auto parts". 
734. Concerning the second aspect of the issue, the European Communities is of the position that 
all imported auto parts are "accorded treatment (… ) less favourable" than that accorded to like 
domestic auto parts in respect of internal regulation within the meaning of Article III:4.  As set out in 
the EC first written submission, the measures negati vely modify the conditions of competition for all 
imported automotive parts since all imported auto parts may be subject to the internal charges 
pursuant to Article 28 of Decree 125 and because all imported auto parts are subject to stringent  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-163 
  
  administrative procedures (see first written submission of the European Communities, paras 153 to 
158). 
Response of the United States (WT/DS340) 
 735. The comparison is the same: that is, under Artic le III:4, the United States considers the proper 
comparison as between "all imported auto parts" and domestic parts.  The scope of the auto parts 
subject to the breach, however, is wider under Article III:4.  That is, China's measures adversely affect 
the internal sale, purchase and use of all
 imported parts, regardless of whether those parts are treated 
as whole vehicles .  This is true for two reasons: first, ever y imported part used by a manufacturer will 
bring the manufacturer closer to the thresholds (and thus to the additional charges), regardless of whether in any particular instance the thresholds are exceeded.  Thus, the measures create a strong 
disincentive to the use of imported parts.  Se cond, so long as a vehicle manufactured in China 
contains a single imported part, the manufacturer of that vehicle is faced with all of the administrative 
burdens inherent in China's measures.  A manufactur er can only avoid those burdens by solely using 
domestic parts.   
Response of Canada (WT/DS342) 
 
736. Yes, with respect to the "likeness" question. In respect of part (b) of the question, the 
appropriate criterion by which to judge under Article  III:4 is whether the charges "adversely modify 
the conditions of competition". The same crite rion applies when assessing the administrative 
requirements applicable to vehicle manufacturers that use imported parts.  
151. ( Complainants )  If the Panel were to find that the disputed "charge" is in violation of 
Article III:2 GATT, would the complainants consid er it necessary for the Panel to also examine 
their claims relating to "the charge" under Article III:4 GATT?  Or in the alternative, if the 
Panel were to find that "the challenged meas ures in their entirety" are inconsistent with 
Article III:4 GATT, would the complainants consid er it necessary for the Panel to also examine 
"the charge" under Article III:2 GATT? 
 
Response of the European Communities (WT/DS339) 
 
737. In the view of the European Communities,  the Chinese measures in their entirety are 
inconsistent with Article III:2 and Article III:4 GATT. If the Panel finds  that the internal charges to 
which imported auto parts can be subject are inc onsistent with Article III:2 GATT, it would not be 
necessary – albeit possible - to also find that this asp ect of the Measure, i.e. the internal charges, are 
also inconsistent with Article III:4 GATT.  In th is scenario, the Panel would however still need to 
examine whether the other aspects of the measures, in particular the internal administrative burden on 
vehicle manufacturers using imported parts, violate Article III:4 GATT. 
738. Were the Panel to find that the measures "in th eir entirety", i.e. the internal charges and the 
internal administrative burden, both violate Article  III:4 GATT, it would for the Panel to consider 
whether it wishes to examine the charges also under Article III:2 GATT. 
Response of the United States (WT/DS340) 
 739. The United States considers the most essential claims in this dispute as the breach of 
Article III:4 and/or the TRIMs Agreement, be cause China's measures impose a local content 
requirement that discriminates against all imported parts as well as administrative burdens that discourage the use of imported auto parts, and Artic le III:2, because China imposes an internal charge WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-164 
  
  on certain imported parts in excess of any charges with  no  comparable charge on like domestic parts.  
With respect to other claims, the United States understands that questions of judicial economy are to 
be decided at the discretion of the panel, so long as the all findings are made that are necessary for the 
resolution of the dispute.   
Response of Canada (WT/DS342) 
 
740. See Canada's response to Question 85.  The char ges that would be the subject of analysis 
under Article III:2 are related to the overall burden imposed by the measures that should properly be 
examined under Article III:4, even if a violation of  Article III:2 is found.  Since the actual nature of 
the national treatment violation under the measur es varies depending on whether one considers the 
differential charges, the overall legislative regime  that gives rise to those charges, or the 
administrative requirements that are related to, but ultimately distinct from, the charges themselves, 
one may consider independent violati ons under both Articles III:2 and III:4. 
152. ( Complainants )  What is the view of the complainants on the relationship between 
Article III:5 and Article III:4 GATT?  Woul d a finding under Article III:4 render unnecessary 
a finding under Article III:5?  Or, alternativel y, would a finding under Article III:5 render 
unnecessary a finding under Article III:4? 
 
