WORLD TRADE  
ORGANIZATION  WT/DS339/R 
WT/DS340/R 
WT/DS342/R 
18 July 2008 
 (08-3275) 
 Original:  English 
  
 
     
 
    
 
   
CHINA – MEASURES AFFECTING IMPORTS OF 
AUTOMOBILE PARTS 
  
Reports of the Panel 
 
 
 
 
  WT/DS339/R 
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 WT/DS342/R 
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  TABLE OF CONTENTS 
Page 
I.
 INTRODUCTION ................................................................................................................... .1 
A. COMPLAINTS OF THE EUROPEAN COMMUNITIES , THE UNITED STATES AND CANADA ................1  
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL ...................................................................1  
C. PANEL PROCEEDINGS ..................................................................................................................2  
II. FACTUAL ASPECTS ..............................................................................................................2  
A. MEASURES AT ISSUE ...................................................................................................................2  
B. TRANSLATION OF CHINA 'S MEASURES ........................................................................................3  
C. REQUEST FOR INFORMATION FROM THE WCO ...........................................................................3  
D. UNITED STATES ' REQUEST THAT THE PANEL 'S FINDINGS BE PRESENTED AS SEPARATE 
REPORTS CONTAINED IN A SINGLE DOCUM ENT WITH SEPARATE SECTIONS ON THE 
PANEL 'S CONCLUSIONS AND RECOMMENDATIONS FOR EACH COMPLAINING PARTY ..................3  
III. PARTIES' REQUESTS FOR FIND INGS AND RECOMMENDATIONS.........................4  
A. EUROPEAN COMMUNITIES ..........................................................................................................4  
B. UNITED STATES ...........................................................................................................................5  
C. CANADA ............................................................................................................................... .......7  
D. CHINA ............................................................................................................................... ...........8  
IV. ARGUMENTS OF THE PARTIES ........................................................................................8  
A. FIRST WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES ................................................8  
1. Introduction................................................................................................................... ............8  
2. The measures................................................................................................................... ..........8  
(a) Substantive criteria for determining the imposition of internal charges at the "Whole 
Vehicle" rate .................................................................................................................. .............9  
(b) Administrative requirements imposed on vehicle and auto parts manufacturers when 
any imported parts are used .................................................................................................... ....9 
(c) Impact of the measures ......................................................................................................... ....10  
3. Legal argument ................................................................................................................. ......11  
(a) The violation of the TRIMs Agreement and the Accession Protocol relating to the 
TRIMs Agreement ................................................................................................................ ....11  
(b) The violation of Article III of the GA TT 1994 and China's Accession Protocol 
relating to Article III of the GATT 1994 ..................................................................................11  
(i) Article III:4 of the GATT 1994................................................................................................. .11 
(ii) Article III:2 of the GATT 1994................................................................................................. .12 
(iii) Article III:5 of the GATT 1994................................................................................................. .12 
(iv) Accession Protocol............................................................................................................. .......12  
(c) Article II:1 (a) and (b) of the GATT 1994................................................................................13  WT/DS339/R 
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  (d)
 Article 3 of the SCM Agreement ..............................................................................................14  
B. FIRST WRITTEN SUBMISSION OF THE UNITED STATES ..............................................................15  
1. Introduction................................................................................................................... ..........15  
2. Argument....................................................................................................................... ..........15  
(a) The disciplines of Article III of th e GATT 1994 apply to the measures ..................................15  
(b) The charges are inconsistent with  Article III:2, first sentence..................................................17  
(i) Imported auto parts and domestic  auto parts are like products ...............................................17  
(ii) Imported auto parts are taxed in excess of domestic auto parts...............................................17  
(c) The charges and reporting requirements applie d to the use of imported auto parts are 
inconsistent with Article III:4 of the GATT 1994 ....................................................................17  
(i) Imported auto parts and domestic  auto parts are like products ...............................................17  
(ii) The charges and reporting requirements are laws  or regulations affecting the internal 
sale, offering for sale, purchase, distribu tion and use of imported auto parts .........................18  
(iii) By establishing thresholds on the use of im ported auto parts that trigger additional 
internal charges and burdensome procedur al requirements, the measures accord less 
favorable treatment to imported auto parts than to domestic auto parts .................................18  
(d) China's measures are inconsistent with Artic le 2.1 and Paragraph 1(a) of Annex 1 of 
the TRIMs Agreement. ........................................................................................................... ..20 
(e) China's measures are inconsistent with Article III:5 of the GATT 1994..................................20  
(f) China's measures are inconsistent with Part I, Article 7.2 of the Accession Protocol..............20  
(g) China's measures are inconsistent with Part  I, Article 7.3 of the Accession Protocol 
and paragraph 203 of the Working Party Report ......................................................................20  
(h) In the alternative, China's measures are inc onsistent with Article II of the GATT 1994 
and paragraph 93 of the Working Party Report ........................................................................21  
(i) China's measures constitute an import s ubstitution subsidy in breach of Articles 
3.1(b) and 3.2 of the SCM Agreement......................................................................................22  
C. FIRST WRITTEN SUBMISSION OF CANADA .................................................................................23  
1. Introduction and background................................................................................................23  
2. The measures................................................................................................................... ........23  
(a) Substantive criteria for determining the imposition of internal charges at the "whole 
vehicle" rate .................................................................................................................. ............23  
(b) Administrative requirements imposed on vehicle and auto parts manufacturers when 
any imported part s are u sed ......................................................................................................2 4 
(c) Impact of the measures ......................................................................................................... ....25  
3. Legal argument ................................................................................................................. ......25  
(a) China is bound by the WTO Agreement and China's Accession Protocol ...............................25  
(b) The measures impose internal charg es on internal trade in China............................................26   WT/DS339/R 
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  (c)
 The measures violate national treatment oblig ations in Articles III:2, III:4 and III:5 of 
the GATT 1994 and Articles 1.2 and 7.2 of the Accession Protocol ........................................26  
(i) The measures violate Article III:2 first sentence of the GATT 1994.........................................26  
(ii) The measures violate Article III:4 of the GATT 1994...............................................................27  
(iii) The measures violate Article III:5, first sentence  of the GATT 1994.......................................27  
(d) The measures violate the TRIMs Agreement and Articles 1.2 and 7.3 of the 
Accession Protocol............................................................................................................. .......28  
(i) The measures violate Article 2 of the TRIMs Agreement..........................................................28  
(e) Even if the measures are characterized as tariffs, they violate Article II:1 of the 
GATT 1994 and China's Accession Protocol ...........................................................................29  
(i) China's tariff commitments in its Sche dule with respect to auto parts and whole 
vehicles....................................................................................................................... ...............29  
(ii) The measures provide "less favourable treatm ent" than is set out in China's Schedule 
and are thereby inconsistent with Artic le II:1(a) and (b) of the GATT 1994............................29  
(f) China's measures nullify or impair benefits accruing to Canada under 
Article XXIII:1(b) of the GATT ...............................................................................................30  
D. FIRST WRITTEN SUBMISSION OF CHINA ....................................................................................30  
1. Introduction................................................................................................................... ..........30  
2. The measures................................................................................................................... ........31  
3. Legal argument ................................................................................................................. ......32  
(a) The measures are border measures subject  to Article II of the GATT 1994 ............................32  
(b) The measures are consistent with Article II of the GATT and do not collect ordinary 
customs duties in excess of China's bound commitments.........................................................33  
(i) China's interpretation of its tariff schedule is  consistent with its ordinary meaning, in 
context and in light of its object and purpose ...........................................................................33  
(ii) China's interpretation of its tariff schedule is consistent with the practice of other 
Members in preventing the circumvention of duties .................................................................35  
(iii) China's interpretation of its tariff schedule is  based on the condition of goods at the 
time of importation............................................................................................................ ........36  
(iv) Any ambiguity concerning the measures shoul d be resolved in China's favour under 
the principle of in dubio mitius ............................................................................................... ..37 
4. Claimants have failed to demonstrate a violation of Article III of the GATT 
1994, the TRIMs Agreement, Part I, Article 7.2 of the Accession Protocol or Part I, Article 7.3 of the Accession Protocol .........................................................................37
 
5. The United States and the European Comm unities have failed to demonstrate a 
violation of the SCM Agreement ...........................................................................................37  
6. The complainants' claims in respect of China's Accession Protocol and Article 
XXIII of the GATT 1994 must fail ........................................................................................38  
7. Any inconsistency with the GATT 1994 is subject to the general exception under Article XX(d) .................................................................................................................. .........39
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  8.
 Conclusion ..................................................................................................................... ..........39  
E. ORAL STATEMENT BY THE EUROPEAN COMMUNITIES AT THE FIRST SUBSTANTIVE 
MEETING OF THE PANEL ............................................................................................................39  
1. Introduction................................................................................................................... ..........39  
2. China's failure to respond to a prima facie case ..................................................................41  
3. The TRIMs Agreement and Article III of the GATT 1994.................................................41  
(a) The TRIMs Agreement............................................................................................................ .41 
(b) Article III of the GATT 1994................................................................................................... .42 
4. The "anti-circumvention theory" of China under Article II of the GATT 1994 ..............43  
5. Inconsistency of the Chinese Meas ures with the SCM Agreement ....................................48  
6. Conclusion ..................................................................................................................... ..........48  
F. ORAL STATEMENT BY THE UNITED STATES AT THE FIRST SUBSTANTIVE MEETING OF 
THE PANEL ............................................................................................................................... .48 
G. ORAL STATEMENT BY CANADA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL ............56  
1. Introduction................................................................................................................... ..........56  
2. Legal issues ................................................................................................................... ...........57  
(a) China has not answered the case under Article III of the GATT 1994.....................................57  
(b) China's GATT Article  XX defences .........................................................................................59  
3. Conclusion ..................................................................................................................... ..........61  
H. ORAL STATEMENT BY CHINA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL ...............61  
1. Introduction................................................................................................................... ..........61  
2. The issue presented in  this dispute ........................................................................................62  
3. The challenged measures interpret an d enforce China's tariff provisions for 
motor vehicles................................................................................................................. .........63  
4. The threshold issue before the Panel: Interpreting the scope of Article II........................64  
5. The challenged measures are border measur es within the scope of Article II..................66  
6. The challenged measures do not impose excess cust oms duties..........................................68  
7. Conclusion ..................................................................................................................... ..........68  
I. SECOND WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES ..........................................69  
1. Introduction................................................................................................................... ..........69  
2. Factual background............................................................................................................. ...70 
3. Legal argument ................................................................................................................. ......70  
(a) The violation of the TRIMs Agreement and the Accession Protocol of China relating 
to the TRIMs Agreement ......................................................................................................... .70 
(b) The violation of Article  III of the GATT 1994.........................................................................70  
(i) The "internal" nature of the measures ......................................................................................70   WT/DS339/R 
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  (ii)
 The violation of Articles III:4, III:2 and III:5 of the GATT 1994 .............................................71  
(iii) Accession Protocol............................................................................................................. .......72  
(c) Alternatively: the measures are inconsistent  with Article II:1 (a) and (b) of the GATT 
1994 ........................................................................................................................... ...............72  
(i) The HS in the context of WTO law............................................................................................72  
(ii) GIR 1: Motor vehicles vs. parts thereof....................................................................................72  
(iii) The exceptional situations in casu subject to GIR 2(a) ............................................................73  
(iv) Conclusion ..................................................................................................................... ...........74  
(d) No justification under Artic le XX(d) of the GATT 1994 .........................................................74  
(e) The measures are inconsistent with Article 3 of the SCM Agreement .....................................74  
4. Conclusion ..................................................................................................................... ..........75  
J. SECOND WRITTEN SUBMISSION OF THE  UNITED STATES .........................................................75  
1. Introduction................................................................................................................... ..........75  
2. China's analogy between the routine import of auto parts for manufacturing 
purposes and the hypothetical case of a kit separated into "split shipments" is 
fundamentally flawed ........................................................................................................... ..76 
3. China cannot rely on GIR 2(a) as the basis for the defense of its measures......................77  
(a) GIR 2(a) only relates to the interpretation of  China's obligations under its schedule of 
tariff commitments and not to the inte rpretation of other WTO obligations ............................77  
(b) The dispositive issues in this dispute do not turn on GIR 2(a) or any other issue of 
tariff classification .......................................................................................................... ..........78  
(c) GIR 2(a) would not provide China with a defense under Article II of the GATT 1994...........80  
K. SECOND WRITTEN SUBMISSION OF CANADA .............................................................................83  
1. Introduction................................................................................................................... ..........83  
2. Importation and the scope of national treatment ................................................................83  
(a) China ignores the principle of non-discrimination in international trade .................................83  
(b) Ordinary customs duties may only be im posed based upon the physical state of 
products as they arrive  at the border .........................................................................................8 3 
(c) China misapplies the HS and its Explanatory  Notes in imposing charges to auto parts 
as presented at the border..................................................................................................... .....84  
(d) Article II of the GATT 1994 does not allow Members to impose higher ordinary 
customs duties on separate shipments of auto  parts on the theory that they can be 
classified as a whole vehicle.................................................................................................. ...85 
(e) Regardless of classification, China is required by its commitments on accession to 
charge unassembled or partially assembled vehicles a duty rate of 10 per cent .......................86  
(f) Non-violation nullifica tion and impairment .............................................................................86  
3. The measures cannot be justified unde r Article XX(d) of the GATT 1994.......................86  WT/DS339/R 
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  (a)
 China has mischaracterized a Article XX(d ) of the GATT 1994 defence to an Article 
III violation as a defen ce under Article II.................................................................................86  
(b) Test for justifying measu res under Article XX(d) ....................................................................87  
(c) The measures are not justified under of Article XX(d).............................................................87  
(d) The measures do not satisfy the requirements of the chapeau of Article XX...........................87  
L. SECOND WRITTEN SUBMISSION OF CHINA ................................................................................88  
1. Introduction................................................................................................................... ..........88  
2. The challenged measures do not impose ordinary customs duties in excess of 
those set forth in China's Schedule of concessions...............................................................88  
3. The challenged measures are subject to the disciplines of Article II of the GATT 
1994 ........................................................................................................................... ...............92  
4. The complainants have failed to establish a prima facie violation of the 
commitment that China made in paragraph 93 of the Working Party Report.................94  
5. The complainants have failed to establish a violation of the SCM Agreement .................94  
6. The challenged measures would be justified under Article XX(d) if the Panel were to identify any violation of the covered agreements ...................................................94
 
7. Conclusion ..................................................................................................................... ..........96  
M. ORAL STATEMENT BY THE EUROPEAN COMMUNITIES AT THE SECOND SUBSTANTIVE 
MEETING OF THE PANEL ............................................................................................................97  
1. Introduction................................................................................................................... ..........97  
2. The automotive industry ........................................................................................................ 97 
3. The applicable provisions...................................................................................................... .97 
(a) Is there a threshold issue? The TRIMs Agreement as an answer .............................................97  
(b) Article III vs. Article II of the GATT 1994 ..............................................................................98  
4. Article II of the GATT 1994...................................................................................................9 8 
5. Article XX (d) GATT 1994.....................................................................................................99  
N. ORAL STATEMENT BY THE UNITED STATES AT THE SECOND SUBSTANTIVE MEETING 
OF THE PANEL .........................................................................................................................100  
1. Article III of the GATT 1994 a nd the TRIMs Agreement ................................................100  
2. Internal charges vs. customs duties.....................................................................................101  
3. GIR 2(a) would not provide China with a defense under Article II of the GATT 
1994 ........................................................................................................................... .............102  
4. China's Article XX(d) defense .............................................................................................103  
O. ORAL STATEMENT BY CANADA AT THE SECOND SUBSTANTIVE MEETING OF THE 
PANEL ............................................................................................................................... ......104  
P. ORAL STATEMENT BY CHINA AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL .........111  
1. The line between complete motor vehicles and parts of motor vehicles ..........................112   WT/DS339/R 
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  2.
 The line between form and substance .................................................................................112  
(a) The complainants have not articulated an interpretation of the term "as presented"..............113  
(b) The complainants' implicit interpreta tion of GIR 2(a) lacks foundation ................................113  
3. Three paths toward the resolution of this dispute .............................................................113  
V. ARGUMENTS OF THE THIRD PARTIES ......................................................................114  
A. THIRD PARTY SUBMISSION BY ARGENTINA ...........................................................................114  
1. The challenged measures are not border measures under Article II of the GATT 
1994 ........................................................................................................................... .............114  
2. China's measures are not similar to  anti-dumping or countervailing 
anti-circumvention measures...............................................................................................115  
3. The measures are not justif ied under Article XX(d). ........................................................116  
B. THIRD PARTY SUBMISSION BY JAPAN .....................................................................................116  
1. Article III of the GATT 1994 a pplies to the measures.......................................................116  
(a) Relevant WTO and GATT case law .......................................................................................116  
(b) The Chinese measures result in violations  of Article III of the GATT 1994..........................117  
(c) China's first written submission does not re fute the evidence that the challenged 
measures are internal charges subject to Article III of the GATT 1994 .................................118  
2. Alternatively, Article II of the GA TT 1994 applies to the measures................................118  
(a) China's measures result in a prima facie violation of its tariff commitments .........................119  
(b) China inappropriately combines goods imported separately ..................................................119  
3. Tariff classification of CKD and SKD Kits ........................................................................120  
(a) China's tariff treatment of CKD and SKD kits under the challenged measures violates 
Article II of the GATT 1994...................................................................................................1 20 
(b) China's treatment of CKD and SKD kits violates paragraph 93 of the Working Party 
Report......................................................................................................................... .............120  
4. Article XX of the GATT 1994 does not justify the measures............................................121  
C. THIRD PARTY SUBMISSION BY MEXICO .................................................................................121  
1. Introduction................................................................................................................... ........121  
2. The GATT 1994 .................................................................................................................. ..122  
3. TRIMs Agre ement ................................................................................................................ 122 
4. China's Accession Protocol ..................................................................................................123  
5. Conclusion ..................................................................................................................... ........124  
D. ORAL STATEMENT BY ARGENTINA AT THE FIRST SUBSTANTIVE MEETING OF THE 
PANEL ............................................................................................................................... ......124  
1. The challenged measures are not border measures under Article II of the GATT 
1994 ........................................................................................................................... .............124  WT/DS339/R 
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  2.
 China's measures are not similar to  anti-dumping or countervailing 
anti-circumvention measures...............................................................................................125  
3. The measures are not justif ied under Article XX(d). ........................................................126  
4. Conclusion ..................................................................................................................... ........127  
E. ORAL STATEMENT BY AUSTRALIA AT THE FIRST SUBSTANTIVE MEETING OF THE 
PANEL ............................................................................................................................... ......127  
1. Introduction................................................................................................................... ........127  
2. Are the challenged measures border measures or internal measures?............................128  
3. What is the proper interpretatio n of China's tariff schedule? .........................................130  
4. Scope of the general exception under Article XX(d) of the GATT 1994?........................131  
F. ORAL STATEMENT BY BRAZIL AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL ............131  
G. ORAL STATEMENT BY JAPAN AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL ..............133  
1. Argument....................................................................................................................... ........133  
(a) Arguments relating to the GATT Panel Report in EEC – Parts and Components .................133  
(b) The challenged measure violate the TRIMs Agreement.........................................................134  
2. Conclusion ..................................................................................................................... ........136  
VI. INTERIM REVIEW.............................................................................................................136  
A. SECTION VII.F  OF THE INTERIM REPORTS CONCERNING CKD  AND SKD  KITS ......................136  
1. Article II:1(b) of the GATT 1994 ........................................................................................136  
(a) Paragraphs 7.708 and 7.734 – Canada's comments ................................................................136  
(b) Paragraph 7.731, 7.733, 7.734, a nd 7.735 – United States' comments ...................................137  
2. Paragraph 93 of China's Working Party Report...............................................................138  
(a) Admission of Exhibit CDA-48 ...............................................................................................138  
(b) Panel's analysis of Exhibit CDA-48 in para graphs 7.749-7.753 of the Interim Reports.........141  
(i) Ten-digit customs code – new argument by China .................................................................142  
(ii) Complainants' practice – ne w evidence by China ..................................................................144  
(c) Clarification of the term "tariff line" in the context of paragraph 93 of China's 
Working Party Report........................................................................................................... ..145  
B. OTHER REQUESTS FOR REVIEW ...............................................................................................145  
VII. FINDINGS....................................................................................................................... ......146  
A. PRELIMINARY MATTERS ..........................................................................................................146  
1. Measures at  issue .............................................................................................................. ....146  
(a) Identification of the measures at issue ....................................................................................146  
(i) Policy Or der 8 ................................................................................................................. .......146  
(ii) Decree 125 and Announcement 4 ...........................................................................................148   WT/DS339/R 
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  (b)
 Effects of the measures at issue:  charge and administrative procedures ...............................150  
(i) Charge under the measures ....................................................................................................15 1 
Conditions under which th e obligation to pay th e charge arises ........................................................... 151  
Criteria for determining whether imported auto parts should be characterized as complete 
vehicles – criteria for determining auto parts characterized as complete motor vehicles .................... 153  
Criteria for determining whether imported auto pa rts are characterized as complete vehicles – 
auto parts imported in multiple shipments ............................................................................................ 155  
Charge imposed on auto parts imported by third party suppliers – Article 29 of Decree 125............... 155  
(ii) Administrative procedures...................................................................................................... 156 
Self-evaluation  by the automobile manufacturers wh o assemble/produce vehicles with 
imported auto parts fo r domestic sales ......................................................................................... ......... 157  
Registration with the CGA prior to the importation of auto parts characterized as complete 
vehicles....................................................................................................................... ........................... 158  
Provision of duty bond s prior to the importati on of auto parts.............................................................. 159  
Customs clearance  by the auto manufacturers concerned at the time of im portation............................ 160  
Verification  of whether imported auto parts should be characterized as comp lete vehicles ................. 161  
Payment of the charge  by the auto manufacturers concerned ............................................................... 162  
Time taken for the administrative pr ocedures under the measures........................................................ 163  
(iii) Overall operation of the measures..........................................................................................164  
(c) Exceptions under the measures...............................................................................................164  
(i) Exemption of CKD and SKD kits from the admin istrative procedures - Article 2(2) of 
Decree 125..................................................................................................................... .........164  
(ii) Imported auto parts that have been substan tially processed in China – Article 24 of 
Decree 125..................................................................................................................... .........166  
2. Products at issue.............................................................................................................. ......167  
(a) Scope of the products at issue................................................................................................. 167 
(b) Product terms referenced in the measures at issue..................................................................168  
3. Burden of proof................................................................................................................ .....169  
4. Panel's order of analysis...................................................................................................... .169 
B. ARTICLE  III OF THE GATT  1994.............................................................................................171  
1. Are the measures consistent with Article III:2, first sentence, of the GATT 1994? .......171  
(a) Charge under th e measures .....................................................................................................1 73 
(i) Arguments of the parties ....................................................................................................... ..173  
(ii) Consideration by the Panel..................................................................................................... 174 
(b) Is the charge an "internal charge" within  the meaning of Article III:2 of the GATT 
1994?.......................................................................................................................... .............175  
(i) Overview of the arguments of the parties ...............................................................................175  WT/DS339/R 
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  (ii)
 Internal taxes or other internal charges w ithin the meaning of Article III:2 of the 
GATT 1994...................................................................................................................... ........178  
Arguments of the parties ....................................................................................................... ................ 178  
Consideration by  the Panel..................................................................................................... ............... 179  
"Ordinary customs duties" within the meanin g of Article II:1(b) of the GATT 1994 ................... 181  
Ordinary meaning of an "o rdinary custom s duty" ......................................................................... 182  
"Ordinary customs duties" in the context of the first sentence of Article II:1(b) - "on their 
importation"................................................................................................................... ................ 183  
Arguments of the parties ....................................................................................................... .... 183  
Consideration by  the Panel..................................................................................................... ... 188  
"Ordinary customs duties" in the context of the second sentence of Article II:1(b) – "on or 
in connection with  the importation"............................................................................................ ... 192  
Arguments of the parties ....................................................................................................... .... 192  
Consideration by  the Panel..................................................................................................... ... 194  
Subsequent practice ............................................................................................................ ........... 196  
Conclusion ..................................................................................................................... ................ 198  
Object and purpose of the WTO Ag reement and the GATT 1994 ................................................ 202  
Arguments of the parties ....................................................................................................... .... 202  
Consideration by  the Panel..................................................................................................... ... 203  
Is the charge under the measures an "ordinary customs duty" within the scope of 
Article II:1(b), first sentence, or an "internal charge" within the meaning of Article III:2? .......... 204  
(iii) Conclusion ..................................................................................................................... .........206  
(c) Are imported auto parts like domestic auto parts?..................................................................207  
(i) Arguments of the parties ....................................................................................................... ..207  
(ii) Consideration by the Panel..................................................................................................... 207 
(d) Are imported auto parts subject to intern al taxes and charges in excess of those 
applied to domestic products?.................................................................................................2 07 
(i) Arguments of the parties ....................................................................................................... ..207  
(ii) Consideration by the Panel..................................................................................................... 208 
(e) Conclusion ..................................................................................................................... .........208  
2. Are the measures consistent with Article III:2, second sentence, of the GATT 
1994? .......................................................................................................................... ............209  
(a) Arguments of the parties....................................................................................................... ..209  
(b) Consideration by  the Panel ..................................................................................................... 209 
3. Are the measures consistent with Article III:4 of the GATT 1994?.................................209  
(a) Are imported auto parts like domestic auto parts?..................................................................210  
(i) Arguments of the parties ....................................................................................................... ..210  
(ii) Consideration by the Panel..................................................................................................... 211  WT/DS339/R 
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  (b)
 Are the measures a "law, regulation, or requirement" within the meaning of 
Article III:4? ................................................................................................................. ..........211  
(i) Arguments of the parties ....................................................................................................... ..211  
(ii) Consideration by the Panel..................................................................................................... 211 
(c) Are the measures a law, regulation, or requirement "affecting the internal sale, 
offering for sale, purchase, transportation, distribution, or use" of imported auto 
parts?......................................................................................................................... ..............212  
(i) Arguments of the parties ....................................................................................................... ..212  
(ii) Consideration by the Panel..................................................................................................... 214 
(d) Do the measures accord less favourable tr eatment to imported auto parts than to 
domestic auto parts?........................................................................................................... .....217  
(i) Arguments of the parties ....................................................................................................... ..217  
(ii) Consideration by the Panel..................................................................................................... 218 
(e) Conclusion ..................................................................................................................... .........220  
4. Are the measures consistent with Article III:5 of the GATT 1994?.................................220  
(a) Arguments of the parties....................................................................................................... ..220  
(b) Consideration by  the Panel ..................................................................................................... 220 
5. Are the measures justified under Ar ticle XX(d) of the GATT 1994? ..............................221  
(a) What is the law or regulation that the measures at issue secure compliance with 
within the meaning of Article XX(d)? ....................................................................................224  
(i) China's interpretation of the tariff provisions for motor vehicles...........................................224  
(ii) China's tariff schedule ........................................................................................................ ....227  
(b) Are the measures designed to secure compliance with the law or regulation?.......................227  
(i) Whether the measures are "designed" to  secure compliance with the law or 
regulation..................................................................................................................... ...........228  
(ii) Whether the measures "secure complian ce" with the law or regulation ................................233  
(iii) Conclusion ..................................................................................................................... .........242  
(c) Are China's measures "necessary" to secure compliance with China's tariff schedule?.........242  
(d) Conclusion ..................................................................................................................... .........249  
C. TRIM S AGREEMENT ...............................................................................................................249  
D. ARTICLE  II OF THE GATT 1994 ................................................................................................249  
1. Treatment of auto parts und er China's Sche dule CLII ....................................................250  
2. Treatment of auto parts under China's measures – multiple shipments ..........................252  
(a) Interpretation of China's Schedule of Concessions.................................................................252  
(i) Ordinary meaning of the tariff term "motor vehicles"............................................................252  
(ii) Context for the tariff t erm "motor vehicles"............................................................................253  WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page xii 
  
  Other terms in the tariff headings for motor vehicl es and other tariff head ings in Chapter 87 ............. 253  
Harmonized System .............................................................................................................. ................ 253  
General Interpretative Rules for the HS:  relationship between GIRs 1 and 2............................... 253  
Application of GIR 2(a), in conjunction with GIR 1, to the tariff headings for "motor 
vehicles" ...................................................................................................................... .................. 255  
"As presented" – ordinary meaning........................................................................................... 261  
"As presented" – the HS  Committee D ecision .......................................................................... 262  
Interpretive weight to be given to the HS Committ ee Decision ................................................ 262  
The HS Committee Decision and the interpreta tion of "as presented" in GIR 2(a)................... 265  
Conclusion..................................................................................................................... ........................ 276  
(iii) Object and purpose............................................................................................................. ....276  
(iv) Subsequent practice ............................................................................................................ ....279  
China's own practic e........................................................................................................... ................... 279  
Other Members' practice – In general ................................................................................................... 280  
Other Members' practice – Canada's furniture classification decision ................................................. 282  
Other members' practice – Anti-circumvention of anti-dumping and countervailing duties ................. 284  
Anti-dumping duties and ordi nary customs duties......................................................................... 284  
Anti-circumvention measures in re spect of anti-dump ing duties................................................... 287  
Anti-circumvention measures:  EC bicycl e case and US prin ting press case ................................ 289  
Other Members' practice – "split shipments"................................................................................. 291  
Conclusion..................................................................................................................... ........................ 291  
(v) Supplementary means of interpretation ..................................................................................292  
(b) Conclusion ..................................................................................................................... .........294  
3. Treatment of auto parts im ports under China's measures - essential character 
test under Articles 21 and 22 of Decree 125 ..........................................................................295  
(a) "Essential character" t est under GIR 2(a) ...............................................................................295  
(i) Circumstances under which the essential charact er test under GIR 2(a) is applicable.........295  
(ii) Panel's task in respect of th e complainants' claim on the essential character test 
under the me asures ............................................................................................................. ....295  
(iii) Preliminary issue:  pre-determined cri teria for the essential character test..........................298  
(b) Essential character test under  the measures at issue ...............................................................302  
(i) Overview of the arguments of the parties ...............................................................................303  
(ii) Criteria under Article 21(2) of Decree 125 ............................................................................305  
(iii) Criterion for essential character under Article 21(3) of Decree 125 .....................................311  
"Value" as a criterion for the essen tial character dete rmination............................................................ 313  
Criteria for the essential character determination under Article 21(2) and 21 (3) of Decree 125 .......... 315  
(iv) Criteria for Deemed Imported Assemb lies under Article 22 of Decree 125...........................317   WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page xiii 
  
  (c)
 Conclusion ..................................................................................................................... .........318  
4. China's justification of the measures under Article XX(d)...............................................318  
E. SUBSIDIES AGREEMENT ..........................................................................................................319  
1. Arguments of th e parties......................................................................................................3 19 
2. Consideration by the Panel ..................................................................................................323  
F. CKD  AND SKD  KITS ...............................................................................................................323  
1. Complaining parties' claims.................................................................................................323  
2. Scope of CKD and SKD kits ................................................................................................324  
3. Is China's treatment of CKD and SKD kit imports under the measures 
consistent with Article II:1(b) of the GATT 1994? ............................................................327  
(a) Treatment of CKD and SKD kits under China's measures .....................................................327  
(b) Interpretation of China's Schedule of Concessions.................................................................327  
(i) Tariff term to be interpreted .................................................................................................. .328 
(ii) Ordinary meaning of the t erm "motor vehicles".....................................................................329  
(iii) Context for the tariff t erm "motor vehicles"............................................................................330  
What constitutes context for interpreting the tariff term "mot or vehicles"?.......................................... 330  
Other terms in the tariff headings for motor vehicl es and other tariff head ings in Chapter 87 ............. 332  
Other Members'  Schedules....................................................................................................... ............. 333  
Harmonized System .............................................................................................................. ................ 333  
General Explanatory Notes for Chapter 87 and GIR 2(a).............................................................. 333  
Explanatory Note (V II) to GIR 2(a)............................................................................................. .. 336 
(iv) Object and purpose............................................................................................................. ....339  
(v) Subsequent practice ............................................................................................................ ....340  
China's practice since its  accession to  the WTO ................................................................................ ... 341  
Complainants' practice since Chin a's accession to the WTO ................................................................ 343  
Other WTO Members' practice since China's accession to  the WTO ................................................... 344  
(vi) Supplementary means of interpretation ..................................................................................344  
(c) Conclusion ..................................................................................................................... .........349  
4. Is China's treatment of CKD and SKD kit imports under the measures 
consistent with China's commitment under paragraph 93 of China's Working Party Report?.................................................................................................................. ......349
 
(a) What is China's commitment under paragr aph 93 of the Working Party Report?..................349  
(b) Has China created tariff lin es for CKD and SKD kits? ..........................................................350  
(c) Conclusion ..................................................................................................................... .........354  
G. OTHER CLAIMS ........................................................................................................................355  
1. European Communities (DS339) .........................................................................................355  WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page xiv 
  
  2.
 United States (DS340).......................................................................................................... .355 
3. Canada (DS342) ................................................................................................................. ...355  
VIII.  CONCLUSIONS AND RECOMMENDATIONS..............................................................355  
A. COMPLAINT BY THE EUROPEAN COMMUNITIES (DS339):   CONCLUSIONS AND 
RECOMMENDATIONS OF THE PANEL ........................................................................................356  
B. COMPLAINT BY THE UNITED STATES (DS340):   CONCLUSIONS AND 
RECOMMENDATIONS OF THE PANEL .......................................................................................357  
C. COMPLAINT BY CANADA (DS342):   CONCLUSIONS AND RECOMMENDATIONS OF THE 
PANEL ............................................................................................................................... ......358  
 
  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page xv 
  
  ANNEX A 
 
RESPONSES AND COMMENTS BY THE PARTIES TO QUESTIONS 
POSED BY THE PANEL AND OTHER PARTIES 
 
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 of Parties to an  Additional Question A-360 
Annex A-4 Response of China to a Question from the United States following the 
Second Substantive Meeting A-371 
 
ANNEX B 
 
RESPONSES OF THIRD PARTIES TO QUESTIONS 
POSED BY THE PANEL AND THE PARTIES 
 
CONTENTS PAGE 
Annex B-1 Responses of Argentina to Questions from the Panel B-2 
Annex B-2 Responses of Australia to Questions from the Panel B-5 
Annex B-3 Responses of Brazil to Questions from the Panel B-15 
Annex B-4 Responses of Japan to Questions from the Panel B-19 
Annex B-5 Responses of Mexico to Questions from the Panel B-28 
 
ANNEX C1 
 
CORRESPONDENCE BETWEEN THE PANEL AND  
THE WORLD CUSTOMS ORGANISATION 
 
CONTENTS PAGE 
Annex C-1 Letter dated 7 June 2007 from the Panel to the Secretariat of the WCO C-2 
Annex C-2 Letter dated 20 June 2007 from the Secretariat of the WCO to the panel C-5 
Annex C-3 Letter dated 16 July 2007 from th e Panel to the Secretariat of the WCO C-11 
Annex C-4 Letter dated 30 July 2007 from th e Secretariat of the WCO to the Panel C-14 
Annex C 5 China's Comments on the Response of the WCO dated 30 July 2007 C-25 
Annex C-6 Observations of the European Communities on the letter of the 
Secretariat of the WCO of 30 July 2007 C-30 
Annex C-7 Canada's Comments on the WCO Responses C-36 
                                                      
1 Parties' comments to the WCO letter of 20 June 2007 were included in their respective subsequent 
submissions.  The United States' comments to the WCO letter of 30 July 2007 were included in their comments 
on China's responses to written questions from the Panel after the second meeting. WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page xvi 
  
   
ANNEX D 
 
CORRESPONDENCE BETWEEN THE PANEL AND UNOG  
 
CONTENTS PAGE 
Annex D-1 Letter dated 15 August 20 07 from the Panel to UNOG  D-2 
Annex D-2 Letter dated 16 August from UNOG to the Panel  D-3 
 
 
ANNEX E 
 
COMMON TRANSLATIONS OF THE MEASURES 
 
CONTENTS PAGE 
Annex E-1 Translation of Policy Order 8 as agreed by the Parties E-2 
Annex E-2 Translation of Decree 125 as agreed by the Parties E-18 
Annex E-3 Translation of Announcement 4 as agreed by the Parties E-34 
 
  WT/DS339/R 
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 WT/DS342/R 
 Page xvii 
  