Response of the European Communities (WT/DS339) 
 741. The panel in US – Tobacco  stated that " both Article III:5 and Article III:4 deal with internal 
regulations, but that Article III:5 is the more specific of the two provisions ".
104 Therefore, the 
European Communities considers that a finding of  inconsistency with the general provision of 
Article III:4 would not render unnecessary a finding under the more specific provision of Article III:5 
since the latter provision contains criteria that are not contained in Article III:4. 
742. Alternatively, a finding of inconsistency with the specific provision under Article III:5 would 
necessarily indicate that the measures are also incons istent with Article III:4. Any internal quantitative 
regulation that requires specific proportions of a pr oduct to be supplied from domestic sources (within 
the meaning of Article III:5) discriminates merely on the basis of the origin of these products and, 
thus, necessarily treats imported products less fa vourably than like domestic products (within the 
meaning of Article III:4). 
743. However, other aspects of the measures in partic ular the administrative burden of the general 
system of registration, controls etc. would still need to be examined under Article III:4. 
Response of the United States (WT/DS340) 
 
744. Article III:4 and Article III:5 have different elemen ts.  In the circumstances of this dispute, 
however, the United States understands that a breach of Article III:4 would also indicate a breach of 
Article III:5, and vice versa .  Aside from this, the United States again notes its understanding that 
questions of judicial economy are generally  left to the discretion of the panel. 
                                                      
104 GATT Panel Report in US – Tobacco , at para 72.  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-165 
  
  Response of Canada (WT/DS342) 
 
745. As the panel in US – Tobacco  noted, both Article III:5 and Artic le III:4 deal with internal 
regulations but Article III:5 is the more specific of the two provisions.
105 An internal quantitative 
regulation found to be inconsistent with the first sen tence of Article III:5 would also be inconsistent 
with Article III:4. That is, a regulation constraini ng the use of foreign inputs in order to give 
preference to domestic inputs would discriminate solely on the basis of origin and be inconsistent with 
Article III:4. 
746. However, while the various elements of Article  III are necessarily related by the principle, 
expressed in Article III:1, that internal measures s hould not be applied so as to afford protection to 
domestic production, Articles III:4 and III:5 are lega lly distinct expressions of that principle. 
Article III:5 contains criteria that are distinct from t hose found in Article III:4, despite the fact that the 
same measure may be the subject of the same broa d review under both provisions. Not all aspects of a 
measure that may violate Article III:4, such as ot herwise-inconsistent administrative requirements that 
discriminate against imported goods, would necessarily be covered by Article III:5. A finding solely 
under Article III:5 may leave certain aspects of a measure's consistency with Article III:4 unaddressed. Similarly, a finding solely under Article III:4 would not necessarily address criteria in Article III:5 that are absent from Article III:4.   
153. ( Canada and the United States )  On the basis of the Appellate Body statement in 
Bananas III (paras. 202-204). that the agreement which is  more specific to the claim before the 
Panel should be considered first, the European  Communities has presented its legal arguments 
under Article 2 TRIMs first and then its arguments under Article III of the GATT 1994.  What is the position of Canada and the United States in relation to the European Communities' approach? 
 
Response of the United States (WT/DS340) 
 
747. The United States considers that Article III:4 and TRIMs Article 2 are closely related, and in 
these circumstances, the United States considers that th e order of analysis is within the discretion of 
the Panel.   
Response of Canada (WT/DS342) 
 
748. Canada does not take issue with the European  Communities' approach.  We note that the 
measures are not only in the nature of investment measures, but also measures that affect trade in 
goods.  This, together with the fact that a TRIM is de fined in part with refere nce to Articl e III, caused 
Canada to adopt the approach taken in India – Autos  and deal first with Article III. 
E. C
HINA 'S ACCESSION PROTOCOL  
154. ( All parties )  Could the parties confirm that the commitments found in China's 
Accession Protocol, including the specific commitments referred to in paragraph 342 of the Working Party Report, are legally binding upon China and enforceable in WTO dispute 
settlement proceedings? 
 
                                                     
 
105GATT Panel Report US –Tobacco , DS44/R – BISD 41S/131, adopted 4  October 1994 at para 72. WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-166 
  
  Response of China 
 
749. China addressed this issue in paragraphs 187 to 189 of its first written submission.  In sum, 
China considers that the specific provisions of a working party report that are incorporated by 
reference into a protocol of accession, and from the protocol of accession into the WTO Agreement, 
are akin to a Member's Schedule of Concessions from the standpoint of its rights and obligations, and 
for purposes of interpretation under the Vienna Convention.   As China noted in paragraph 189 of its 
first written submission, China consider that its is appropriate for dispute settlement panels to take 
into account the context of a commitment made in a working party report, and to exercise special care 
in interpreting these commitments.   
Response of the European Communities (WT/DS339) 
 