  TABLE OF CASES CITED IN THIS REPORT 
 
Short Title Full Case Title and Citation 
Argentina – Hides and Leather Panel Report, Argentina – Measures Affecting the Export of Bovine Hides and 
Import of Finished Leather , WT/DS155/R and Corr.1, adopted 16 February 2001, 
DSR 2001:V, 1779 
Argentina – Textiles and 
Apparel  Appellate Body Report, Argentina – Measures Affecting Imports of Footwear, 
Textiles, Apparel and Other Items , WT/DS56/AB/R and Corr.1, adopted 22 April 
1998, DSR 1998:III, 1003 
Belgium – Family Allowances (allocations familiales)  GATT Panel Report, Belgian Family Allowances,  G/32, adopted 
7 November 1952, BISD 1S/59 
Brazil – Retreaded Tyres Panel Report, Brazil – Measures Affecting Imports of Retreaded Tyres , 
WT/DS332/R, adopted 17 December 2007, as modified by Appellate Body 
Report, WT/DS332/AB/R 
Canada – Aircraft  Appellate Body Report, Canada – Measures Affecting the Export of Civilian 
Aircraft , WT/DS70/AB/R, adopted 20 August 1999, DSR 1999:III, 1377 
Canada – Autos Panel Report, Canada – Certain Measures Affecting the Automotive Industry , 
WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified by Appellate 
Body 
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of Milk 
and the Exportation of Dairy Products , WT/DS103/AB/R, WT/DS113/AB/R and 
Corr.1, adopted 27 October 1999, DSR 1999:V, 2057 
Canada – FIRA GATT Panel Report, Canada – Administration of the Foreign Investment 
Review Act , L/5504, adopted 7 February 1984, BISD 30S/140 
Canada – Gold Coins GATT Panel Report, Canada – Measures Affecting the Sale of Gold Coins , 
L/5863, 17 September 1985, unadopted 
Canada – Periodicals Appellate Body Report, Canada – Certain Measures Concerning Periodicals , 
WT/DS31/AB/R, adopted 30 July 1997, DSR 1997:I, 449 
Canada – Periodicals Panel Report, Canada – Certain Measures Concerning Periodicals , WT/DS31/R 
and Corr.1, adopted 30 July 1997, as modified by Appellate Body Report, 
WT/DS31/AB/R, DSR 1997:I, 481 
Canada – Wheat Exports and 
Grain Imports Appellate Body Report, Canada – Measures Relating to Exports of Wheat and 
Treatment of Imported Grain , WT/DS276/AB/R, adopted 27 September 2004, 
DSR 2004:VI, 2739 
Canada – Wheat Exports and 
Grain Imports Panel Report, Canada – Measures Relating to Exports of Wheat and Treatment of 
Imported Grain , WT/DS276/R, adopted 27 September 2004, upheld by Appellate 
Body Report, WT/DS276/AB/R, DSR 2004:VI, 2817 
Chile – Alcoholic Beverages Panel Report, Chile – Taxes on Alcoholic Beverages , WT/DS87/R, WT/DS110/R, 
adopted 12 January 2000, as modified by Appellate Body Report, 
WT/DS87/AB/R, WT/DS110/AB/R, DSR 2000:I, 303 
Chile – Price Band System Appellate Body Report, Chile – Price Band System and Safeguard Measures 
Relating to Certain Agricultural Products , WT/DS207/AB/R and Corr.1, adopted 
23 October 2002, DSR 2002:VIII, 3045 
Chile – Price Band System Panel Report, Chile – Price Band System and Safeguard Measures Relating to 
Certain Agricultural Products , WT/DS207/R, adopted 23 October 2002, as 
modified by Appellate Body Report, WT/DS207AB/R, DSR 2002:VIII, 3127 WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page xviii 
  
  Short Title Full Case Title and Citation 
Dominican Republic – Import 
and Sale of Cigarettes Appellate Body Report, Dominican Republic – Measures Affecting the 
Importation and Internal Sale of Cigarettes , WT/DS302/AB/R, adopted 19 May 
2005 
Dominican Republic – Import 
and Sale of Cigarettes Panel Report, Dominican Republic – Measures Affecting the Importation and 
Internal Sale of Cigarettes , WT/DS302/R, adopted 19 May 2005, as modified by 
Appellate Body Report, WT/DS302/AB/R, DSR 2005:XV, 7425 
EEC – Animal Feed Proteins  GATT Panel Report, EEC – Measures on Animal Feed Proteins , L/4599, 
adopted 14 March 1978, BISD 25S/49 
EC – Asbestos  Appellate Body Report, European Communities – Measures Affecting Asbestos 
and Asbestos-Containing Products , WT/DS135/AB/R, adopted 5 April 2001, 
DSR 2001:VII, 3243 
EC – Asbestos  Panel Report, European Communities – Measur es Affecting Asbestos and 
Asbestos-Containing Products , WT/DS135/R and Add.1, adopted 5 April 2001, 
as modified by Appellate Body Report, WT/DS135/AB/R, DSR 2001:VIII, 3305 
EEC – Bananas II GATT Panel Report, EEC – Import Regime for Bananas , DS38/R, 
11 February 1994, unadopted 
EC – Bananas III Appellate Body Report, European Communities – Regime for the Importation, 
Sale and Distribution of Bananas , WT/DS27/AB/R, adopted 25 September 1997, 
DSR 1997:II, 591 
EC – Bananas III (US) Panel Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas, Complaint by the United States , WT/DS27/R/USA, 
adopted 25 September 1997, as modified by Appellate Body Report, WT/DS27/AB/R, DSR 1997:II, 943 
EC – Bed Linen  
(Article 21.5 – India)  Appellate Body Report, European Communities – Anti-Dumping Duties on 
Imports of Cotton-Type Bed Linen from I ndia – Recourse to Article 21.5 of the 
DSU  by India , WT/DS141/AB/RW, adopted 24 April 2003, DSR 2003:III, 965  
EC – Chicken Cuts Appellate Body Report, European  Communities – Customs Classification of 
Frozen Boneless Chicken Cuts , WT/DS269/AB/R, WT/DS286/AB/R, and 
Corr.1, adopted 27 September 2005 
EC – Chicken Cuts (Brazil) Panel Report, European  Communities – Customs Classification of Frozen 
Boneless Chicken Cuts, Complaint by Brazil , WT/DS269/R, adopted 
27 September 2005, as modified by Appellate Body Report, WT/DS269/AB/R, 
WT/DS286/AB/R, DSR 2005:XIX, 9295 
EC – Chicken Cuts (Thailand) Panel Report, European  Communities – Customs Classification of Frozen 
Boneless Chicken Cuts, Complaint by Thailand , WT/DS286/R, adopted 
27 September 2005, as modified by Appellate Body Report, WT/DS269/AB/R, 
WT/DS286/AB/R, DSR 2005:XX, 9721 
EC – Computer Equipment  Appellate Body Report, European Communities – Customs Classification of 
Certain Computer Equipment , WT/DS62/AB/R, WT/DS67/AB/R, 
WT/DS68/AB/R, adopted 22 June 1998, DSR 1998:V, 1851 
EC – Export Subsidies on 
Sugar Appellate Body Report, European Communities – Export Subsidies on Sugar , 
WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, adopted 19 May 2005 
EC – Export Subsidies on Sugar (Australia) Panel Report, European Communities – Export Subsidies on Sugar, Complaint by 
Australia , WT/DS265/R, adopted 19 May 2005, as modified by Appellate Body 
Report, WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, DSR 
2005:XIII, 6499  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page xix 
  
  Short Title Full Case Title and Citation 
EC – Export Subsidies on 
Sugar (Brazil) Panel Report, European Communities – Export Subsidies on Sugar, Complaint by 
Brazil , WT/DS266/R, adopted 19 May 2005, as modified by Appellate Body 
Report, WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, DSR 
2005:XIV, 6793 
EC – Export Subsidies on 
Sugar (Thailand) Panel Report, European Communities – Export Subsidies on Sugar, Complaint by 
Thailand , WT/DS283/R, adopted 19 May 2005, as modified by Appellate Body 
Report, WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, DSR 2005:XIV, 7071 
EC – Hormones  Appellate Body Report, EC Measures Concerning Meat and Meat Products 
(Hormones) , WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, 
DSR 1998:I, 135 
EEC – Imports of Beef  GATT Panel Report, European Economic Community – Imports of Beef from 
Canada , L/5099, adopted 10 March 1981, BISD 28S/92 
EEC – Parts and Components  GATT Panel Report, European Economic Community – Regulation on Imports 
of Parts and Components , L/6657, adopted 16 May 1990, BISD 37S/132 
EC – Poultry Appellate Body Report, European Communities – Measures Affecting the 
Importation of Certain Poultry Products , WT/DS69/AB/R, adopted 23 July 1998, 
DSR 1998:V, 2031 
EC – Sardines  Appellate Body Report, European Communities – Trade Description of Sardines , 
WT/DS231/AB/R, adopted 23 October 2002, DSR 2002:VIII, 3359 
EC – Selected Customs Matters Appellate Body Report, European Communities – Selected Customs Matters , 
WT/DS315/AB/R, adopted 11 December 2006 
EC – Selected Customs Matters Panel Report, European Communities – Selected Customs Matters , WT/DS315/R, 
adopted 11 December 2006, as modified by Appellate Body Report, 
WT/DS315/AB/R 
EC – Tariff Preferences Panel Report, European Communities – Conditions for the Granting of Tariff 
Preferences to Developing Countries , WT/DS246/R, adopted 20 April 2004, as 
modified by Appellate Body Report, WT/DS/246/AB/R, DSR 2004:III, 1009 
EC – Trademarks and 
Geographical Indications (US) Panel Report,  European Communities – Protection of Trademarks and 
Geographical Indications for Agricultural Products and Foodstuffs, Complaint by the United States , WT/DS174/R, adopted 20 April 2005, DSR 2005:VIII-IX, 
3499 
Greece – Import Taxes  GATT Panel Report, Special Import Taxes Instituted by Greece,  G/25, adopted 
3 November 1952, BISD 1S/48 
India – Autos  Panel Report, India – Measures Affecting the Automotive Sector , WT/DS146/R, 
WT/DS175/R and Corr.1, adopted 5 April 2002, DSR 2002:V, 1827 
India – Patents (US) Appellate Body Report, India – Patent Protection for Pharmaceutical and 
Agricultural Chemical Products , WT/DS50/AB/R, adopted 16 January 1998, 
DSR 1998:I, 9 
Indonesia – Autos  Panel Report, Indonesia – Certain Measures Affecting the Automobile Industry , 
WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R and Corr.1, 2, 3 and 4, 
adopted 23 July 1998, DSR 1998:VI, 2201 
Italy – Agricultural Machinery  GATT Panel Report, Italian Discrimination Against Imported Agricultural 
Machinery , L/833, adopted 23 October 1958, BISD 7S/60 WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page xx 
  
  Short Title Full Case Title and Citation 
Japan – Alcoholic Beverages I GATT Panel Report, Japan – Customs Duties, Taxes and Labelling Practices 
on Imported Wines and Alcoholic Beverages , L/6216, adopted 
10 November 1987, BISD 34S/83 
Japan – Alcoholic Beverages II  Appellate Body Report, Japan – Taxes on Alcoholic Beverages , WT/DS8/AB/R, 
WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97  
Japan – Film Panel Report, Japan – Measures Affecting Consumer Photographic Film and 
Paper , WT/DS44/R, adopted 22 April 1998, DSR 1998:IV, 1179 
Japan – Semi-Conductors GATT Panel Report, Japan – Trade in Semi-Conductors , L/6309, adopted 
4 May 1988, BISD 35S/116 
Korea – Alcoholic Beverages Panel Report, Korea – Taxes on Alcoholic Beverages , WT/DS75/R, WT/DS84/R, 
adopted 17 February 1999, as modified by Appellate Body Report, 
WT/DS75/AB/R, WT/DS84/AB/R, DSR 1999:I, 44 
Korea – Various Measures on 
Beef  Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled 
and Frozen Beef , WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, 
DSR 2001:I, 5 
Korea – Various Measures on 
Beef Panel Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen 
Beef, WT/DS161/R, WT/DS169/R, adopted 10 January 2001, as modified by 
Appellate Body Report, WT/DS161/AB/R, WT/DS169/AB/R, DSR 2001:I, 59 
Mexico – Taxes on Soft Drinks Appellate Body Report, Mexico – Tax Measures on Soft Drinks and Other 
Beverages , WT/DS308/AB/R, adopted 24 March 2006 
Mexico – Taxes on Soft Drinks Panel Report, Mexico – Tax Measures on Soft Drinks and Other Beverages , 
WT/DS308/R, adopted 24 March 2006, as modified by Appellate Body Report, 
WT/DS308/AB/R 
Turkey – Rice Panel Report, Turkey – Measures Affecting the Importation of Rice , 
WT/DS334/R, adopted 22 October 2007 
Turkey – Textiles Panel Report, Turkey – Restrictions on Imports  of Textile and Clothing Products , 
WT/DS34/R, adopted 19 November 1999, as modified by Appellate Body Report, WT/DS34/AB/R, DSR 1999:VI, 2363 
US – 1916 Act (EC)  Panel Report, United States – Anti-Dumping Act of 1916, Complaint by the 
European Communities , WT/DS136/R and Corr.1, adopted 26 September 2000, 
upheld by Appellate Body Report, WT/DS136/AB/R, WT/DS162/AB/R, DSR 2000:X, 4593 
US – 1916 Act (Japan) Panel Report, United States – Anti-Dumping Act of 1916, Complaint by Japan , 
WT/DS162/R and Add.1, adopted 26 September 2000, upheld by Appellate Body 
Report, WT/DS136/AB/R, WT/DS162/AB/R, DSR 2000:X, 4831 
US – Carbon Steel Appellate Body Report, United States – Countervailing Duties on Certain 
Corrosion-Resistant Carbon Steel Flat Products from Germany , 
WT/DS213/AB/R and Corr.1, adopted 19 December 2002, DSR 2002:IX, 3779 
US – Certain EC Products  Appellate Body Report, United States – Import Measures on Certain Products 
from the European Communities , WT/DS165/AB/R, adopted 10 January 2001, 
DSR 2001:I, 373 
US – Countervailing Measures 
on Certain EC Products 
(Article 21.5 – EC) Panel Report, United States – Countervailing Measures Concerning Certain 
Products from the European Communities – Recourse to Article 21.5 of the DSU 
by the European Communities , WT/DS212/RW, adopted 27 September 2005, 
DSR 2005:XVIII, 8950  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page xxi 
  
  Short Title Full Case Title and Citation 
US – FSC  Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" , WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619 
US – FSC  
(Article 21.5 – EC) Appellate Body Report, United States – Tax Treatment for "Foreign Sales 
Corporations" – Recourse to Articl e 21.5 of the DSU by the European 
Communities , WT/DS108/AB/RW, adopted 29 January 2002, DSR 2002:I, 55 
US – FSC  
(Article 21.5 – EC II) Panel Report, United States – Tax Treatment for "Foreign Sales Corporations" 
 – Second Recourse to Article 21.5 of the DSU by the European Communities , 
WT/DS108/RW2, adopted 14 March 2006, upheld by Appellate Body Report, WT/DS108/AB/RW2 
US – Gambling Appellate Body Report, United States – Measures Affecting the Cross-Border 
Supply of Gambling and Betting Services , WT/DS285/AB/R and Corr.1, 
adopted 20 April 2005 
US – Gasoline  Appellate Body Report, United States – Standards for Reformulated and 
Conventional Gasoline , WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3 
US – Gasoline Panel Report, United States – Standards for Reformulated and Conventional 
Gasoline , WT/DS2/R, adopted 20 May 1996, as modified by Appellate Body 
Report, WT/DS2/AB/R, DSR 1996:I, 29 
US – Lamb Appellate Body Report, United States – Safeguard Measures on Imports of Fresh, 
Chilled or Frozen Lamb Meat from New Zealand and Australia , 
WT/DS177/AB/R, WT/DS178/AB/R, adopted 16 May 2001, DSR 2001:IX, 4051 
US – Malt Beverages GATT Panel Report, United States – Measures Affecting Alcoholic and Malt 
Beverages , DS23/R, adopted 19 June 1992, BISD 39S/206 
US – Offset Act  
(Byrd Amendment ) Panel Report, United States – Continued Dumping and Subsidy Offset Act of 
2000 , WT/DS217/R, WT/DS234/R, adopted 27 January 2003, as modified by 
Appellate Body Report, WT/DS217/AB/R, WT/DS234/AB/R, DSR 2003:II, 489 
US – Section 337 Tariff Act GATT Panel Report, United States Section 337 of the Tariff Act of 1930 , 
L/6439, adopted 7 November 1989, BISD 36S/345 
US – Shrimp  Appellate Body Report, United States – Import Prohibition of Certain Shrimp and 
Shrimp Products , WT/DS58/AB/R, adopted 6 November 1998, DSR 1998:VII, 
2755 
US – Softwood Lumber IV  Appellate Body Report, United States – Final Countervailing Duty Determination 
with Respect to Certain Softwood Lumber from Canada , WT/DS257/AB/R, 
adopted 17 February 2004, DSR 2004:II, 571 
US – Sugar  GATT Panel Report, United States Restrictions on Imports of Sugar , L/6514, 
adopted 22 June 1989, BISD 36S/331 
US – Superfund  GATT Panel Report, United States – Taxes on Petroleum and Certain Imported 
Substances , L/6175, adopted 17 June 1987, BISD 34S/136 
US – Tobacco GATT Panel Report, United States Measures Affecting the Importation, Internal 
Sale and Use of Tobacco , DS44/R, adopted 4 October 1994, BISD 41S/131 
US – Upland Cotton Appellate Body Report, United States – Subsidies on Upland Cotton , 
WT/DS267/AB/R, adopted 21 March 2005, DSR 2005:I, 3 WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page xxii 
  
  Short Title Full Case Title and Citation 
US – Wool Shirts and Blouses  Appellate Body Report, United States – Measure Affecting Imports of Woven 
Wool Shirts and Blouses from India , WT/DS33/AB/R and Corr.1, adopted 
23 May 1997, DSR 1997:I, 323 
  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page xxiii 
  
  LIST OF ABBREVIATIONS 
 
 
Accession Protocol  Protocol on the Accession of China to the WTO 
 CGA    General Administration of Customs  CKD    Completely Knocked Down 
 
DSU  Understanding on Rules and Pro cedures Governing the Settlement of 
Disputes 
 GATT 1947   General Agreement on Tariffs and Trade 1947 
 
GATT 1994   General Agreement on Tariffs and Trade 1994  GIR    General Rules for the Interpretation of the Harmonized System  HS    Harmonized System 
 
NDRC    National Development and Reform Commission  SCM Agreement  Agreement on Subsidies and Countervailing Measures  
SKD    Semi-Knocked Down 
 TRIMs Agreement  Agreement on Trade-Related Investment Measures  UNOG    United Nations Office at Geneva  
Verification Centre National Professional Centre for Verification of the Character of 
Complete Vehicles 
 Vienna Convention   Vienna Convention on the Law of Treaties 
 
WCO    World Customs Organization 
 Working Party Report  Working Party Report on the Accession of China    WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page 1 
  
  I. INTRODUCTION 
A. C
OMPLAINTS OF THE EUROPEAN COMMUNITIES , THE UNITED STATES AND CANADA  
1.1 On 30 March 2006, the European Communities requested consultations with the People's 
Republic of China (hereinafter "China") pursuant to  Article 4 of the DSU, Article XXII:1 of the 
GATT 1994, Article 8 of the TRIMs Agreement and Articles 4 and 30 of the SCM Agreement 
regarding China's imposition of measures that allegedl y adversely affect exports of automobile parts 
from the European Co mmunities to China.2 
1.2 Consultations were held between the European Communities and China on 11 and 
12 May 2006 in Geneva on these and other measures.  They did not lead to a satisfactory resolution of 
the matter. 
1.3 On 30 March 2006, the United States requested consultations with China pursuant to 
Articles 1 and 4 of the DSU, Article XXII of th e GATT 1994, Article 8 of the TRIMs Agreement (to 
the extent that Article 8 incorporates Article XXII of the GATT 1994), and Articles 4 and 30 of the 
SCM Agreement (to the extent that Article 30 incorporates Article XXII of the GATT 1994) with 
respect to China's treatment of motor vehicle parts, components, and accessories imported from the 
United States.3 
1.4 Consultations were held between the United States and China on 11 and 12 May 2006 in 
Geneva.  However, they did not resolve the dispute. 
1.5 On 13 April 2006, Canada requested consultations with China pursuant to Articles 1 and 4 of 
the DSU, Article XXII of the GATT 1994, Article 7 of the Agreement on Rules of Origin (ARO), 
Article 8 of the TRIMs Agreement, and Articles 4 and 30 of the SCM Agreement with respect to China's treatment of automobile parts from Canada.
4 
1.6 Consultations were held between Canada and China on 11 and 12 May 2006 with a view to 
reaching a mutually satisfactory solution.  Unfort unately, the consultations failed to resolve the 
dispute. 
1.7 On 15 September 2006, the European Communities, the United States and Canada each 
requested the establishment of a panel.  At its meeting on 28 September 2006, the Dispute Settlement 
Body deferred the establishments of a panel. 
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL  
1.8 At its meeting on 26 October 2006, the DSB established a single Panel pursuant to the 
requests of the European Communities in documen t WT/DS339/8, the United States in document 
WT/DS340/8 and Canada in document WT/DS342/8 in accordance with Article 9.1 of the DSU.5 
1.9 At that meeting, the parties to the dispute agre ed that the Panel should have standard terms of 
reference.  The Panel's terms of reference are, therefore, as follows: 
                                                      