750. The European Communities confirms that the commitments found in China's Accession 
Protocol, including the specific commitments referr ed to in paragraph 342 of the Working Party 
Report, are legally binding upon China and enfo rceable in WTO dispute settlement proceedings. 
751. The legally binding nature of these commitments  follows from Part I, paragraph 1.2 of the 
Accession Protocol which provides that " [t]his 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 ". Being an integral part of the WTO Agreem ent which is one of the "covered agreements" 
listed in Appendix 1 to the DSU, the aforementioned commitments are also enforceable in WTO 
dispute settlement proceedings. 
Response of the United States (WT/DS340) 
 
752. As set out in the first US submission, the United States believes that commitments in 
paragraph 342 of the Working Party Repo rt are legally binding upon China.   
Response of Canada (WT/DS342) 
 
753. Canada confirms that the commitments in China's Accession Protocol , including those 
referred to in paragraph 342 of the Working Pa rty Report, are legally binding upon China and 
enforceable in WTO dispute settlement proceedings, as set out in paragraphs 75 to 77 of Canada's first 
written submission. 
F. SCM
 AGREEMENT  
155. ( Canada )   Could Canada please confirm that it is not pursuing any claim under the 
SCM Agreement. 
 
Response of Canada (WT/DS342) 
 
754. Canada confirms that it is not pursuing any claim under the SCM Agreement . 
156. ( United States )  Could the United Sates clarify whether its claims under the SCM 
Agreement are in the alternative to its claims under Articles II and III GATT as well as those 
under the TRIMs Agreement. 
  WT/DS339/R/Add.1 
 WT/DS340/R/Add.1 
 WT/DS342/R/Add.1 
 Page A-167 
  
  Response of the United States (WT/DS340) 
 
755. The US claims under the SCM Agreement are not st ated in the alternative – that is, they do 
not depend on whether or not China's charges are in ternal taxes or "ordinary customs duties."  As 
noted above, however, questions of judicial economy ar e generally left to the discretion of the panel, 
so long as the findings resolve the issues in dispute.   
157. ( Complainants )   With respect to "revenue foregone" under Article 1.1(a)(1)(ii) of the 
SCM Agreement, could the complainants please clarify the following: 
 
(a) What is the specific factual basis for your argument that the default rate of import 
duties and charges that would apply to imported  parts and components would be 25 per cent, 
and that the lower rate of 10 per cent would on ly be available upon demonstration that local 
content requirements were met?; 
 
Response of the European Communities (WT/DS339)  
756. The European Communities has not argued that 25 % would be "the default rate" of charges 
applied to imported auto parts and that the 10% ra te would "only be availa ble upon demonstration that 
local content requirements were met". 
757. In its first written submission, the European  Communities set out, following the Appellate 
Body Report in US – FSC , that in order to determine whether "government revenue that is otherwise 
due is foregone or not collected" it is necessary 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.
106 
758. Under the contested Chinese measures, imported auto parts that satisfy the local content 
requirements of Article 21 of Decree 125 are charged at  a rate of generally 10%.  This rate of 10% 
does not depend on any "demonstration", as the Pane l's question suggests, but is available for 
imported parts "that have been verified as not  being Deemed Vehicles " (see Article 28 of 
Decree 125).  In order to determine the revenue  "otherwise due", the European Communities had 
recourse to the normative benchmark provided by the Chinese treatment of imported auto parts that do 
not satisfy the local content requirements of Article  21 of Decree 125 and which are charged at a rate 
of typically 25%.  This rate of 25% is no "defau lt rate", as the Panel's question implies, but is 
available for imported parts "that have been verifi ed by the Center as Deemed Whole Vehicles" and 
that are charged "according to the duty rate for whol e vehicles" (see Article 28 of Decree).  As this 
25% rate is explicitly foreseen for certain imported auto parts in the Chinese measures, it is, in the 
words of US - FSC,  no "entitlement in the abstract" but a "definitive, normative benchmark".  By 
charging imported auto parts that satisfy the local content requirements "only" with a 10% rate, China 
has, in the words of US – FSC,  "given up an entitlement to raise re venue that it could 'otherwise' have 
raised"107  
Response of the United States (WT/DS340) 
 
759. The "normative benchmark" concept described by the Appellate Body in US - FSC 
(Article 21.5 - EC)  does not require reference to a default ra te, as implied in the above question, when 
determining whether revenue has been foregone.  The Appellate Body stated that Article 1.1(a)(1)(ii) 
                                                      