2 WT/DS339/1 of 3 April 2006. 
3 WT/DS340/1 of 3 April 2006. 
4 WT/DS342/1 of 19 April 2006. 
5 WT/DSB/M/221, para. 54. WT/DS339/R 
WT/DS340/R WT/DS342/R 
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  "To examine, in the light of the relevant provisions of the covered agreements cited 
by the European Communities in document WT/DS339/8, the United States in documents WT/DS340/8 and Canada in doc ument WT/DS342/8, the matter referred 
to the DSB by the European Communities, the United States, and Canada in those 
documents, and to make such findings as will assist the DSB in making the 
recommendations or in giving the rulings provided for in those agreements." 
1.10 On 19 January 2007, the European Communities,  the United States and Canada requested the 
Director-General to determine the composition of the Panel, pursuant to para graph 7 of Article 8 of 
the DSU.   
1.11 On 29 January 2007, the Director-General accordingly composed the Panel as follows:
6 
 Chairman: Mr Julio Lacarte-Muró 
  Members: Mr Ujal Singh Bhatia 
   Mr Wilhelm Meier 
 1.12 Argentina, Australia, Brazil, Japan, Mexico, Ch inese Taipei and Thailand have reserved their 
rights to participate in the Panel proceedings as third parties. 
C. P
ANEL PROCEEDINGS  
1.13 The Panel held the first substantive meeting with the parties on 22 and 24 May 2007.  The 
session with the third parties took place on 23 May 2007.  The Panel's second substantive meeting 
with the parties was held on 12 and 13 July 2007. 
1.14 On 20 September 2007, the Panel issued the descriptive part of its Panel Report.  The Panel 
submitted its Interim Reports to the parties on 13 February 2008.  The Panel submitted its Final 
Reports to the parties on 20 March 2008. 
II. FACTUAL ASPECTS 
A. MEASURES AT ISSUE  
2.1 This case concerns China's measures on imports  of automobile parts.  The European 
Communities, the United States and Canada have id entified the following as the measures at issue in 
this case:7 
(a) Policy on Development of Automotive Indus try (Order of the National Development 
and Reform Commission (No. 8)) ("Policy Order 8"), which entered into force on 21 
May 2004; 
(b) Administrative Rules on Importation of Automobile Parts Characterized as Complete 
Vehicles (Decree of the People's Republic  of China, No. 125) ("Decree 125"), which 
entered into force on 1 April 2005; and 
                                                      
6 WT/DS339/9, WT/DS340/9 and WT/DS342/9 of 30 January 2007. 
7 The titles and terms of China's measures used in thes e reports follow those provided in the texts of the 
common translations of the measures as agreed by the parties, attached as Annex E to these reports.  See 
paras. 2.2-2.4 for procedural aspects of the common translations of China's measures.    WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
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  (c) Rules on Verification of Imported Automobile Parts Characterized as Complete 
Vehicles (Public Announcement of the Customs General Administration of the People's Republic of China, No. 4 of 2005) ("Announcement 4"), which entered into 
force on 1 April 2005. 
B. T
RANSLATION OF CHINA 'S MEASURES  
2.2 Regarding China's measures at issue, the European Communities, the United States and 
Canada (also "co-complainants" he reinafter) submitted their unofficial translations of the measures 
into English as part of the joint exhibits attached to their first written submissions.8  China also 
submitted its own unofficial translations of Chapte r XI of Policy Order 8, of Decree 125 and of 
Announcement 4 as part of the exhibits attached to its first written submission.9 
2.3 At the second substantive meeting with the parti es, the Panel requested the parties to agree on 
one common translated version of China's measure s.  Accordingly, on 2 August 2007, the parties 
submitted common translations of all provisions of China's measures except for Article 28 of 
Decree 125.10 
2.4 Upon the complainants' request that the Panel seek  the translation of Article 28 of Decree 125 
by an independent translator, the Panel sent a lette r to the UNOG requesting the translation by UNOG 
Conference Services Section of the concerned provision.11  On 23 August 2007, the Panel forwarded 
the translation by the UNOG to th e parties for their comments. 
C. REQUEST FOR INFORMATION FROM THE WCO 
2.5 On 7 June 2007, the Panel sent a letter to th e WCO requesting its assistance in issues relating 
to the HS.12  The parties were invited to provide their comments on the WCO's reply at the second 
substantive meeting with the parties. 
2.6 A second letter from the Panel was sent out to the WCO on 16 July 2007, requesting its 
further assistance in the same matter.13  The parties were given the opportunity to provide their 
comments on the WCO's second reply. 
D. UNITED STATES ' REQUEST THAT THE PANEL 'S FINDINGS BE PRESENTED AS SEPARATE REPORTS 
CONTAINED IN A SINGLE DOCUMENT WITH SEPARATE SECTIONS ON THE PANEL 'S 
CONCLUSIONS AND RECOMMENDATIONS FOR EACH COMPLAINING PARTY  
2.7 At the second substantive meeting, the United States requested pursuant to paragraph 18 of 
the Panel's Working Procedures that the Panel issu e its findings in the form of a single document 
                                                      
8 Exhibit JE-18 (Policy Order 8); Exhibit JE-27 (Decree 125); and Exhibit JE-28 (Announcement 4). 
9 Exhibit CHI-2 (Chapter XI of Policy Order 8), Exhibit CHI-3 (Decree 125); and Exhibit CHI-4 
(Announcement 4). 
10 The texts of the common translations of China's m easures are attached as Annex E to these reports.  
In respect of Article 28 of Decree 125, the translation by the UNOG has been inserted. 
11 Both English and Chinese are official languages of the United Nations.  The Panel's letter to the 
UNOG dated 15 August 2007 and the UNOG's reply to the Panel are reproduced in Annex D to these reports. 
12 The Panel's letter of 7 June 2007 to the WCO and the WCO's reply dated 20 June 2007 are 
reproduced in Annex C to these reports. 
13 The Panel's second letter to the WCO and the WCO's reply dated 30 July 2007 are reproduced in 
Annex C to these reports. WT/DS339/R 
WT/DS340/R WT/DS342/R 
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  containing three separate reports with comm on sections on the Panel's conclusions and 
recommendations for each complaining party. 
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS  
A. E
UROPEAN COMMUNITIES  
3.1 The European Communities requests the Panel to  find that China has acted inconsistently 
with:14 
(a) Article 2.1 and Article 2.2 of the TRIMs Agreement in conjunction with paragraph 
1(a) of the Illustrative List annexed to the TRIMs Agreement by applying investment 
measures related to trade in goods that are in consistent with the provisions of Article 
III or Article XI of GATT 1994 and by applyi ng investment measures related to trade 
in goods, compliance with which is necessar y to obtain an advantage, and which 
require the purchase or use by an enterprise of products of domestic origin or from 
any domestic source, whether specified in te rms of particular products, in terms of 
volume or value of products, or in terms of a proportion of volume or value of its 
local production.  Further, China has acted inconsistently with Ar ticle 2.1 and 2.2 of 
the TRIMs Agreement in conjunction with pa ragraph 2(a) of the Illustrative List 
annexed to the TRIMs Agreement, by applyi ng investment measures related to trade 
in goods that are inconsistent with the pr ovisions of Article III or Article XI of GATT 
1994 and by applying investment measures rela ted to trade in goods, compliance with 
which is necessary to obtain an advantage, and which restricts the importation by an 
enterprise of products used in or related to  its local production, generally or to an 
amount related to the volume or value of local production that it exports;  
(b) its obligations under the Marrakesh Agre ement Establishing the World Trade 
Organization, as set out in the Protocol on the Accession of the People's Republic of 
China to the WTO, in particular Part I pa ragraph 7.3 of the Protocol of Accession of 
China, and in paragraph 203 of the Work ing Party Report on the Accession of China 
in conjunction with Part I,  paragraph 1.2 of the Protoc ol of Accession of China, and 
paragraph 342 of the Working Party Report on the Accession of China by failing, upon accession, to comply fully with the TRIMs Agreement, without recourse to Article 5 thereof, and to eliminate local c ontent requirements and to not enforce the 
terms of contracts containing such requirements; 
(c) Article III:4 of the GATT 1994 by imposing sp ecified thresholds for imported parts in 
an assembled vehicle above which an additio nal charge applies on each imported part 
included in the vehicle. In addition, as part of the measures, China also imposes 
additional administrative requirements on importers and manufacturers that may not 
meet the required threshold for domestic c ontent. Thereby, China has failed to accord, 
to products of the territory of the Europe an Communities imported into the territory of 
China, treatment no less favourable than that accorded to like products of national 
origin in respect of all laws, regulations a nd requirements affecting their internal sale, 
offering for sale, purchase, trans portation, distribution or use; 
                                                     
 
14 European Communities, Request for the establis hment of a panel, WT/DS339/8 and European 
Communities' first written submission, paras. 300-303.  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page 5 
  
  (d) Article III:2 of the GATT 1994 by subjecting the products of the territory of other 
Members imported into the territory of China, directly or indirectly, to internal taxes 
or other internal charges of any kind in ex cess of those applied, di rectly or indirectly, 
to like domestic products.  China has also a pplied internal taxes or other internal 
charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1 of Article III; 
(e) Article III:5 of the GATT 1994 by establishi ng and maintaining internal quantitative 
regulations relating to the mixture, processi ng or use of products in specified amounts 
or proportions which requires, directly or indirectly, that any specified amount or 
proportion of any product which is the subject of the regulation must be supplied from 
domestic sources.  Moreover, China has app lied internal quantitative regulations in a 
manner contrary to the principles set fo rth in paragraph 1 of Article III; and 
(f) its obligations under the WTO Agreement, as set out in the Accession Protocol, in 
particular Part I, paragraph 7.2 of th e Accession Protocol, by introducing measures 
that are inconsistent with the provisions of  the GATT 1994, in particular Article III. 
3.2 In the alternative, the Europ ean Communities requests the Panel to find that China has acted 
inconsistently with: 
(g) Article II:1(a) and (b) of the GATT 1994 by failing to accord to the commerce of 
another Member treatment no less favourable than that provided for in the appropriate 
Part of the Schedule annexed to the GATT 1994.  China has failed to exempt 
products, which are the products of te rritories of another Member, on their 
importation into China's territory, from ordina ry customs duties in excess of those set 
forth and provided in China's Schedule.  China has failed to exempt such products 
from all other duties or charges of any kind imposed on or in connection with the 
importation in excess of those imposed on the da te of this Agreement or those directly 
and mandatorily required to be imposed th ereafter by legislation in force in the 
importing territory on that date; and 
(h) Article 3.1(b) together with Article 3. 2 of the SCM Agreement by granting or 
maintaining subsidies contingent, in law or in  fact, whether solely or as one of several 
other conditions, upon the use of domestic over imported goods. 
3.3 Furthermore, the European Communities requ ests the Panel to recommend, pursuant to 
Article 4.7 of the SCM Agreement, that China wit hdraw its prohibited subsid ies within 90 days after 
the DSB adopts its recommendations and rulings in this dispute.
15 
B. UNITED STATES  
3.4 The United States requests the Panel to find th at China has acted inconsistently with:16 
(a) Article III:2 of the GATT 1994, by imposing a charge on imported auto parts but not 
on domestic auto parts, and otherwise appl ying internal charg es so as to afford 
protection to domestic production; 
                                                      
15 European Communities' first written submission, para. 303. 
16 United States, request for the establishment of a panel, WT/DS340/8 and Un ited States' first written 
submission, paras. 128-129. WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page 6 
  
  (b) Article III:4 of the GATT 1994, by treating imported auto parts less favourably than 
like domestic auto parts by imposing additi onal administrative burdens and additional 
charges upon manufacturers that use imported parts in excess of specified thresholds, 
thereby affecting the internal sale, o ffering for sale, purchase, transportation, 
distribution, or use of imported auto parts; 
(c) Article 2.1 and paragraphs 1(a) and 2(a) of Annex 1 of the TRIMs Agreement, by 
requiring motor vehicle manufacturers in China to purchase or use domestic auto parts in order to obtain advantages such as the avoidance of administrative burdens 
and the payment of additional charges and by imposing restrictions which generally 
restrict the importation by a manufacturer of auto parts used in or related to its local production; 
(d) Article III:5 of the GATT 1994, by requiring that a specified amount or proportion of 
the auto parts assembled into a complete  motor vehicle be supplied from domestic 
sources, and otherwise applying internal quantitative regulations so as to afford 
protection to domestic production;  
(e) Part I, paragraph 7.2 of the Accession Pr otocol, by introducing measures that cannot 
be justified under the provisions of the WTO Agreement, particularly with respect to 
Articles III and XI of the GATT 1994; 
(f) Part I, paragraph 7.3 of the Accession Pr otocol and paragraph 203 of the Working 
Party Report, by failing to comply with the TRIMs Agreement and by maintaining 
local content requirements made effective through the measures;  
(g) Articles 3.1(b) and 3.2 of the SCM Agreement, by exempting domestic auto parts 
from charges imposed by the measures, as we ll as exempting imported parts from the 
charges if the motor vehicle manufacturer u ses domestic over imported parts in order 
to meet the specified thresholds; and 
3.5 to the extent that the measures impose a charge  on or in connection with the importation of 
auto parts, 
(h) Article II:1(a) and (b) of the GATT 1994, by according imported auto parts less 
favorable treatment than that provided for in its Schedule of Concessions and 
Commitments annexed to the GATT 1994 and imposing charges in excess of those set 
forth and provided therein; 
(i) paragraph 93 of the Working Party Report, by specifically identifying CKD and SKD 
kits for motor vehicles and assessing them the tariff for complete vehicles; and 
(j) Article XI:1 of the GATT 1994, by constitu ting prohibitions or restrictions on the 
importation of auto parts other than in the form of duties, taxes or other charges. 
3.6 The United States further requests that the Panel issue the recommendations set out in 
Article 4.7 of the SCM Agreement.
17 
                                                      
17 United States' first written submission, para. 128.  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page 7 
  
  C. C
ANADA  
3.7 Canada requests the Panel to find that China has acted inconsistently with:18 
(a) Article III:2 of the GATT 1994 because the measures result in charges on imported 
parts related to their use in manufacturing in China, while such charges are not 
imposed on domestically-produced parts.  Ch ina also imposes internal taxes or other 
charges to imported products in a manner contrary to Article III:1; 
(b) Article III:4 of the GATT 1994 because th e measures result in less-favourable 
treatment for imported parts than for domes tic parts.  The less-favourable treatment 
includes the effect of additional charg es on, more burdensome regulation of, and 
specified thresholds for the use of imported parts; 
(c) Article III:5 (and also Article III:1) of the GATT 1994 because the measures 
constitute an internal quantitative regulati on which requires specified proportions of 
domestic content; 
(d) Article 2.1 of the TRIMs Agreement, in conjunction with paragraph 1(a) of the 
Agreement's Illustrative List, because the measures constitute measures requiring the 
purchase or use by domestic enterprises of products of domestic origin; 
(e) Part I, paragraph 7.2 of the Accession Prot ocol, through measures inconsistent with 
the provisions of the GATT 1994, in particular Article III; and 
(f) Part I, paragraphs 1.2 and 7.3 of the Pr otocol, and paragraphs 203 and 342 of the 
Working Party Report, through measures that establish and maintain local content 
requirements. 
3.8 Alternatively, Canada requests the Panel to fi nd that China has acted inconsistently with: 
(g) Article II:1(a) and (b) of the GATT 1994, because the charges imposed on imported 
parts, if they are properly characterized as tariffs, are higher than those set out in 
China's Schedule of Concessions and Commitmen ts, and therefore contrary to China's 
commitments on joining the WTO. 
3.9 Canada also requests that the Panel find that China's measures nullify or impair benefits, as 
understood under GATT Article XXIII:1(b) of the GATT 1994, accruing to Canada in respect of 
CKD and SKD kits for motor vehicles.  In particular , China has nullified or impaired benefits related 
to paragraphs 93 and 342 of the Working Party Report , in conjunction with Part I, paragraph 1.2 of 
the Accession Protocol, through applying tariffs ex ceeding 10 per cent on imports of CKD and SKD 
kits for motor vehicles. 
3.10 Further, Canada requests that the Panel recommend China to bring its measures into 
conformity with its WTO obligations, including  by removing domestic-content thresholds and 
                                                      
18 Canada, request for the establishment of a panel,  WT/DS342/8 and Canada's first written submission, 
paras. 159-160. WT/DS339/R 
WT/DS340/R WT/DS342/R 
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  eliminating the discriminatory internal charge app lied in excess of the comm itments set out in its 
Schedule.
19 
D. CHINA  
3.11 China requests that:20 
(a) the Panel reject the claims raised by th e European Communities, the United States, 
and Canada; and 
(b) in the event that the Panel finds that one or more aspects of the challenged measures 
is inconsistent with Article II or Artic le III of the GATT, China has provisionally 
demonstrated that any inconsistency be tween the challenged measures and China's 
GATT obligations is subject to the general exception under Article XX(d). 
IV. ARGUMENTS OF THE PARTIES 
4.1 The arguments presented by the parties in thei r written submissions and oral statements are 
reflected below.21  The parties' responses to questions and comments on each other's responses are 
reproduced in Annex C. 
A. FIRST WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES  
1. Introduction 
4.2 China, as a WTO Member, has undertaken to comp ly with the obligations set out in the WTO 
Agreement.  It has undertaken to open its markets, in part through the reduction of tariffs on auto parts 
and by eliminating its domestic -content requirements.  Despite commitments made during WTO 
accession, China introduced measures imposing disc riminatory internal charges on imported auto 
parts if vehicles manufactured in China exceed certain maximum thresholds of imported auto parts.  The measures also include burdensome record-keepi ng, reporting and verification requirements that 
apply only to imported auto parts.  The measures make imported auto parts more expensive and less 
competitive than like domestic auto parts and, thus, encourage investment in local part manufacture. 
2. The measures 
4.3 The measures are contained in three documents: 
• Policy Order 8; 
• Decree 125;  and 
• Announcement 4. 
                                                     
 
19 Canada's first written submission, para. 160. 
20 China's first written submission, paras. 214-215. 
21 The summaries of the parties' arguments are based on the execu tive summaries submitted by the 
parties to the Panel.  Footnotes in th is section are those of the parties.  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page 9 
  
  4.4 Policy Order 8 was issued on 21 May 2004 by China's National Development and Reform 
Commission. Decree 125 and Announcement 4, both ma de effective on 1 April 2005, implement and 
administer the Automotive Policy Order. 
(a) Substantive criteria for determining the imposition of internal charges at the "Whole Vehicle" 
rate 
4.5 If a vehicle model is manufactured using imported parts that exceed specified quantity or 
value thresholds, all imported parts are considered to be "automobile parts characterized as complete 
vehicles" and assessed a charge based on the whole vehicle rate, typically 25 per cent of the value of 
the imported parts.  Imported parts will be automob ile parts characterized as complete vehicles if any 
of the following three tests are met (Article 21 of Decree 125): 
• As of 1 April  2005, when complete CKD or SKD kits are imported to assemble a 
vehicle. 
• As of 1 April 2005, if a sufficient number of Deemed Imported Assemblies are used 
in manufacturing the vehicle. Imported parts will be characterized as complete vehicles if the following combinations of assemblies are "Deemed Imported": 
ο the two main assemblies (the vehicle body and engine); 
ο either of the two main assemblies as well as three or more other assemblies; or 
ο five or more assemblies, other than the main assemblies. 
• As of 1 July 2006, when the aggregate price of imported parts reaches 60 per cent or 
more of the price of all parts used in a ve hicle.  However, this aspect of the measures 
was suspended by Customs Joint Bulletin 38,  dated 5 July 2006, until 1 July 2008.  
4.6 An assembly will be "Deemed Imported" and th us count against the thresholds if the 
aggregate price of imported parts is 60 per cent or more of the total price of the assembly, or if it uses more than a specified number of "key parts", or if it is assembled from a complete set of imported 
parts (Article 22 of Decree 125). 
4.7 If the vehicle manufacturer produces a vehicle that uses imported parts that are automobile 
parts characterized as complete vehicles, the manufacturer will be required to pay a charge on all imported parts incorporated into the vehicle (i.e . not just the imported parts used in the Deemed 
Imported Assembly).  This charge  generally equates to a 10 per cent tariff on the auto parts and an 
additional 15 per cent internal charge.  Charges under the measures are levied, not at the border, but at 
a later date after the goods have been incorporat ed into manufactured vehicles, and, as described 
above, depending on the use to which the parts are put into China. 
(b) Administrative requirements imposed on vehi cle and auto parts manufacturers when any 
imported parts are used 
4.8 Any use of imported parts in vehicle manufacturing will subject a manufacturer to the 
burdensome administrative regime under the measures.  The administrative requirements do not apply 
to vehicle manufacturers that use solely domestic pa rts.  This may result in significant delays in 
receiving and using imported auto parts and affect s a manufacturer's ability to source imported parts 
not included in a registered vehicle plan.   WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page 10 
  
  4.9 The administrative burden requires vehicle ma nufacturers using imported parts, among other 
things, to: 
(a) perform a self-evaluation on proposed vehicle models to determine if the quantity or 
value of imported parts to be used in manufacturing the vehicle renders those parts 
characterized as complete vehicles; 
(b) file documents with Customs showing th e quantity and value of imported parts 
actually used in manufacturing a vehicle model; 
(c) apply for and undergo verification by Cust oms of self-evaluation (if imported parts 
are not characterized as complete vehicles) or of the first batch of vehicles produced 
(if imported parts are characterized as complete vehicles); 
(d) prior to import provide the district cust oms office in charge of the area where the 
manufacturer is located with a general duty guarantee where a vehicle model uses 
parts that are characterized as complete vehicles; 
4.10 Another administrative burden on the face of the measures comes from deeming imported 
parts to be "in bond".  To date, that deeming is a fi ction. Imported auto parts have not been subject so 
far to Chinese bonding requirements and are used freely at the manufacturing sites of vehicle and auto 
parts manufacturers.  But, if and when applied, this would add substantia l complication (such as 
special record-keeping, restrictions on entry and ex it including special passes for personnel, Customs 
approval for moving parts out of the bonded areas ...). 
4.11 The measures also impose specific administrativ e requirements when modifications are made 
to the vehicle model using imported parts rather than  domestic parts.  This goes from the obligation to 
report to Customs when imported optional parts are fitted on the vehicle model to repeating all the 
administrative hurdles to register and import parts.  The effect is to limit the ability of vehicle manufacturers to freely source imported auto parts. 
4.12 The measures also require manufacturers to tr ack down the chain of supply to determine 
whether individual assemblies and key parts are to be treated as imported for purposes of the 
measures.  As a result, parts manufacturers and supp liers that use imported parts have to maintain 
records of the quantity, type and cost of importe d parts used in any parts incorporated into a 
manufactured vehicle.  The parts manufacturers and s uppliers do this in order to meet their contractual 
obligations to vehicle manufacturers and guarantee to them that they meet the domestic content 
requirements of the measures.  
(c) Impact of the measures 
4.13 The overall impact of the measures is to discriminate against imported auto parts by 
encouraging the use of domestic parts in auto part s and vehicle manufacturing in China.  Due to the 
price-sensitivity of the Chinese market, vehicle and au to part manufacturers would be "priced out" of 
the Chinese marketplace if they passed on the additional 15 per cen t internal charge to their 
customers, and they would suffer a loss if they ab sorbed the cost themselv es.  The result is that 
manufacturers are forced to  meet the domestic content thresholds under the measures.  This also 
serves to devalue the investment of foreign vehicle and auto parts manufacturers that had invested in 
China on the premise they would be able to import auto parts at the 10 per cent rate to which China 
bound itself in its Schedule of Concessions.  WT/DS339/R 
 WT/DS340/R 
 WT/DS342/R 
 Page 11 
  
  3. Legal argument 
(a) The violation of the TRIMs Agreement and th e Accession Protocol relating to the TRIMs 
Agreement 
4.14 The European Communities considers that the meas ures are inconsistent with Article 2 of the 
TRIMs Agreement  in conjunction with paragraphs 1(a)  and 2(a) of the Illustrative List.  
4.15 The measures are "investment measures" because they are aimed at encouraging the 
development of a local manufacturing capability for finished motor vehicles and parts for motor vehicles in China.  Inherent to this objective is  that these measures necessarily have a significant 
impact on investment in these sectors.  The whole investment strategy of both local and foreign 
vehicle and part manufacturers is governed by the constraints laid down by these measures.   
4.16 The measures are "trade-related" because they  apply and relate onl y to imported parts. 
Furthermore, local content requirements are necessar ily "trade-related" because such requirements, by 
definition, always favour the use of domestic produ cts over imported products, and therefore affect 
trade. 
4.17 The measures fall squarely within the scope of para graphs 1(a) and 2(a) of the Illustrative List 
to the TRIMs Agreement as (i) they require compli ance with local content thresholds to obtain a 
number of advantages (lower charges and procedural  advantages) and (ii) since such local content 
requirements have, by definition, considerable eff ects on the importation of products used or related 
to local production.  
4.18 As China has specifically undertaken to comply  with the TRIMs Agreement in its Accession 
Protocol, the measures are consequently also inconsistent with its obligations under the WTO 
Agreement , as set out in the Accession Protocol (Part I,  Article 7.3 and paragraph 203 of the Working 
Party Report in conjunction with Part I, Article 1. 2 and paragraph 342 of the Working Party Report).  
(b) The violation of Article III of the GATT 1994 and China's Accession Protocol relating to 
Article III of the GATT 1994  
4.19 The application of the measures is triggered by the actual manufacturing process taking place 
in China.  Therefore, the measures are "internal" measures.  Indeed, it is only once the imported parts 
have been assembled and processed into a complete ve hicle that the internal charge is imposed if the 
domestic content is insufficient. 
(i) Article III:4 of the GATT 1994 
4.20 The measures are inconsistent with Article  III:4 of the GATT 1994 because all the three 
elements for a finding of inconsistency there under are fulfilled.  
4.21 The imported and domestic automobile parts are "like products" because the measures 
themselves treat domestic and imported parts as "like" .  The only distinction is made on the basis of 
the origin of the products. 
4.22 The measures constitute "laws, regulations or  requirements affecting the internal sale, 
offering for sale, purchase, transportation, distribut ion, or use" of the imported like products since 
they impose very strict procedural and administrativ e rules and a possibly 15 per cent internal charge WT/DS339/R 
WT/DS340/R WT/DS342/R 
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  and thus adversely modify the conditions of co mpetition between the domes tic and imported products 
on the internal market. 
4.23 Finally, the imported automobile parts a nd components are accorded "less favourable" 
treatment than that accorded to like domestic products since car manufacturers are not free to 
purchase imported parts in excess of a certain proportion without heavy consequences.  These 
consequences consist of an additi onal charge and the obligation to comply with additional procedural 
requirements. 
(ii) Article III:2 of the GATT 1994 
4.24 The measures also violate Article III:2, first sentence.  Imported and domestic auto parts are 
"like products" because the measures only apply to im ported, and not to domestic auto parts. Imported 
auto parts identical in all respects to domestic auto  parts, except for their origin, will – depending on 
the amount of local content in the assembled vehicl e – be subject to internal charges.  As these 
internal charges do not apply to domestic auto part s, the charges applied to imported auto parts are 
necessarily "in excess of" the charges ap plied to like domestic products. 
4.25 In the alternative, the measu res are inconsistent with Ar ticle III:2, second sentence in 
conjunction with the relevant Ad Article.  As th e measures discriminate between auto parts on the 
basis of their origin, imported and domestic au to parts are necessarily "directly competitive or 
substitutable".  They are "not similarly taxed" si nce the internal charges are only imposed on imported 
auto parts.  The protective application within the meaning of Article III:1 follows from the fact that 
the differential in charges is significantly above  the de minimis level, from the discriminative 
structure of the measures and the stated goal of the measures to protect domestic production. 
(iii) Article III:5 of the GATT 1994  
4.26 Furthermore, the measures violate Article III:5, first sentence.  First, they constitute an 
"internal regulation" since they are authoritative rules from Chinese authorities on the administrative 
and fiscal treatment of imported auto parts. Secondly,  they are "quantitative … relating to the mixture, 
processing or use of products in specified amounts or proportions" because they are concerned with 
the amounts and proportions of domestic or impor ted auto parts in assembled vehicles and their 
assemblies.  The measures set out maximum amounts  and proportions of imported auto parts which 
must not be surpassed when using them in the assembl y of vehicles.  Thirdly, the measures "requir[e], 
directly or indirectly, that any specified amount or  proportion of any product which is the subject of 
the regulation must be supplie d from domestic sources".  If vehicle manufacturers do not use 
sufficient domestic parts to remain within the maxi mum thresholds of imported parts set out in the 
measures, all imported parts assembled in that vehicle are categorized "automobile parts characterized as complete vehicles" and charged according to the duty rate for complete vehicles. 
4.27 In the alternative, the Europ ean Communities demonstrates that the measures are inconsistent 
with Article III:5, second sentence because they are applied "so as to afford protection to domestic 
production".  The factors indicating protective app lication under Article III:2, second sentence above 
also lead to the conclusion of inconsis tency with Article III:5, second sentence. 
(iv) Accession Protocol 
4.28 As demonstrated above, the measures are inconsis tent with Article III, paragraphs 2, 4 and 5 
of the GATT 1994 and China in its Accession Protocol has undertaken to implement inter alia  
Article III without introducing, re-introducing or ap plying non-tariff measures that cannot be justified  WT/DS339/R 
 WT/DS340/R 
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  under the WTO Agreement.  By adopting the measur es China has introduced non-tariff measures that 
cannot be justified under the provisions of the WTO Agreement.  Clearly, China cannot implement Article III of the GATT 1994 by introducing measures that are inconsistent with that provision 
without violating the commitments it has taken under the terms of its accession to the WTO.  
Consequently, China has acted inconsistently with  its obligations under the WTO Agreement, as set 
out in the Accession Protocol , (Part I, paragraph 7.2).  
(c) Article II:1 (a) and (b) of the GATT 1994 
4.29 Alternatively the European Communities consider s that the measures are inconsistent with 
Article II:1 (a) and (b) of the GATT 1994.  Under Article II China has committed to treat imports no 
less favourably than provided for in its Schedule.  In particular, ordinary customs duties must not be applied in excess of the bound rates provided for in China's Schedule. 
4.30 There are four different general categories of automotive products rele vant for this case under 
the nomenclature of the Chinese tariff schedule, namely 
1. complete vehicles
 (headings 87.01 to 87.05 of which headings 87.02 to 87.04 are 
most relevant in view of the scope of th e measures – bound rate of duty of typically 
25 per cent; 
2. intermediate products such as the body and the chassis with engine (a combination of 
vehicle elements and/or parts fitted and/or  equipped together without being complete 
vehicles (headings 87.06, 87.07) – bound rate of duty of typically 10 per cent; 
3. parts and accessories  of Chapter 87 (heading 87.08) – bound rate of duty of typically 
10 per cent or less; 
4. parts and accessories of motor vehicles classi fied elsewhere than Chapter 87 (tyres, 
engines, accumulators) – bound rate of duty of typically 10 per cent or less. 
4.31 The Chinese tariff schedule provides for separate tariff lines for complete motor vehicles on 
the one hand, and parts and accessories of such motor vehicles on the other hand.  However, the 
measures are not consistent with these tariff lines a nd the bound rates of duty provided for in China's 
Schedule. 
4.32 Under the measures, automotive parts are cla ssified (or "deemed") as complete or whole 
vehicles and are imposed duties accordingly.  Already on the basis of the ordinary meaning of the terms "whole" or "complete" motor vehicle as compared with "part" of motor vehicles this is not only 
a manifest error but a contradiction in terms.  
4.33 Even when the ordinary meanings of "whole or  complete motor vehicles" as compared with 
"part(s)" of such vehicles are examined in their cont ext, there is nothing that supports the view that 
parts or some parts for motor vehicles could be classifiable under the relevant headings covering 
complete motor vehicles.  In particular, the measu res classify parts of products as complete products 
in a context where China's tariff schedules provide  for a clear separation between the products and 
parts thereof: 
• "a chassis fitted with engines" are deem ed a "whole vehicle" and subject to the 
generally 25 per cent duty for complete vehicles despite the specific heading (87.06) and the final bound duty rate of typically 10 per cent; WT/DS339/R 
WT/DS340/R WT/DS342/R 
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  • the imported vehicle body and the engine are deemed a "whole vehicle" and subject to 
the generally 25 per cent duty for complete  vehicles despite the specific headings 
(87.07, 84.07 and 84.08) and the final  boun d rate of duty of typically 10 per cent or 
less; 
• the tariff of complete vehicles is imposed on SKD and CKD kits instead of the lower 
tariff for the relevant automotive parts and components; 
• Imported parts in any random configuration are classified as complete or whole 
vehicles as long as their aggregate price attains 60 per cent or more of the complete 
vehicle price.  
4.34 The measures also provide for considerable unpr edictability in terms of when a part of a 
product is "deemed" to be the complete product and subject to a much higher tariff.  Therefore the 
measures fundamentally undermine the object a nd purpose of the WTO Agreement and the GATT 
namely "the security and predictability of the reci procal and mutually advantageous arrangements 
directed to the substantial reduction of tariffs and other barriers to trade". 
(d) Article 3 of the SCM Agreement 
4.35 Should the Panel find that the Chinese measures are border charges and, secondly, that China 
is entitled to accord to the imports of auto parts th e treatment it provides for vehicles in its Schedule, 
quod non , then the measures would in any case be a prohi bited subsidy pursuant to Articles 3.1(b) and 
3.2 of the SCM Agreement. 
4.36 First, the measures constitute a financial c ontribution since "government revenue that is 
otherwise due is foregone or not collected" (Artic le 1.1(a)(1)(ii) of the SCM Agreement).  The 
appropriate benchmark for comparis on is the revenue that China raises through duties on imports of 
auto parts that are automobile parts characterized as complete vehicles.  China has established a duty 
rate which typically amounts to 25 per cent of the va lue of the parts.  If the local content requirements 
of the measures are not satisfied, this duty would be  paid on imports of auto parts.  If the imports, on 
the other hand, satisfy the local content requireme nts, China has given up an entitlement to raise 
revenue that it could "otherwise" have raised.  By  charging this second category of parts imports with 
duties of typically only 10 per cent, China has i gnored the normative benchmark that it established for 
the first category of parts imports and, thus, has fo rgone "government revenue that is otherwise due". 
4.37 Secondly, the measures confer a benefit within  the meaning of Article 1.1(b) of the SCM 
Agreement.  Vehicle manufacturers which satisfy the local content requirements of the measures are 
financially "better off" than those which do not.  They do not have to pay the higher import duties for parts of typically 25 per cent and are instead only charged at 10 per cent. 
4.38 Thirdly, the measures are contingent upon the use of domestic over imported goods within the 
meaning of Article 3.1(b) of the SCM Agreement.  Th e benefit of the lower duty rate of typically 10 
per cent is only conferred if vehicle manufacturers satisfy the local content requirements of the measures.  Consequently, they are deemed to be specific pursuant to Article 2.3 of the SCM 
Agreement.  WT/DS339/R 
 WT/DS340/R 
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  B. F
IRST WRITTEN SUBMISSION OF THE UNITED STATES  
1. Introduction 
4.39 China has adopted measures that favor domestic  auto parts over imported parts, so as to 
afford protection to the domestic production of auto pa rts.  These measures incl ude an internal charge 
of 25 per cent that China imposes on imported auto parts, with no comparable charge on domestic 
auto parts.  The measures provide that the charge only applies if domestically-produced autos include 
an amount (in volume or value) of imported auto pa rts that exceeds specified thresholds.  And the 
measures include extensive record-keeping, reporting,  and verification requirements that apply if and 
only if domestic automobile manufacturers make use of imported auto parts.   
4.40 These measures amount to clear and straightforw ard inconsistencies with China's national 
treatment obligations under Article III of th e GATT 1994".  In particular, these measures 
impermissibly result in internal charges on imported parts in excess of those applied on domestic parts 
(Article III:2); the measures accord treatment less  favorable to imported parts with respect to 
requirements affecting internal sale, purchase, dist ribution, and use (Article III:4); and the measures 
directly or indirectly require that specified amounts or proportions of auto parts used in vehicle manufacturing must be supplied from domestic sources (Article III:5). 
4.41 Before proceeding with a de tailed factual and legal analysis, the United States would 
emphasize the following two points.  First, the me asures are subject to Article III even though China 
has labelled them as "customs duties".  China's meas ures are not applied at the border; rather, they are 
internal measures that apply charges and procedural  requirements based on the specific details of the 
auto manufacturing processes that occur within China.  It is not the label that a Member applies to its 
measure that determines whether an obligation under  a covered agreement applies; rather it is the 
substance of the measure that matters.  Othe rwise the GATT 1994's core national treatment 
obligations under Article III would be eviscerated.  Second, although the deta iled operation of China's 
measures on auto parts contain considerable comple xity, the analysis of those measures under Article 
III is neither ambiguous nor complex.  Rather, despit e the complexity of China's auto parts scheme, 
the results of an analysis under the text of Artic le III, as clarified by prior GATT panel and WTO 
panel and Appellate Body reports, is clear – namely , China's measures are inconsistent with China's 
obligations under Article III.   
2. Argument 
(a) The disciplines of Article III of the GATT 1994 apply to the measures 
4.42 Article III of the GATT 1994 ensures that "inter nal taxes and other internal charges ... 
affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products" are not applied in a manner so as to afford protec tion to domestic production.  China's Policy Order 8, 
Decree 125, and Announcement 4 together establish in ternal charges and burdensome procedures that 
apply only to foreign goods and that ind eed afford protection to domestic production. 
4.43 Although China's measures label the 25 per cent charge as an "import duty," the name 
assigned to the charge is not determinative in decidi ng whether the charge is an internal one – thus 
subject to the disciplines of Article III – or an import duty subject to tariff bindings under Article II of the GATT 1994.  Rather, it is necessary to examine wh ether the charge is based on the internal use 
and/or sale of the product, or if the charge is in stead a border measure.  In this dispute, China's 
measures apply after importation of the product, and cannot be considered border measures.   WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page 16 
  