106 European Communities' first written submission, paras 285 to 288. 
107 Appellate Body Report in US – FSC , at para. 90. WT/DS339/R/Add.1 
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Page A-168 
  
  of the SCM Agreement does not require panels to identify a "general" rule of taxation and 
"exceptions" to that "general" rule.  Rather, panels  should compare the domestic fiscal treatment of 
"legitimately comparable income" to ascertain whether the measure  under consideration involves the 
foregoing of revenue that is "otherwise due."  Th e Appellate Body further considered that the 
comparison ought to be made with respect to  taxpayers in "comparable situations." 
760. In this dispute, taxpayers in comparable s ituations pay different amounts of money to the 
Chinese government, depending on whether or not they  source a sufficient amount of goods locally.  
That is, automobile manufacturers that use imported parts in quantities that exceed certain thresholds 
when assembling complete vehicles pay a combinati on of import duties and internal charges to the 
Chinese government equal to 25 per cent of the value of all imported parts used in the assembly of a 
complete vehicle.  Specifically, these automobile ma nufacturers pay import duties equal to 10 per cent 
of the value of all imported parts used in the asse mbly of a complete vehicle and internal charges 
equal to 15 per cent of the value of all imported parts used in the assembly of a complete vehicle.  In 
contrast, automobile manufacturers that use suffi cient quantities of domestic parts when assembling 
complete vehicles pay import duties equal to 10 per cent of the value of all imported parts used in the assembly of a complete vehicle and no internal charg es.  As a result, automobile manufacturers that 
use imported parts in quantities that exceed certain  thresholds when assembling complete vehicles pay 
internal charges that the Chinese government entirely foregoes in the case of automobile 
manufacturers that use sufficient quantities of domes tic parts when assembling complete vehicles.   
761. According to China, the measures at issue onl y impose payment requirements in the form of 
import duties, not internal charges.  However, ev en if all of the payments due to the Chinese 
government are classified as import duties, it is still clear that the Chinese government foregoes 
revenue.  Specifically, automobile manufacturers th at use imported parts in quantities that exceed 
certain thresholds when assembling complete vehicles pay 25 per cent duties on all imported parts 
used in the assembly of a complete vehicle, wh ile the Chinese government foregoes revenue by only 
requiring payment of 10 per cent import duties on all imported parts used in the assembly of a complete vehicle in the case of automobile manuf acturers that use suffici ent quantities of domestic 
parts when assembling complete vehicles.  The amo unt of the revenue foregon e equals the difference 
between the 25 per cent import duties and the 10 per cent import duties. 
762. From a practical standpoint, there are situations where it may make sense to talk in terms of a 
"default rate," and there are situations where it will not .  The concept of a default rate implies that it is 
the rate that is normally applied or applied in most  situations.  In the case of measures like those at 
issue in this dispute, the rate normally applie d will likely change as business practices change in 
response to those measures, so that it does not make  sense to talk in terms of a default rate.  For 
example, when measures like those at issue in this dispute are first enforced, the rate normally applied 
will likely be the higher payment rate - in the case of  China's measures, this default rate would be the 
combination of import duties and internal charges payable to the Chinese government in an amount equal to 25 per cent of the value of all imported part s used in the assembly of a complete vehicle.  The 
reason for this situation is obvious.  The purpose of measures like those at issue in this dispute is to 
change how business is normally conducted and to create an incentive for manufacturers to begin 
sourcing more parts locally rather than importing them.  Over time, unless the measures are 
withdrawn, manufacturers will change their business pr actices and source more parts locally in order 
to avoid the higher payment rate and remain competi tive.  As this change in business practices takes 
place, the rate normally applied under the measures will change as well.  Manufacturers will normally 
pay the lower payment rate because they have res ponded to the incentive to source more parts locally 
- in the case of China's measures, this new default rate would be the payment of import duties to the 
Chinese government in an amount equal to 10 per cent of the value of all imported parts used in the 
assembly of a complete vehicle, with no internal charges.  WT/DS339/R/Add.1 
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  (b) Is it relevant to the Panel's analysis of th e question of the "normative benchmark" in the 
context of the claims under the SCM Agreement th at the bonding rate on imported parts and 
components is, according to the parties' oral arguments, 10 per cent?; 
 
Response of the European Communities (WT/DS339)  
763. No, the question of the bonding rate is not rele vant for the "normative benchmark" indicating 
whether revenue is foregone within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.  As 
set out in response to the previous sub-question,  the normative benchmark provided by the Chinese 
measures is the treatment of imported auto parts th at do not satisfy the local content requirements of 
Article 21 of Decree 125.  Pursuant to Article 28 of Decree 125, charges "according to the duty rate 
for whole vehicles" (i.e. 25%) are imposed on such part s, after their manufacture, if they were verified 
as "Deemed Whole Vehicles".  The bonding rate does not have any impact on this normative 
benchmark. 
Response of the United States (WT/DS340) 
 