  4.44 The distinction between internal charges a nd customs duties had been addressed in prior 
panels under the GATT 1947.  In one  of the first GATT 1947 reports, Belgian Family Allowances , the 
panel examined whether a particular  charge should be treated as an "internal charge" within the scope 
of Article III:2 of the GATT 1994 or an "import ch arge" within the scope of Article II.  Belgium 
imposed the charge at issue on imported goods purch ased by public bodies when the goods originated 
in a country whose system of family allowances failed to meet specific requirements.  The panel 
concluded that because the charge (a) "was collected  only on products purchased  by public bodies for 
their own use and not on imports as such" and (b) "was charged, not at the time of importation, but 
when the purchase price was paid by the public bo dy," the charge constituted an internal charge.   In 
other words, because the charge depended on the in ternal use of the pro duct, it could not be 
considered a border charge.   
4.45 The issue was again addressed in  EEC – Parts and Components .  In that dispute, the 
GATT 1947 Panel examined whether charges imposed to  allegedly prevent the circumvention of anti-
dumping duties should be analysed as customs du ties or internal charges.  In making its 
determination, the Panel focused on "whether the char ge is due on importation or at the time or point 
of importation or whether it is collected internally."   The Panel noted that the duties were levied on 
finished products assembled or produced in the EEC and were not imposed "conditional upon the 
importation of a product or at the time or point of  importation."  Accordingly, the Panel concluded 
that the EEC charges qualified as "internal charges" under Article III.   
4.46 As in Belgian Family Allowances  and EEC – Parts and Components , China's measures at 
issue in this dispute are internal ones, not border measures.  China's charges are not imposed at the 
time of, or as a condition to, the entry of the parts into China.  Indeed, the measures at issue do not 
impose charges on all imported parts, but only on pa rts used by manufacturers in the assembly of new 
vehicles that exceed the thresholds established by Decree 125.   
4.47 Instead of being border measures, China's meas ures at issue in this dispute are internal 
measures, the application of which turns on the details of the manufactur ing operations conducted 
within China.  All of the following factors lead to this conclusion: 
− The determination of whether imported parts constitute "features of a complete 
automobile" is made at the time the parts ar e used in the assembly process rather than 
at the time the parts enter the territory to which China's Schedule relates.   
− Under the measures, all of the parts of a completed vehicle are combined for the 
determination of whether the 25 per cent ch arge applies, regardless of where those 
parts originate, when or where they entere d the territory of China, or who imported 
them.  Even if a part has been imported by  a supplier, and even if the supplier has 
already paid customs fees and duties, the part is nonetheless grouped together with 
parts imported by the manufacturer itself when making the determination.   
− The 25 per cent charge is imposed not on the importer, but on the manufacturer – 
whether or not the manufacturer is actually the importer of the part in question.   
−
 Official verification is performed by the Chinese authorities at the manufacturer's site, 
not at the border.  And, this determina tion is not made by China Customs through 
normal customs procedures, but by a special administrative body pursuant to measures developed by agencies w ith industrial policy functions.   WT/DS339/R 
 WT/DS340/R 
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  4.48 In short, the measures are not focused on importation, but rather on the internal use of 
imported parts in the manufacture of new automobiles.   China's measures are th us internal ones, and 
are subject to the disciplines of Article III of the GATT 1994.  
(b) The charges are inconsistent with Article III:2, first sentence 
4.49 The charges imposed under China's measures ar e inconsistent with the first sentence of 
Article III:2 of the GATT 1994.  As confirmed by the Appellate Body in Japan – Alcoholic 
Beverages , a determination of an internal charge's inc onsistency with Article III:2, first sentence is a 
two step process:  First, the imported and domestic products at issue must be "like."  Second, the 
internal charge must be applied to imported produc ts "in excess of" those applied to the like domestic 
products.  "If the imported and domestic products are 'like products', and if the charges applied to the 
imported products are 'in excess of' those applied to the like domestic products, the measure is 
inconsistent with Article III:2, first sentence." 
(i) Imported auto parts and domestic  auto parts are like products 
4.50 Where the number or value of the imported part s used in the assembly of a vehicle in China 
exceeds the specified thresholds, the measures im pose an internal charge of 25 per cent on all 
imported parts in the vehicle.  This internal charge  applies only to parts of foreign origin – domestic 
parts are exempt.   
4.51 Where a WTO Member draws an origin-based distin ction in respect of internal charges, a  
case-by-case determination of "likeness" between th e foreign and domestic product is unnecessary.  
As such, in this dispute, the requirement that the "like products" be established is readily satisfied.   
(ii) Imported auto parts are taxed in  excess of domestic auto parts 
4.52 When the number or value of the imported part s used in the assembly of a vehicle in China 
exceed the thresholds established in the measures, the measures im pose an internal charge on all 
imported parts in the vehicle.  Domestic parts are exempt.  This differential taxation of imported and 
domestic auto parts breaches Article III:2.  Indeed , any taxation of imported products in excess of like 
domestic products, regardless of amount, is suffici ent to render a charge inconsistent with 
Article III:2, first sentence. 
(c) The charges and reporting requirements applie d to the use of imported auto parts are 
inconsistent with Article III:4 of the GATT 1994 
4.53 In examining a claim under Article III:4, the Appellate Body has identified three distinct 
elements required to establish a breach:  (1) the im ported and domestic products are "like products;" 
(2) the measure is a law, regulation, or requireme nt affecting the internal sale, offering for sale, 
purchase, transportation, distribution, or use of the imported and domestic lik e products;  and (3) the 
imported product is accorded less favorable treatment than the domestic like product. 
(i) Imported auto parts and domestic  auto parts are like products 
4.54
 As with the Article III:2 analysis above, th e determination of "like products" for purposes of 
Article III:4 is established where the measures at issue make distinctions between products based 
solely on origin.  As noted above, China's measures at issue apply the internal charge, and the burdensome administrative requirements on car manufacturers, solely on an origin-based distinction.  As such, foreign and domestic auto parts satisfy the "like products" requirement of Article III:4. WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page 18 
  
  (ii) The charges and reporting requirements are laws or  regulations affecting the internal sale, 
offering for sale, purchase, distribution and use of imported auto parts 
4.55 The second element of an Article III:4 analysis is that the measures "a ffect[] [the] internal 
sale, offering for sale, purchase, distribution ... or use" of the like products.  The Appellate Body has 
noted that the term "affecting" in Article III:4 should be interpreted as ha ving a "broad scope of 
application."  In addition, the panels in EC – Bananas III and India – Autos both concluded that the 
word "affecting" covered more than measures which directly regulate or govern the sale of domestic 
and imported like products.  In fact, the term "a ffecting" was broad enough to cover measures that 
might "adversely modify the conditions of comp etition between domestic a nd imported products."  
Thus, in India – Autos , the Panel found that a measure "affects"  the internal sale, offering for sale, 
purchase and use of an imported product, because it provided an incentive to purchase local products.  
In Canada – Wheat Exports , the Panel found that a Canadian measure "affects" internal distribution of 
like products, because it created a disincentive to accept and distribute imported grain.  
4.56 In this instance, China's Policy Order 8, D ecree 125 and Announcement 4 work together to 
create an incentive to purchase domestic auto part s.  By establishing a system that (1) levies an 
internal charge equal to 25 per cent of the total va lue of imported parts used in the automobile, and (2) 
imposes burdensome administrative recording requirements when a certain threshold of imported parts are used in the manufacturing of vehicles, Ch ina has established a disi ncentive to purchase, use 
and distribute imported auto parts.  Thus the measure s at issue "affect" the international sale, offering 
for sale, purchase, distribution, and use of imported auto parts. 
(iii) By establishing thresholds on the use of imported auto parts that trigger additional internal 
charges and burdensome procedural requiremen ts, the measures accord less favorable 
treatment to imported auto parts  than to domestic auto parts 
4.57 The last element for determining a breach of Article III:4 is to asses s whether the measures 
accord less favorable treatment to imported products re lative to the domestic product.  Previous panels 
have found that measures meet this element of th e analysis if they impose requirements on foreign 
products that are not imposed on domestic products; create an incentive to purchase and use domestic 
products or a disincentive to utilize imported products; or "adversely affect . . . the equality of competitive opportunities of imported products in rela tion to like domestic products."  Significantly, 
the Appellate Body in US – FSC (Article 21.5)  noted that a measure could still be inconsistent with 
Article III:4 even if unfavorable treatme nt did not arise in every instance. 
4.58 Here, the measures treat foreign parts less favourably than domestic parts by creating 
different competitive conditions for the parts so that  protection is afforded to the domestic products.  
This is done in two ways. 
4.59 With respect to the first, i.e ., through the application of the additional charge, consider the 
following:  When a manufacturer assembles a vehicl e, the manufacturer can choose to include either 
an imported part or, if one is available, a domes tic part.  As explained above, the measures establish 
thresholds (i.e., what constitutes "features of a co mplete automobile") for the number of imported 
parts that can be included in a fini shed vehicle; if the threshold is exceeded, then a charge equal to 25 
per cent of the value of each imported part (instead of the import duty on the imported part) is imposed on each and every imported part included in  the vehicle.  The measures accordingly alter the 
conditions of competition by creating a significant incentive to include domestic parts over imported 
parts.    WT/DS339/R 
 WT/DS340/R 
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  4.60 The second method by which the measures treat foreign parts less favourably than domestic 
parts is through the imposition of burdensome  administrative reporting requirements on any 
manufacturer who chooses to use imported auto part s in building an automo bile in China.  These 
requirements also create different competitive conditi ons for the imported parts so that protection is 
afforded to the domestic products.  
4.61 Decree 125 requires manufacturers to perform a "s elf-evaluation" to determine the number of 
imported parts used in the assembly of a particular vehicle model.  To perform this self-evaluation, a 
manufacturer must catalogue all the parts of each  model it manufactures, determine whether, under 
the measures, the parts are foreign or domestic, and calculate the thresholds for each assembly system 
and the overall price percentage of imported parts in  the model.  Should this self-evaluation result in a 
determination that the imported parts used constitute  "features of a complete automobile," as defined 
in the Decree, the manufacturer must register the vehicle model with CGA.  None of this is required if the manufacturer uses only domestic auto parts. 
4.62 To register the vehicle model with CGA, the manufacturer must include the following 
information:  
− a description of the manufacturer;  
− the annual production plan for the vehicle model;  
− a list of all domestic a nd foreign suppliers; and  
− a detailed list of all imported and domestic  parts used in the model being filed. 
4.63 This information must then be constantly update d to take into account changes in the source 
and relative price of various parts of every auto mobile model, as well as changes to individual 
automobiles (e.g ., if optional imported parts are fitted on an individual vehicle). 
4.64 Further, if imported parts are used, China's sp ecial payment system for the internal charges 
requires that the imported parts – if entering China through a port not administered by the district 
customs office where the manufacturer is located – be "transferred" to the district customs office, 
where the manufacturer is required to maintain a general financial guarantee in an amount no lower 
than the average total amount of total duties payabl e by the enterprise for its average monthly imports 
of parts and components.  The manufacturer is requi red to make payments on a monthly basis, at 
which time the following information is required:  verification report, the previous month's total 
production figures, and a list of parts and components used by the manufacturer in the prior month to assemble completed vehicles.    
4.65 Should the manufacturer use imported parts that he himself did not import, the manufacturer 
is required to maintain records regarding the actua l importer of record, and any evidence of duties and 
value-added taxes paid. 
4.66 None of these burdensome reporting requirements are necessary for manufacturers who 
choose to use only domestic auto parts to manufactu re automobiles in China.  Such administrative 
requirements thus create different competitive conditi ons for the imported parts so that protection is 
afforded to the domestic products.  In sum, th e imposition of internal charges and burdensome 
procedural requirements on manufacturers who use im ported rather than domestic parts results in a 
breach of Article III:4 of the GATT 1994. WT/DS339/R 
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Page 20 
  
  (d) China's measures are inconsistent with Article  2.1 and Paragraph 1(a) of Annex 1 of the 
TRIMs Agreement. 
4.67 China's measures are inconsistent with Article  2 of the TRIMs Agreement.  First, these 
measures fall within the types of measures covered in  the Illustrative List in the Annex to the TRIMs 
Agreement.  The Chinese measures at issue provide  an advantage, i.e., an exemption from paying the 
internal charge and related burdensome administ rative requirements, for auto manufacturers that 
decide to purchase or use domestic auto parts.  Th us, the measures require "the purchase or use by an 
enterprise of products of domestic origin or from a ny domestic source" so as "to obtain an advantage";  
they fall squarely within the Illustrative List  of measures covered by the TRIMs Agreement. 
4.68 Further, under Article 2 of the TRIMs Agreement, a TRIM that is inconsistent with Article III 
of the GATT 1994 is also inconsistent with the TR IMs Agreement.  As the measures at issue are 
already determined to be "trade-related investment  measures" in that they fall squarely within 
Illustrative List 1(a) of the TRIMs Agreement, and th ey are also inconsistent with China's obligations 
under Article III:4 (as discussed above), these measures are thus inconsistent with Article 2 of the 
TRIMs Agreement as well. 
(e) China's measures are inconsistent with Article III:5 of the GATT 1994 
4.69 China's measures are also inconsistent with Article III:5 of the GATT 1994.   China's 
measures at issue impose additional internal charge s and burdensome administrative requirements if, 
among other things, the quantity of the imported part s and components used by a car manufacturer (1) 
exceed specified limits on the number of imported assembly systems, or (2) results in the total price of 
the imported parts and components being 60 per cent or more of the total price of all parts and 
components in the finished vehicle.  Given that these provisions are expressed in quantitative terms, 
they are by their nature "quantitative regulations."   Moreover, given that their terms specify the 
quantitative amounts of imported parts that would result in the internal charges and reporting 
requirements being applicable, the measures are al so quantitative regulations that relate "to the 
mixture, processing or use of products in specifi ed amounts or proportions," and 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 char ge is assessed.  As such, the Chin ese measures are inconsistent with 
Article III:5 of the GATT 1994.  
(f) China's measures are inconsistent with Part  I, Article 7.2 of the Accession Protocol 
4.70 Part I, Article 7.2 of China's Accession Protocol states in relevant part: "In implementing the 
provisions of Articles III and XI of the GATT 1994  and the Agreement on Agriculture, China shall 
eliminate and shall not introduce, re-introduce or apply non-tariff measures that cannot be justified 
under the provisions of the WTO Agreement."  Therefore, by introducing measures that are inconsistent with Article III:2, Article III:4, a nd Article III:5 of the GATT 1994 and that thus cannot 
be justified under the pr ovisions of the WTO Agreement, Chin a's measures at issue consequentially 
are in breach of Part I, Article 7.2 of China's Accession Protocol. 
(g) China's measures are inconsistent with Part I, Article 7.3 of the Accession Protocol and 
paragraph 203 of the Working Party Report 
4.71 Part I, Article 7.3 of China's Accession Protoc ol states in relevant pa rt: "China shall, upon 
accession, comply with the TRIMs Agreement, without  recourse to the provisions of Article 5 of the 
TRIMs Agreement.  China shall eliminate and cease to enforce ... local content ... requirements made  WT/DS339/R 
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  effective through laws, regulations or other measu res."  Paragraph 203 of the Working Party Report 
reiterates this obligation. 
4.72 In light of the earlier discussion that China's m easures are inconsistent with obligations under 
Article 2 of the TRIMs Agreement, and in light of the fact that the measures effectively maintain the 
local content requirement initially set forth in China's Automotive Industry Industrial Policy of 
3 July 1994, China's measures at issue consequentially  are inconsistent with China's obligations under 
Part I, Article 7.3 of China's Accession Protocol  and paragraph 203 of the Working Party Report. 
(h) In the alternative, China's measures are inc onsistent with Article II of the GATT 1994 and 
paragraph 93 of the Working Party Report 
4.73 As the United States has explained above, China' s measures at issue are internal charges and 
other internal requirements, not border measures.  Accordingly, the United States submits that these 
measures are to be analysed under (and are inconsiste nt with) the obligations set out in Article III of 
the GATT 1994. 
4.74 Nonetheless, even if the measures were consid ered border measures, China's measures would 
be inconsistent with Article II of the GATT 1994 and paragraph 93 of the Working Party Report.    
4.75 First
, if China's measures are considered to resu lt in the imposition of customs duties subject 
to Article II obligations, the measures would result in the imposition of customs duties in an amount 
greater than allowed under Article II.  Under Ch ina's Schedule of Concessions and Commitments, 
most motor vehicles are classified under items 87.02  through 87.04, while auto parts and components 
are classified under several different items includi ng 84.07-84.09 (engines and engine parts), 87.07 
(bodies for motor vehicles), and 87.08 (parts and accessories of motor vehicles).  China's final bound 
tariff rate for complete vehicles is 25 per cent, wh ile its bound rate for auto parts and components is 
10 per cent (and in some cases, even lower).  Acco rdingly, should the 25 per cent charges under the 
measures be considered customs duties on auto pa rts, those charges would violate China's tariff 
binding (of 10 per cent or lower) on such parts.  
4.76 Second , should China's measures be considered bor der measures rather than internal measures 
subject to Article III, the 25 per cent charge on im ported CKD and SKD kits would be inconsistent 
with China's commitments in paragraph 93 of the Wo rking Party Report.  Part I, Article 1.2 of the 
Accession Protocol provides that the Protocol, wh ich includes the commitments referred to in 
paragraph 342 of the Working Party Report, shall be an integral part of the WTO Agreement.  
Paragraph 342 of the Working Party Report includes China's commitment reproduced in paragraph 93 
of the Working Party Report.  As a result, China's commitment in paragraph 93 of the Working Party Report is an integral part of the WTO Agreement.   
4.77 Paragraph 93 of the Working Party Report provides: 
Certain members of the Working Party expressed particular concerns about tariff 
treatment in the auto sector .  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 semi-knocked down kits for motor vehicles.  If China created su ch tariff lines, the tariff rates would be no 
more than 10 per cent.  The Working Part y took note of this commitment.   WT/DS339/R 
WT/DS340/R WT/DS342/R 
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  4.78 To the extent that the charges imposed by th e measures are considered to be tariffs, the 
measures would in effect specify a tariff line for CKD and SKD kits that  imposes a 25 per cent tariff, rather than a 10 per cent tariff as require d under the Working Party Report.   
(i) China's measures constitute an import substitution su bsidy in breach of Articles 3.1(b) and 3.2 
of the SCM Agreement 
4.79 China's measures impose additional duties and other requirements on imported auto parts, 
thereby resulting in a breach of China's obligations  under Article III of the GATT 1994.  Another way 
to view these charges is that they exempt manuf acturers from the charges otherwise due if they use 
domestic auto parts rather than imported auto parts.  From this perspective, the measures constitute an 
import substitution subsidy in breach of Artic les 3.1(b) and 3.2 of the SCM Agreement. 
4.80 The reduction available for using domestic parts is  a subsidy pursuant to Article 1.1 of the 
SCM Agreement.  First, pursuant to  the chapeau of Article 1.1(a)(1),  the reduction is a "financial 
contribution" by the Chinese Government, where " government revenue that is otherwise due is 
foregone or not collected."  Under China's meas ures, on domestic parts the government foregoes the 
difference between the across-the-board 25 per cen t charge on auto parts and the customs duty 
(10 per cent or less) applied to imported parts.  Likewise, on certain imported parts, the government foregoes the difference between the across-the- board 25 per cent charge and the customs duty 
(10 per cent or less) when the thresholds for using domestic parts in a finished vehicle are satisfied.  
Second, this financial contribution results in a "benef it ... conferred," pursuant to Article 1.1(b) of the 
SCM Agreement, because the auto manufacturer is ab le to retain the amount of money equivalent to 
the amount of revenue foregone by the government.  
4.81 Article 2.3 of the SCM Agreement further specifies  that a subsidy shall be deemed "specific" 
if it falls within the provisions of Article 3 of the SCM Agreement relating to "prohibited" subsidies.  
As shown below, China's measures are "prohibited" and therefore are deemed "specific" within the 
meaning of Article 2.3 of the SCM Agreement. 
4.82 China's measures are "prohibited" within the meaning of Article 3.1(b) because they are 
"contingent, whether solely or as one of several  other conditions, upon the use of domestic over 
imported goods."  China's measures are contingent  upon the use of domestic over imported goods, in 
that the subsidy provided by these measures is only available to an auto manufacturer when (1) the 
quantity of the domestic parts and components used  by the auto manufacturer exceeds specified 
thresholds on the number of domestic assembly syst ems or (2) the quantity of the domestic parts and 
components used by the auto manuf acturer results in the total pr ice of the domestic parts and 
components being more than 40 per cent of the tota l price of all parts and components in a finished 
vehicle.  As such, the measures violate Articles 3. 1(b) and 3.2 of the SCM Agreement, which provide 
that a Member shall neither grant nor maintain subsidies contingent upon the use of domestic over 
imported goods.   
4.83 Since China's measures amount to a prohibited subsidy, the provisions of Article 4.7 of the 
SCM Agreement apply.  Those provisions provide that  the Panel shall recommend that the subsidizing 
Member withdraw the subsidy without delay, and th at the Panel shall specify in its recommendation 
the time-period within which the measure must be withdrawn.   WT/DS339/R 
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  C. F
IRST WRITTEN SUBMISSION OF CANADA  
1. Introduction and background 
4.84 In 2005 China introduced measures inconsistent with its WTO obligations and its Accession 
Protocol by imposing discriminatory internal ch arges and administrative burdens on imported auto 
parts. The internal charges under the measures apply when imported auto parts are used in 
manufacturing a vehicle and the quantities or valu es of imported parts exceed specified thresholds. 
The administrative burdens apply when any imported auto parts are used in vehicle manufacturing. 
Neither the internal charges nor the admini strative burdens apply to domestic parts. 
4.85 Before its accession, China imposed differentia l charges on imported auto parts based on the 
domestic content of the vehicles in which they we re incorporated.  As it committed to do in its 
Accession Protocol, China removed those differentia l charges and reduced its bound tariff rate on 
most auto parts to 10 per cent, and on most vehicl es to 25 per cent, by 1 July 2006.  China also 
specifically agreed that the tariff imposed on kits im ported to form vehicles (described as either CKD 
or SKD kits) would be no more than 10 per cent.  
2. The measures 
4.86 The measures are contained in three documents: 
• Policy Order 8; 
• Decree 125;  and 
• Announcement 4. 
4.87 Decree 125 and Announcement 4, both made e ffective on 1 April 2005, are legally binding 
instruments designed to implement and administer Policy Order 8.   
(a) Substantive criteria for determining the imposition of internal charges at the "whole vehicle" 
rate 
4.88 If a vehicle model is manufactured using imported parts that exceed specified quantity or 
value thresholds, all imported parts are considered to be "automobile parts characterized as complete 
vehicles" and assessed a charge of 25 per cent of th e value of the imported parts.  This 25 per cent 
charge equates to a 10 per cent tariff on the auto pa rts and an additional 15 per cent internal charge.  
Charges under the measures are levied, not at the border, but after  the goods have entered into free 
circulation in the Chinese market and have been in corporated into manufactured vehicles.  Imported 
parts will be automobile parts charact erized as complete vehicles if any of the following three tests are 
met: 
• As of 1 April 2005, when complete CKD or SKD kits are imported to assemble a 
vehicle. 
• As of 1 April, 2005, if a sufficient numbe r of assemblies characterized as imported 
assemblies are used in manufacturing the vehi cle. Imported parts will be automobile 
parts characterized as complete vehicles if the following combinations of assemblies are characterized as imported: WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page 24 
  