764. The 10 per cent bonding rate on imported part s is not relevant, regardless of whether the 
domestic fiscal treatment at issue is considered to be a combination of import duties and internal 
charges (in the complainants' view) or only import duties (in China's view).  As explained above, the 
Appellate Body has stated that Article 1.1(a)(1)(ii)  of the SCM Agreement does not require panels to 
identify a "general" rule of taxation and "exceptions" to  that "general" rule, but rather allows panels to 
compare the domestic fiscal treatment of "legitimatel y comparable income," with respect to taxpayers 
in "comparable situations," to ascertain whet her the measure under consideration involves the 
foregoing of revenue that is "otherwise due".  In other words, it is not necessary to identify a default 
rate, which this question implies could be the bonding rate.   
765. Furthermore, in the complainants' view, th e import duties imposed under China's measures 
total 10 per cent of the value of all imported part s used in the assembly of a complete vehicle, 
regardless of the local content used by an automobile manufac turer when assembling a complete 
vehicle in China.  As explained above, automobile  manufacturers that use imported parts in quantities 
that exceed certain thresholds when assembling complete vehicles pay import duties equal to 10 per 
cent of the value of all imported parts used in th e assembly of a complete vehicle, plus internal 
charges equal to 15 per cent of the value of all im ported parts used in the assembly of a complete 
vehicle. Automobile manufacturers that use suffi cient quantities of domestic parts when assembling 
complete vehicles similarly pay import duties equal to  10 per cent of the value of all imported parts 
used in the assembly of a complete vehicle; the differen ce is that they do not pay any internal charges.   
(c) What is the legal test to be applied to determine the normative benchmark in a subsidy 
claim in which the alleged financial contribution takes the form of revenue foregone in the sense 
of SCM Article 1.1(a)(1)(ii)?; and  Response of the European Communities (WT/DS339)  
766. The Appellate Body in US – FSC  interpreted Article 1.1(a)(1)(ii) of the SCM Agreement  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". Moreove r, the word "foregone" suggests that the 
government has given up an entitlement to raise revenue that it could "otherwise" WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-170 
  
  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 whic h a comparison can be made between the 
revenue actually raised and the revenue that  would have been raised "otherwise". We, 
therefore, agree with the Panel that the term "otherwise due" implies some kind of 
comparison between the revenues due under the contested measure and revenues that 
would be due in some other situation. We also agree with the Panel that the basis of comparison must be the tax rules applied by the Member in question
."108 
767. On the basis of this test, the European Co mmunities considers that the revenues actually 
raised need to be compared not with "an entitle ment in the abstract" but with "some defined, 
normative benchmark" as already existing in the legal system of the Member in question. 
768. In the present case, China's treatment of importe d auto parts that do not satisfy the local 
content requirements of Article 21 of Decree 125 prov ides such a benchmark. It is not "an entitlement 
in the abstract", but a pre-existing "def ined" rule in the Chinese legal system. 
Response of the United States (WT/DS340) 
 
769. Please see the response to subquestion (a) above. 
(d) In your oral statements, in the context of other claims, you have characterized the 
measures in question as involving the additional "c harge" of 15 per cent on imported auto parts 
only when those parts are treated as whole vehi cles.  For example, the United States argued 
that:    
"the additional charge only applies if  domestically-produced autos include an 
amount ... of imported auto parts that  exceeds specified thresholds" (US oral 
statement, paragraph 3, emphasis added); and "the measures ... require that a 
specified amount or proportion of an automobile be supplied from domestic sources or else a penalty in the form of an additional charge is assessed" (US oral statement, paragraph 18, emphasis added).   
Response of the European Communities (WT/DS339) 
 770. Question 158 (the European Communities unders tands that the question that begins under 
question 157 (d) is put to it under question 158) 
Response of the United States (WT/DS340) 
 
771. Please see the response to subquestion (a) above. 
158. ( European Communities )  The European Communities argued that:  
 
"Only the [imported parts] that will be used in complete vehicles that do NOT 
attain the necessary domestic content will be subject to the higher duty on 
complete vehicles" (EC oral statement,  paragraph 55, italic emphasis added); 
and " ...[China] will ... verify whether the [parts] will be used in a complete 
vehicle or not and whether the complete vehicle will contain sufficient local 
                                                      
108 Appellate Body Report in US – FSC , at para. 90.  WT/DS339/R/Add.1 
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  content before deciding whether to apply an additional charge  on the products 
after they have already been manufact ured in China" (EC oral statement, 
paragraph 57, emphasis added).   
 How can these arguments be reconciled with your position that the 25 per cent rate is 
the "normative benchmark" or default rate that would apply to all
 imported auto parts unless  
there is a demonstration that local content requirements are fulfilled?   
 
Response of the European Communities (WT/DS339) 
 
Question 158 (the European Communities unders tands that the question that begins under 
question 157 (d) is put to it under question 158)  772. In the view of the European Communities, there is no contradiction between these quotes 
from the EC oral statement and its position that  China foregoes revenue "otherwise due" when it 
charges imported auto parts that satisfy local cont ent requirements at a rate of (only) 10% whereas it 
charges imported auto parts that do not satisfy  local content requirements at a rate of 25%. 
773. As set out in response to the previous s ub-questions, the European Communities has not 
argued that the 25% rate is a "default rate" a pplying to "all imported parts unless there is a 
demonstration that local content requirements are fulfille d" and does not consider this to be part of the 
relevant legal test in order to determine the "nor mative benchmark" under Article 1.1(a)(1)(ii) of the 
SCM Agreement. 
159. ( China )  With respect to "revenue foregone" under Article 1.1(a)(1)(ii) of the SCM 
Agreement, could China please: (a) Clarify the specific factual basis for its argu ment that the 10 per cent rate and the 25 per 
cent rate of import duties and charges have sep arate and independent scopes of application and 
operation, such that the 25 per cent is not the defa ult rate, as alleged by the complaining parties; 
and (b) Indicate what would be the appropriate normative benchmark in its view.   
 
Response of China 
 
774. The Appellate Body has stated that "the term 'otherwise due' implies some kind of 
comparison between the revenues due under the contest ed measure and revenues that would be due in 
some other situation."
109  The "basis of comparison must be the tax rules applied by the Member in 
question. … What is 'otherwise due', therefore, depends on the rules of taxation that each Member, by 
its own choice, establishes for itself."110  The Appellate Body has further observed that "the 
comparison under Article 1.1(a)(1)(ii) of the SCM Agreement  must necessarily be between the rules of 
taxation contained in the contested measure and othe r rules of taxation of the Member in question."111  
In making these comparisons, "panels must obviously ensure that they identify and examine fiscal situations which it is legitimate to compare."
112 
775. Decree 125 concerns the obligation of auto manuf acturers to pay the applicable duty rates for 
motor vehicles when they import parts and component s of motor vehicles that, in their entirety, have 
                                                      
109 US – FSC,  at para. 90.   
110 US – FSC , at para. 90.   
111 US – FSC (Article 21.5 – EC) , at para. 89. 
112 US – FSC (Article 21.5 – EC),  at para. 90.   WT/DS339/R/Add.1 
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Page A-172 
  
  the essential character of a motor vehicle under GI R 2(a).  These are the "revenues due under the 
contested measure."  When auto manufacturers import auto parts and components that do not have the 
essential character of a motor vehicle, China classifies  these imports under the applicable headings for 
parts , also in accordance with the rules of the Harm onized System.  These are not the same "fiscal 
situations" for purposes of making a proper comparison.  The application of GIR 2(a) to imported 
parts (whether one shipment of parts or multiple ship ments of parts) leads to a different classification 
depending on whether the parts have the essentia l character of the complete article.    
776. It is therefore not the case, as the US and EC argument necessarily presumes, that the 
benchmark rate of taxation is the duty rate that applies to motor vehicles.  The benchmark rate of 
taxation depends on what is imported – parts that have the essential character of the complete article, 
or parts that do not have the essential character of  the complete article.  China therefore does not 
"forego revenue" when it applies the applicable duty ra tes for parts to imports of parts that do not have 
the essential character of a motor vehicle.  This is , as China has explained, the "independent scope and 
effect of China's separate tariff provi sions for auto parts and components."
113 
Comments by the United States on China's response to question 159 
777. In its response to question 159, China does not di spute the basic formulation laid down by the 
Appellate Body in US - FSC (Article 21.5 – EC)  that the term "otherwise due" in the context of 
Article 1.1(a)(1)(ii) of the Agreement on Subsidi es and Countervailing measures (SCM Agreement) 
"implies some kind of comparison between the revenues due under the contested measure and 
revenues that would be due in some other situation. "  China also does not seem to directly dispute the 
US position set forth in response to question 157, to the extent that the United States argues that (1) a government foregoes revenue when it imposes a 10 per cent internal charge on an imported part if it is 
used in the assembly of a vehicle with insufficient local content but imposes no internal charge on that 
same imported part if it is used in the assembl y of a vehicle with sufficient local content or, 
alternatively, that (2) a government forego es revenue when it imposes 25 per cent duties on an 
imported part if it is used in the assembly of a ve hicle with insufficient local content but imposes only 
10 per cent duties on that same imported part if it is used in the assembly of a vehicle with sufficient 
local content.  Instead, China argues that neither of these scenar ios accurately portrays how the 
measures at issue in this dispute operate.  Acco rding to China, the measures at issue are border 
measures that simply apply the duty rates set fort h in China's Schedule of Concessions.  In other 
words, China insists that its measures properly classify imported parts as motor vehicles (and apply 
25 per cent duties) if they will be assembled into a vehicle with insufficient local content within one 
year, and its measures properly classify imported part s as parts (and apply 10 per cent duties) if they 
will be assembled into a vehicle w ith sufficient local content.   
778. The United States, of course, disagrees with Chin a's view that the measures at issue are border 
measures that properly apply China's Schedule of Concessions.  But the United States would agree in 
general that in the case of true border measures properly applying a Member's Schedule there may 
well be no "revenue foregone" within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.   
779. But since China's measures are in ternal measures or border measures that misclassify parts as 
motor vehicles for tariff purposes, the Chinese gove rnment foregoes revenue under the measures at 
issue, as the United States describes above and expl ains more fully in response to question 157(a). 
                                                     