  − the two main assemblies (the vehicle body and engine); 
− either of the two main assemblies as well as three or more other assemblies;  or 
− five or more assemblies, other than the main assemblies. 
• As of 1 July 2006, when the aggregate price of imported parts reaches 60 per cent or 
more of the price of all parts used in a ve hicle.  However, this aspect of the measures 
was suspended by Customs Joint Bulletin 38,  dated 5 July 2006, until 1 July 2008.  
4.89 An assembly will be characterized as imported asse mbly and thus count against the thresholds 
if the value of imported parts comprises 60 per cent or more of the price of all parts used in the 
assembly, or if it uses more than a specified number of "key parts".  
4.90 If the vehicle manufacturer produces a vehicle that uses imported parts that are automobile 
parts characterized as complete vehicles, the manufacturer will be required to pay a charge on all 
imported parts incorporated into the vehicle (i.e., no t just the imported parts used in the automobile 
parts characterized as imported assembly). 
(b) Administrative requirements imposed on vehicle and auto parts manufacturers when any 
imported parts are used 
4.91 Any use of imported parts in vehicle manufacturing will subject a manufacturer to the 
burdensome administrative regime under the measur es. The administrative requirements do not apply 
to vehicle manufacturers that use solely domestic parts. This may result in significant delays in 
receiving and using imported auto parts and affect s a manufacturer's ability to source imported parts 
not included in a registered vehicle plan.   
4.92 The administrative burden requires every vehicl e manufacturer using imported parts, among 
other things, to: 
(a) perform a self-evaluation on proposed vehicle models to determine if the quantity or 
value of imported parts to be used in manufacturing the vehicle renders those parts 
characterized as complete vehicles; 
(b) provide the district customs office with  a general duty guarantee where a vehicle 
model uses parts that are characterized as complete vehicles; 
(c) file documents with the customs office showing the quantity and value of imported 
parts actually used in manufacturing a vehicle model. That filing must then be re-
evaluated by the Chinese government's Veri fication Centre, and a verification report 
prepared; and 
(d) pay internal charges based on the verification report.   
4.93 Another administrative burden on the face of the measures is the deeming of imported parts to 
be "in bond".  However, that de eming is a fiction.  Imported auto parts are not subject to Chinese 
bonding requirements and are used freely at the manufacturing sites of vehicle and auto parts manufacturers.    WT/DS339/R 
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  4.94 The administrative requirements make it difficu lt to source imported parts not included in a 
vehicle model registered with CGA.  Such changes may require repeating all the administrative hurdles to register and import parts.  The effect is to limit the ability of vehicle manufacturers to freely 
source imported auto parts. 
4.95 The measures also require manufacturers to tr ack down the chain of supply to determine 
whether individual assemblies and key parts are to be treated as imported for purposes of the measures.  As a result, parts manufacturers and supp liers that use imported parts have to maintain 
records of the quantity, type and cost of importe d parts used in any parts incorporated into a 
manufactured vehicle.  The parts manufacturers and s uppliers do this in order to meet their contractual 
obligations to vehicle manufacturers and guarantee to them that they meet the domestic content 
requirements of the measures.  
(c) Impact of the measures 
4.96 The overall impact of the measures is to discriminate against imported auto parts by 
encouraging the use of domestic parts in auto part s and vehicle manufacturing in China.  Due to the 
price-sensitivity of the Chinese market, vehicle and au to part manufacturers would be "priced out" of 
the Chinese marketplace if they passed on the additional 15 per cen t internal charge to their 
customers, and they would suffer a loss if they ab sorbed the cost themselv es.  The result is that 
manufacturers are forced to  meet the domestic content thresholds under the measures.  This also 
serves to devalue the investment of foreign vehicle and auto parts manufacturers that had invested in 
China on the premise they would be able to import auto parts at the 10 per cent rate to which China 
bound itself in its Schedule of Concessions. 
3. Legal argument 
4.97 The measures are inconsistent with China's WTO obligations, including the terms of its 
Accession Protocol.  Specifically, the measures result in the following violations: 
• Articles III:2, III:4 and III:5 of the GATT 1994, and Articles 1.2 and 7.2 of the 
Accession Protocol; 
• Article 2 of the TRIMs Agreement and Artic les 1.2 and 7.3 of the Accession Protocol; 
• Article II of the GATT 1994, and thereby Artic le 1.2 of the Accession Protocol;  and 
• Article XXIII:1(b) of the GATT 1994, in r espect of, but not limited to, China's 
commitments under Article 1.2 of the Accessi on Protocol and paragr aphs 93 and 342 of 
the Working Party Report. 
(a) China is bound by the WTO Agreem ent and China's Accession Protocol 
4.98 China agreed on its accession to be bound by  all the obligations contained in the 
WTO Agreement and covered agreem ents, and all of the terms set out in its Accession Protocol.  
These terms include the specific commitments contai ned in its Working Party Report and its tariff 
commitments in its Schedule. WT/DS339/R 
WT/DS340/R WT/DS342/R 
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  (b) The measures impose internal char ges on internal trade in China 
4.99 The measures regulate internal trade, not the process of importation.  They are, therefore, 
subject to obligations relating to internal measures imposed by Article III of the GATT 1994, not 
obligations relating to border measures under Article II of the GATT 1994. 
4.100  Internal charges and border charges can readily  be distinguished.  First, Members have a 
greater degree of flexibility in varying internal char ges and duties than with tariffs.  Internal charges 
need not be specified by a WTO Member and, subj ect to the restrictions in Article III of the GATT 
1994 and elsewhere, they can be increased at will.  In contrast, all border charges, both "ordinary 
customs duties" and "other duties and charges", must  be limited to those re corded in a Member's 
Schedule against the tariff item to which they appl y.  Second, internal charges are imposed on 
activities occurring within the territory of a Member in relation to normal internal trade of a product, 
while border charges are imposed "at the time or point of importation".  A Member may not, at its 
discretion, "deem" imported products not to have  entered their internal commerce.  To permit 
otherwise would allow Members subjectively to determine after the fact whether Articles II or III 
would apply to their charges.  
4.101  China attempts to move the border inwards by  deeming imported parts to be "bonded" while 
they are being used in manufacturing. However, this deeming is irrelevant: the measures apply 
charges and administrative requirements after importe d parts have entered into commerce in China. 
As such, the measures are properly characterized as internal measures subject to the disciplines of 
Article III. 
(c) The measures violate national treatment obligations in Articles III:2, III:4 and III:5 of the 
GATT 1994 and Articles 1.2 and 7.2 of the Accession Protocol  
4.102  Under Articles 1.2 and 7.2 of China's Accession Pr otocol, China commits itself to remove and 
not to introduce measures contrary to Article III of the GATT 1994.  Consequently, China's violations 
of Article III of the GATT 1994 set out below also  constitute violations of the Accession Protocol . 
(i) The measures violate Article III:2 first sentence of the GATT 1994 
4.103  The measures violate Article III:2, first sente nce of the GATT 1994, because they impose an 
internal charge on imported auto parts in excess of that imposed on like domestic parts.  A measure is 
inconsistent with the first sentence where: (1) th e imported and domestic products at issue are "like 
products"; and (2) the imported products are subject to  internal charges "in ex cess of" those applied to 
the like domestic products. 
4.104  WTO jurisprudence has established that origin alone cannot distinguish an imported product 
from an otherwise like domestic product.  The m easures' only distinction between imported and 
domestic auto parts is on the basis of origin, and therefore the parts are like for purposes of 
Article III:2. 
4.105  Further, any taxation above that "in excess of" that applied to the like domestic product is 
inconsistent with Article III:2, first sentence.  China has imposed a 15 per cent internal charge on 
imported auto parts, thereby taxing imported auto parts "in excess of" like domestic parts. 
4.106  The measures therefore meet the two conditions re quired to show a violation of Article III:2, 
first sentence.  WT/DS339/R 
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  (ii) The measures violate Article III:4 of the GATT 1994 
4.107  The measures violate Article III:4 of the GATT 1994 by providing less favourable treatment 
for imported auto parts than domestic auto parts.  Three elements must be satisfied for a measure to 
violate Article III:4:  (1) there are imported products  that are like domestic products;  (2) the measure 
constitutes a law, regulation or requirement affec ting the internal sale, offering for sale, purchase, 
transportation, distribution or use;  and (3) th at measure accords less favourable treatment to the 
imported products by modifying the conditions of co mpetition in the relevant market to the detriment 
of imported products.  
4.108  In the present circumstances, the only distincti on between imported and domestic auto parts is 
their origin, which alone cannot distinguish an imported product from an otherwise like domestic 
product.  Imported and domestic auto parts are, therefore, like for purposes of Article III:4. 
4.109  The measures constitute "laws, regulations and requirements" affecting the sale, offering for 
sale, purchase, transportation, distribution or use of imported auto parts.  This condition has broad 
application, and includes both obligations that an enterprise is "legally bound to carry out" and those 
that an enterprise voluntarily accepts in order to  obtain an advantage from the government.  The 
measures meet this second element as they are legally binding and affect the conditions of competition for imported auto parts. 
4.110  The measures modify the conditions of competiti on, as required by the third element, in two 
ways.  
(a) They create an economic incentive for manuf acturers to use domestic parts.  If a 
manufacturer exceeds the level of imported part s specified in the measures, even by a 
nominal quantity or value, that manufacturer is subject to additional charges equal to 
15 per cent of the value of all imported parts that it uses.  
(b) A vehicle manufacturer using any imported auto parts is subjected to burdensome 
administrative requirements. The only way to avoid these administrative requirements 
under the measures is for a vehicle manufacturer to use solely  domestic auto parts.  
4.111  China's measures violate Article III:4, as all three elements are satisfied. 
(iii) The measures violate Article III:5, first sentence  of the GATT 1994 
4.112  The measures are inconsistent with Artic le III:5 of the GATT 1994, first sentence, by 
requiring the use of domestic auto parts in specified quantities or values.  In or der to find a violation 
of the first sentence of Article III:5, the measure must  be:  (1) an internal re gulation;  (2) that is 
quantitative, relating to the mixture, processing or use of products in specified amounts;  and (3) 
requiring, directly or indirectly, the use of those products from domestic sources. 
4.113  The measures constitute "internal regulations " as they are legally binding and regulate 
conduct with respect to the purchase, sale or use of imported auto parts in China.   
4.114  The measures are quantitative and relate to the u se of auto parts in specified amounts.  The 
measures "relate" to the use of domestic parts and are "quantitative" as they specify quantity and value 
thresholds for the use of domestic parts.  The measur es therefore "relate" to the use of auto parts in 
specified amounts.  WT/DS339/R 
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Page 28 
  
  4.115  The measures "require" the use of domestic auto parts.  If measures provide advantages 
conditioned on the purchase of a specified quantity  of goods from domestic sources, then those 
measures "require" such a purchase.  The measures "r equire" that vehicle manufacturers satisfy these 
domestic content thresholds because failure to meet  such thresholds results in the imposition of the 
additional charges on all imported auto parts.  
4.116  In summary, the measures violate Article III:5,  first sentence, becau se they are internal 
quantitative regulations relating to the use of domes tic auto parts in specified quantities and values 
that impose financial penalties if those specified quantities and values of domestic parts are not met. 
(d) The measures violate the TRIMs Agreement and Articles 1.2 and 7.3 of the Accession 
Protocol 
(i) The measures violate Article 2 of the TRIMs Agreement 
4.117  The measures are inconsistent with Article 2 of  the TRIMs Agreement because they are trade-
related investment measures ("TRIM") that establish domestic-content thresholds  that adversely affect 
imports of auto parts.  In addition, the measures also violate Articles 1.2 and 7.3 of the Accession 
Protocol, which bind China to all obligations contained in the TRIMs Agreement.  
4.118  The TRIMs Agreement applies where:  (1) a challenged measure is a TRIM, i.e., an 
"investment measure" that is "trade-related"; and (2 ) the measure is inconsistent with Articles III or 
XI of the GATT 1994.  The inconsistency required for the second element is apparent if the measure 
is included in the Illustrative List.  
4.119  The measures constitute a TRIM.  An "invest ment measure" includes receiving an advantage 
by meeting domestic content requirements, such as choosing to use domestic over imported goods. It 
also includes a measure designed to develop dom estic manufacturing capability.  The measures 
constitute an "investment measure" because they  impose domestic content requirements that are 
designed to improve domestic auto parts manufact uring capability.  "Trade-related" investment 
measures are those that adversely affect th e conditions of competition between WTO Members 
respecting trade in goods, and necessarily include th ose that prescribe domestic-content requirements.  
As the measures specify domestic-content thresholds  and apply to trade in auto parts, they are 
"trade-related". 
4.120  The measures violate Article III of the GATT 1994, both for the reasons set out above 
regarding Article III generally and because they fall within paragraph 1(a) of the Illustrative List 
referenced in Article 2.2 of the TRIMs Agreement,  and therefore necessarily violate Article III of the 
GATT 1994.  A measure must satisfy two elements to  fall within paragraph 1(a) of the Illustrative 
List:  (1) it must be mandatory or enforceable, or there must be compliance with it in order to obtain 
an advantage;  and (2) it must re quire the purchase of domestic product.  
4.121  A simple advantage conditional on the use of domestic goods meets the requirement for the 
first element.  The measures provide two distinct advantages conditional on the use of domestic auto 
parts: avoiding additional internal charges a nd avoiding additional administrative requirements. 
4.122  The second element is met because the measures "require" vehicle manufacturers to meet 
specified quantities or values of domestic auto pa rts.  If vehicle manufacturers do not comply, all 
imported parts used will be subject to an internal charge of 15 per cent.  Accordingly, the measures 
"require" a specified quantity or value of domestic c ontent in order to avoid those internal charges.   WT/DS339/R 
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  4.123  In sum, the measures are a TRIM that is incons istent with Article 2 of the TRIMs Agreement  
and China's Accession Protocol.  
(e) Even if the measures are characterized as tariffs, they violate Article II:1 of the GATT 1994 
and China's Accession Protocol  
4.124  Canada has submitted that the measures impose an  internal charge.  However, if the Panel 
determines, contrary to Canada's position, that the additional charge under the measures constitutes a 
tariff on the importation of auto parts, then the charge violates Article II:1(a) and (b) of the GATT 1994, Article 1.2 of the Accession Protocol and Chin a's Schedule, by imposing a tariff rate on auto 
parts greater than 10 per cent. 
(i) China's tariff commitments in its Schedule with respect to auto parts and whole vehicles 
4.125  The relevant bound tariff rates in China's Schedule  fall into three categories: 
• whole vehicles, whose  bound tariff rate is generally 25 per cent; 
• vehicle chassis fitted with engines and bodies , whose bound tariff rate is generally 
10 per cent;  and 
• auto parts , whose bound tariff rate is generally 10 per cent. 
4.126  There is presently no explicit tariff line in Ch ina's Schedule for CKD and SKD kits, but China 
specifically committed in the Working Party Report to  charge them a tariff no greater than 10 per 
cent, a commitment incorporated into the Accession Protocol in Article 1.2.  
4.127  The only relevant factor in levying a customs ta riff is the classification of the product based 
on its condition at the time of importation at the borde r.  Contrary to this well-established principle, 
the measures impose a 25 per cent charge on imported auto parts characterized as complete vehicles 
after  importation based upon their use in manufacturing.   China has therefore violated its GATT and 
Accession Protocol obligations to apply a tariff rate of 10 per cent on imported auto parts.  
(ii) The measures provide "less favourable treatmen t" than is set out in China's Schedule and are 
thereby inconsistent with Article II:1(a) and (b) of the GATT 1994 
4.128  Article II:1(b) of the GATT 1994 contains two distinct commitments.  A Member may not, 
except as set out in its Schedule, impose in connec tion with the importation of products from other 
Members:  (1) any ordinary customs duty;  or (2) any other duty or charge.  
4.129  Canada has submitted that, should the Panel determine, contrary to Canada's position that the 
measures impose internal charges, that the entir e 25 per cent charge under the measures constitutes a 
tariff on importation of auto parts, then that charge  is an ordinary customs duty "in excess of" that set 
forth in China's Schedule.  Imported parts are not whole vehicles.  China, through its arbitrary 
deeming of imported parts as whol e vehicles and thus charging a 25 pe r cent tariff rate, provides less 
favourable treatment to imported auto parts than that  provided for in its Schedule, contrary to Article 
II:1(b), first sentence. 
4.130  If the charge under the measures is not an "ordin ary customs duty", it must be an "other duty 
or charge".  China has not recorded the measures  as an "other duty or charge" in its Schedule.  
Therefore, the additional 15 per cent charge on auto pa rts, even if it is an "other duty or charge", WT/DS339/R 
WT/DS340/R WT/DS342/R 
Page 30 
  