 
113 China first written submission at para. 177.  WT/DS339/R/Add.1 
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 Page A-173 
  
  G. A
RTICLE XX( D) GATT 
160. ( China )  China submits in paragrah 211 of its first written submission that the example 
of [ ] "illustrates both the importance of the in terests furthered by the challenged measures as 
well as the contribution that these measures make towards the realization of those interests."   
China further submits in paragraph 21 of its first written submission that the example provided by [ ] is "not an isolated incident".  Could China please provide the Panel with further specific  
examples. 
 
Response of China 
 
780. The following table provides several more exampl es of motor vehicles that are assembled in 
China from imported parts and components that have  the essential character of a motor vehicle, and 
that are imported into China in multiple shipments: 
Assembly [ ] [ ] [ ]) [ ]) 
Body X X X X 
Engine X X X X 
Transmission X X X X 
Driving Axle X X X X 
Driven Axle  X X  
Frame X  X X 
Steering System X X  X 
Braking System X X   
 
781. The example of the [ ] is particularly interesting, as it highlights the nature of the tariff 
classification issue that China sought to resolve through Decree 125.  In 2003, [ ] produced the [ ] 
almost entirely from imported CKD kits.  Beginning in 2004, however, [ ]'s importation of CKD kits 
for the [ ] dropped dramatically, while its importati on of auto parts surged.  By 2005, [ ] produced 
38,600 [ ], and imported only 24 CKD kits in that  year.  As verified under the provisions of 
Decree 125, [ ] continues to import seven out of th e eight major assemblies for the production of the 
[ ].  Thus, [ ] has gone from the importation of CKD kits – classified as mo tor vehicles under GIR 2(a) 
– to the importation of parts and components that, in  their entirety, have the essential character of a 
motor vehicle.  In essence, nothing has changed excep t the manner in which it structures its imports.   
161. ( China )   Could China please clarify whether the alleged customs circumvention is also 
related to the importation of CKD/SKD kits?  If so, could China please reconcile its response with the statement in paragraph 39 of China's first written submission that "major car manufacturers have imported CKD/SKD into China and declared these imports as complete 
vehicles , both before  and after the challenged measure took effect" (emphasis added). 
 
Response of China 
 
782. As China has explained, there is no tariff cl assification issue associated with CKD/SKD kits, 
as China classifies CKD/SKD kits as motor vehicles in accordance with GIR 2(a).  China's point in 
paragraph 39 of its first written submission was simp ly that this classification of CKD/SKD kits has 
never been contested by importers of CKD/SKD kits into China.   WT/DS339/R/Add.1 
WT/DS340/R/Add.1 WT/DS342/R/Add.1 
Page A-174 
  
  Comments by the United States on China's response to question 161 
783. The United States disagrees with China's statemen t in response to this question that China's 
classification of CKD and SKD kits as motor vehicles "has never been contested by importers."  As 
the United States explained above under question 2, from 1992 until China began to implement the 
measures at issue, China normally did not apply th e motor vehicle tariff rates to CKDs and SKDs.  
Instead, the applicable rate for CKDs and SKDs (and parts) was negotiate d between an individual 
auto manufacturer and the Chinese authorities.  The ke y factors in this negotiation were the amount of 
the auto manufacturer's investment in China and th e extent to which the auto  manufacturer used local 
content in the assembly of its vehicles, both at the time of the negotiation and under the auto 
manufacturer's future plans.  Normally, an auto ma nufacturer with a larger amount of investment and 
a larger percentage of local conten t would be able to negotiate a lowe r tariff rate than would an auto 
manufacturer with a smaller amount of investment and a smaller percentage of local content.  
Particularly for the auto manufacturers that th e Chinese authorities viewed as committed to China 
based on these factors, the negotiated tariff rates fo r CKDs and SKDs (and part s) were substantially 
below the tariff rates for motor vehicles.  But, fo r an auto manufacturer that the Chinese authorities 
viewed as insufficiently committed to China, as may have been the case for one manufacturer,
114 it is 
very possible that the Chinese authorities woul d insist on applying higher tariff rates. 
162 ( China ) Concerning the trade effect of the measure, China, in paragraph 213, refers to 
an observation that several of the world's largest  auto manufacturers and auto parts suppliers 
have noted that the challenged measures have had no impact on trade and investment as 
provided in Exhibit CHI-33 (Fan Yan, Big car parts makers unfazed by China tax row ).  Please 
comment on the indication in the same source that the policy might block small European auto 
part suppliers as well as hurt car makers of luxury brands such as BMW and DaimlerChrysler AG's Mercedez-Benz. 
 
Response of China 
 
784. China is unaware of any basis for the asserti on that the challenged measures could affect 
smaller European auto parts suppliers.  As for ma kers of luxury brands such as BMW and Mercedes-
Benz, the article explains the reason why they coul d be relatively more affected by the challenged 
measures.  Quoting a securities analyst, the article  explains that these companies import parts and 
components that "make up as much as 90 per cent of locally assembled vehicles."
115  To the extent 
that these companies import these levels of parts and components in multiple shipments and assemble 
the parts and components into specific vehicle m odels, the effect of Decree 125 is that these 
companies now have to pay the applicable duty rates for motor vehicles.  That is precisely the tariff 
classification issue that the challenged measures seek to  resolve, by ensuring that the substance of the 
auto manufacturer's import transactions prevail over their form.   
H. ARTICLE XXIII:1( B) GATT 
163. ( Canada )  In paragraph 159 of its first written submission, Canada requests the Panel to 
find that the measures at issue nullify or impa ir benefits, as understood under GATT Article 
XXIII:1(b), accruing to Canada in respect of CKD and SKD .  Could Canada please confirm that 
its claim under Article XXIII:1(b) GATT is limited to CKD and SKD kits?  
                                                     
 
114 See China's first written submission, pages 15-16. 
115 CHI-33.  WT/DS339/R/Add.1 
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 Page A-175 
  
  Response of Canada (WT/DS342) 
 
785. Canada confirms that this claim is limited to CKD and SKD kits. 
I. O
THER CLAIMS  
164. ( United States )  In its request for the establishment of the Panel, the United States 
submitted that the measures at issue were inconsistent with inter alia  Article 2 TRIMs in 
conjunction with paragraph 2(a) of the Illustrative  List.  Could the United States confirm that it 
is not pursuing an additional claim under Article 2 TRIMs in conjunction with paragraph 2(a) 
of the Illustrative List . 
 
Response of the United States (WT/DS340) 
 
786. Please see the following response to Question 165.   
165. ( United States )  In its request for the establishment of the Panel, the United States 
submitted that the measures at issue were inconsistent with inter alia  Article XI:1 GATT.  
Could the United States please confirm that it is not pursuing a claim under Article XI:1 GATT. 
 
Response of the United States (WT/DS340) 
 787. The United States included claims under Article XI of the GATT 1994 and paragraph 2(a) of 
the TRIMs Agreement Illustrative Li st in the event that China trie d to buttress its argument that its 
charges were "ordinary custom s duties" by claiming that China's measures actually prohibit
 the import 
of auto parts until after the parts were used in the manufacture of a complete vehicle.  In that case, 
China's measures would indeed r esult in breaches of the two above-cited provisions.  Given that 
China is not pursuing such an argument, and on th e condition that China does not in the future pursue 
such an argument, the United States likewise is not pursuing its claims under these two provisions.   
788. It is worth noting, however, that the existen ce of an Article XI obligation means that China 
necessarily must agree that the auto parts at issue in this dispute are in fact "imported" when the parts 
are presented at the border.  Otherwise, as noted, if China's measures forbid the importation of auto 
parts until after those parts were assembled into co mplete vehicles, China's measures would result in a 
breach of Article XI of the GATT 1994. 
166. ( European Communities )  In its request for the establishment of the Panel, the European 
Communities submitted that, with the adoption of the measures at issue, China has nullified or impaired the benefits accruing to the Europe an Communities under Article XXIII:1(b) GATT, 
in conjunction with China's Protocol of Accession and in particular paragraph 93 of the 
Working Party Report.  Could the European Communities please confirm that it is not 
pursuing a claim under Article XXIII:1(b) GATT.  Response of the European Communities (WT/DS339) 
 
789. The European Communities confirms that it is  not pursuing claims under Article XXIII:1(b) 
GATT.