  violates Article II:1(b), second sentence, by imposing charges not set out in China's Schedule, and 
Article II:1(a), by providing less favourable treat ment to auto parts from Canada than China's 
Schedule permits. 
4.131  Further, in the Working Party Report China co mmitted to charging no more than 10 per cent 
for parts imported as CKD and SKD kits. China's imposition of a 25 per cent charge on CKD and SKD kits  therefore violates its obligations under the WTO Agreements. 
(f) China's measures nullify or impair benefits accr uing to Canada under Article XXIII:1(b) of 
the GATT 
4.132  Even if the Panel finds, contrary to Canada's pos ition, that China is entitled to charge a tariff 
rate in excess of 10 per cent on CKD and SKD kits , China has nevertheless nullified or impaired 
benefits owing to Canada in the sense of Article XXIII:1(b) of the GATT 1994.  A complaining party 
must establish three elements for a claim under Article XXIII:1(b):  (1) application of a measure by a 
WTO Member;  (2) a benefit accruing under the releva nt agreement, including legitimate expectations 
of improved market access opportunities arising out of relevant tariff concessions; and (3) the 
nullification or impairment of the benefit as the result of the application of the measure. 
4.133  The measures are legally enforceable measures applied to imported auto parts from other 
Members.  As such they are "measures" within the meaning of Article XXIII:1(b). 
4.134  Canada had a benefit accruing: a legitimat e expectation of improved market access 
opportunities for auto parts imported, notably that CKD and SKD kits would be charged tariffs no 
greater than 10 per cent.  That expectation deriv es from China's Schedule, wh ere tariff lines for auto 
parts are bound at 10 per cent.  It also derives from China's commitment in paragraph 93 of the 
Working Party Report, incorporated as an obliga tion in Article 1.2 of the Accession Protocol, to 
charge no more than 10 per cent on CKD and SKD kits. 
4.135  China has nullified or impaired that benefit by upsetting the competitive relationship between 
imported and domestic auto parts by imposing on imported auto parts an additional 15 per cent 
internal charge that is not imposed on domestic auto parts. 
4.136  Thus, the three elements are met for establis hing that China has nullified or impaired a 
concession to Canada within the meaning of Article XXIII:1(b) of the GATT 1994. 
D. F
IRST WRITTEN SUBMISSION OF CHINA  
1. Introduction 
4.137  This case concerns the relationship between s ubstance and form in the administration of 
national customs laws.  The European Communities,  the United States, and Canada submit that the 
GATT 1994 does not permit China to look beyond the form  of how an auto manufacturer imports and 
assemble auto parts into complete motor vehicles.  China considers that, on the contrary, its authority 
to give effect to the substance  of how an auto manufacturer imports and assembles auto parts is 
entirely supported by Article II of the GATT 1994.   
4.138  Under GIR 2(a), customs authorities should classify as a complete article any group of parts 
and components that has the essential character of that  article, regardless of the state of assembly or 
disassembly of the parts and components at the time  of importation.  The issue presented in this 
dispute is whether the manner in which an importe r chooses to structure its imports of parts and  WT/DS339/R 
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 Page 31 
  
  components should change this classification result.  In particular, the issue presented is whether 
customs authorities must assign a different classifi cation to a group of imported parts and components 
merely because the parts and components enter th e customs territory in multiple shipments. 
4.139  The measures challenged in this proceeding give effect to China's tariff provisions for "motor 
vehicles" by defining the circumstances under whic h China will classify imported auto parts and 
assemblies as having the essential character of a moto r vehicle.  These measures are designed to reach 
the same classification determination without re gard to whether the imported auto parts and 
assemblies enter China in one shipme nt or in multiple shipments.  The measures thereby ensure that 
the substance of an auto manufacturer's import tran sactions prevails over their form, and prevent the 
circumvention of China's tariff provisions for motor vehicles.  
4.140  China will demonstrate that the measures at  issue are border measures subject to the 
disciplines of Article II of the GATT 1994.  China will further demonstrate that these measures give effect to a proper interpretation of the term "motor  vehicles" in China's Schedule of Concessions, and 
therefore do not result in the imposition of ordinary customs duties in excess of China's bound 
commitments.  The claims advanced by complain ants on the contrary assumption that the challenged 
measures are internal measures subject to Article  III of the GATT 1994 are without basis, and the 
Panel should reject them.   
2. The measures 
4.141  China's tariff commitments with respect to moto r vehicles are set forth in Chapter 87 of its 
Schedule of Concessions.  With limited exceptions, China's bound duty rate for motor vehicles is 
25 per cent.  Different tariff headings under Chap ters 84, 85, and 87 set forth China's commitments 
with respect to parts and assemblies of motor vehi cles.  In almost all cases, the bound duty rate for 
parts and assemblies of motor vehicles is 10 per cent.   
4.142  The difference between the higher tariff rates fo r motor vehicles and the lower tariff rates for 
parts and assemblies of motor vehicles creates an in centive for auto manufacturers to take a collection 
of auto parts and assemblies that has the essential character of a motor vehicle under GIR 2(a), export 
those parts and assemblies to China in multiple shipments, and assemb le them domestically into a 
complete motor vehicle.  Auto manufacturers can thereby import a group of auto parts and assemblies 
that would have been classified as a complete moto r vehicle had it entered China in a single shipment, 
and evade the higher duty rate that applies to moto r vehicles.  This type of tariff evasion deprives 
China of duly-owned revenues and undermines the e ffectiveness of the tariff concessions that China 
negotiated upon its accession to the WTO. 
4.143  As other WTO Members have done under like circumstances, China adopted measures to 
define the boundary between complete motor vehicl es and the parts and assemblies of motor vehicles, 
and to prevent tariff circumvention.  The principal measure that China adopted for this purpose, and 
that is challenged in this proceeding, is the Administrative Rules on Importation of Automobile Parts 
Characterized as Complete Vehicles,  which took effect on 1 April 2005.  This measure is known as 
"Decree 125".  Decree 125 is further implemented in Announcement 4, "Rules on Verification of 
Imported Automobile Parts Characterized as Complete Vehicles". 
4.144  The basic objective of Decree 125 is to establish a uniform methodology for determining 
whether a group of imported auto parts has the essential character of a complete motor vehicle, and to 
apply that methodology without regard to whether the auto parts in question enter China in a single 
shipment or multiple shipments.  Decree 125 requi res every auto manufacturer in China, without 
regard to the extent of its domestic or foreign ow nership, to conduct an evaluation of each vehicle WT/DS339/R 
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  model that it produces.  The purpose of this evaluation is to determine whether the imported parts and 
assemblies that the manufacturer uses to assemble that vehicle model should be characterized as 
having the essential character of a complete motor vehi cle, based on a series of thresholds set forth in 
the measure. 
4.145  If, as a result of the evaluation, the auto manuf acturer determines that a particular vehicle 
model is assembled from imported parts and assemblies having the essential character of a motor vehicle, the manufacturer must register that model with the CGA.  Thereafter, when auto parts are 
imported for use in the assembly of that model, th e importer must declare those parts at the time of 
importation as parts of a complete motor vehicle.  The importer is required to provide a customs bond 
for those entries, and the parts remain under customs control after they cross the border. 
4.146  When the auto manufacturer assembles the imported parts an d components in accordance 
with the declaration made at the time of importation, i.e. , as part of a larger group of imported parts 
and components having the essential character of a motor vehicle, the CGA assesses the imported 
parts and components at the tariff rate for motor vehi cles.  This tariff rate applies only to the imported 
parts and assemblies in the assembled vehicle.  The CGA calculates the amount of duty liability on 
the imported parts and assemblies in accordance with  the ordinary customs laws and regulations of 
China. 
4.147  The overall effect of this system is to base the tariff classification of imported auto parts and 
components on the commercial reality of what the auto manufacturer is importing and assembling.  If 
the auto manufacturer plans to import and assemble pa rts that, in their quantity and character, have the 
essential character of a complete vehicle, then it must register that intent in advance and declare those 
imports accordingly.  Auto parts that are importe d for this purpose enter China in bond, and the CGA 
collects the appropriate duties when the imported auto parts are assembled in accordance with the 
declarations made at the border.  These measures ensure that there is no difference in tariff 
classification or duty liability based solely on how  the auto manufacturer structures its imports. 
3. Legal argument 
(a) The measures are border measures subject to Article II of the GATT 1994 
4.148  The threshold issue before the Panel is whet her the challenged measures are border measure 
subject to Article II of the GATT 1994, or whether th ey are internal measures subject to Article III of 
the GATT 1994.  The Panel must resolve this issue at the outset to determine which provisions of the 
covered agreements are relevant to its evaluati on of the conformity of the challenged measures. 
4.149  The challenged measures implement and enfo rce the provisions of China's Schedule of 
Concessions relating to "motor vehicles" by de fining the circumstances under which China will 
classify imported auto parts and assemblies as havi ng the essential character of a motor vehicle.   
4.150  The measures operate on the basis of a prior dete rmination that an auto manufacturer intends 
to assemble a particular vehicle model from imported parts and assemblies that have the essential 
character of a motor vehicle.  When an importer s ubsequently imports auto parts and assemblies into 
China for the purpose of assembling one of these vehicl e models, the declaration that it is required to 
make at the time of importation imposes a conditio n upon the entry of goods into China.  That 
condition is that the CGA will assess the imported au to parts and assemblies at the tariff rate for 
motor vehicles when they are used in the assembly of the designated vehicle model.  This condition is 
secured by the provision of a bond, and the importe d auto parts and assemblies remain in a bonded 
status until they are used in accordance with the declaration.  WT/DS339/R 
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  4.151  These characteristics of the challenged measures re sult in the imposition of ordinary customs 
duties on auto parts and assemblies "on their importati on" into the customs territory of China, within 
the meaning of Article II:1(b) of the GATT 1994.   Consistent with a proper interpretation of 
Article II:1(b) under the Vienna Convention,  and consistent with prio r interpretations of this 
provision, a measure falls within the scope of Artic le II if it imposes charges that are conditional upon 
the importation of a product into the customs territory of a Member.   
4.152  Contrary to the arguments of the United States and Canada, the conclusion that the challenged 
measures fall within the scope of Article II is supported, not undermined, by the adopted GATT panel 
report in EEC – Parts and Components.   That report interpreted the sc ope of Article II to include 
charges that are "imposed conditional upon the impor tation of a product or at the time or point of 
importation."
22  As demonstrated by the widespread customs practices of WTO Members, this 
includes charges that are imposed subsequent to th e point at which goods physically cross the border, 
so long as any such charges objectively relate to  a duty obligation that arose as a condition of 
importation.  The challenged measur es operate in precisely this way. 
4.153  In addition, the anti-circumvention measures that the panel in EEC – Parts and Components  
found to be inconsistent with Article III of th e GATT 1994 were materially different than the 
measures at issue in this proceeding.  Following the adoption of the Panel report in EEC – Parts and 
Components,  the European Communities significantly re vised its anti-circumvention measures to 
address the concerns identified by that panel and to  place the measures squarely within the framework 
of Article II.  The EC has taken the position that its revised measures do not impose internal taxes or 
charges subject to Article III of the GATT 1994.  The measures that China has adopted to prevent 
circumvention of its tariff provisions for motor ve hicles operate on the same basis as the revised EC 
measures, and do not have the flaw that fo rmed the basis for the panel's findings in EEC – Parts and 
Components.  
4.154  For these reasons, the challenged measures are subject to the disciplines of Article II of the 
GATT 1994, and it is on this basis that the Panel must evaluate the conformity of the challenged 
measures with China's WTO obligations. 
(b) The measures are consistent with Article II of  the GATT and do not collect ordinary customs 
duties in excess of China's bound commitments 
(i) China's interpretation of its tar iff schedule is consistent with its ordinary meaning, in context 
and in light of its object and purpose 
4.155  The central issue before the Panel is whether the challenged measures give effect to a proper 
interpretation of the term "motor vehicles" as used  in China's Schedule of Concessions.  In particular, 
the interpretive issue is whether the term "motor vehicles" can encompass the importation, in multiple 
shipments, of auto parts and assemblies that have  the essential character of a motor vehicle when 
assembled.  In accordance with th e Appellate Body's holding in EC – Computer Equipment,  the Panel 
must resolve this interpretive issu e in accordance with "the general rules of treaty interpretation set 
out in the Vienna Convention ."23   
4.156  Critical context for the resolution of this interp retive issue is provided by GIR 2(a) of the HS, 
which states: 
                                                      
22 GATT Panel Report on EEC – Parts and Components , para. 5.5. 
23 Appellate Body Report on EC – Computer Equipment , para. 84.   WT/DS339/R 
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  Any reference in a heading to an article shal l be taken to include a reference to that 
article incomplete or unfinished, provide d that, as presented, the incomplete or 
unfinished article has the essential character of  the complete or finished article.  It 
shall also be taken to include a reference to that article complete or finished (or 
falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled. 
4.157  The application of GIR 2(a) to the interpretation of the term "motor vehicles" gives rise to 
several circumstances in which customs author ities should classify auto parts and assemblies as 
"motor vehicles," and not as parts and assemblies of motor vehicles: 
• First, the importation of a completely assembled motor vehicle is clearly the 
importation of a "motor vehicle," even though it is necessarily composed of the parts and components of a motor vehicle.   
• Second, the importation of 100 per cent of the parts necessary to assemble a motor 
vehicle is the importation of a "motor vehicl e," and not the parts of a motor vehicle, 
regardless of their state of assembly or di sassembly.  Thus, for example, a completely 
knocked-down ("CKD") kit is classified as a motor vehicle, not as parts of a motor 
vehicle.   
• Finally, the importation of less than 100 per cent of the parts necessary to assemble a 
complete motor vehicle is the importation of a "motor vehicle," and not the parts of a motor vehicle, provided that the imported parts, when assembled, have the essential 
character of a motor vehicle. 
4.158  As is evident from GIR 2(a) and these examples,  there is no clear dividing line between tariff 
provisions for a complete article (such as motor vehi cles) and separate tariff provisions for the parts 
and components of that article (such as parts and assemblies of motor vehicles).  There is necessarily a continuum of circumstances under which the parts and components of an article will be classified as 
the complete article. 
4.159  Further context for the interpretation of the te rm "motor vehicles" in China's Schedule of 
Concessions is provided by Note VII of the Expl anatory Notes to GIR 2(a), which states that 
"unassembled components of an article which are in  excess of the number required for that article 
when complete are to be classified separately."  As other customs authorities have recognized, the 
effect of this rule is that a collection of parts is cl assified, in the first instance, as the total number of 
complete articles that can be assembled from those parts (including articles that have the essential 
character of the complete article).  Any separate tariff provisions for parts and components therefore 
encompass the importation of parts other than for the purpose of assembling a complete article from imported parts.   
4.160  The challenged measures apply the interpretive rul es of GIR 2(a), including Note VII, in two 
basic respects.   
4.161  First, the challenged measures define the thres holds at which China will classify a collection 
of auto parts as having the essential character of a complete motor vehicle.  Because GIR 2(a) 
provides that something less than 100 per cent of the parts necessary to assemble  the complete article 
can have the essential character of the complete article, regardless of their state of assembly or disassembly, it benefits customs authorities and importer s alike to have certainty with respect to the 
boundary between motor vehicles and the parts and assemblies of motor vehicles.  WT/DS339/R 
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  4.162  Second, the challenged measures apply the interpre tive rules of GIR 2(a) to ensure that the 
substance of an auto manufacturer's import activiti es prevails over their form.  The United States has 
stated, and China agrees, that it is "a general princi ple of international customs practice that substance 
should prevail over the form of a transaction."
24  Consistent with this principle, the challenged 
measures apply the interpretive rules of GIR 2(a) w ithout regard to whether the imported auto parts 
and components used to assemble a motor vehicle enter China in one shipment or in multiple 
shipments.  This ensures that tariff classificati ons do not change based solely on how an auto 
manufacturer chooses to structure its imports. 
4.163  The application of the interpretive rules of GIR 2(a) to multiple shipments of auto parts and 
assemblies is consistent with the object and pur pose of China's Schedule of Concessions and of 
Article II of the GATT 1994.  The Appellate Body  has observed that one object and purpose of the 
WTO Agreement and the GATT 1994 is to "maintain[] the security and predictability of reciprocal 
market access arrangements manifested in tariff concessions …".25  The Appellate Body has stated 
that the interpretation of a Schedule of Concessions  must recognize that tariff arrangements negotiated 
by Members are meant to be "reciprocal and mutually advantageous".26 
4.164  The difference in tariff rates between motor vehicles and parts and assemblies of motor 
vehicles is part of the "reciprocal and mutually advantageous" market access arrangements that China 
negotiated with other WTO Members.  It is therefor e consistent with the "security and predictability 
of reciprocal market access arrangements" to inte rpret China's Schedule of Concessions to prevent the 
circumvention of this tariff rate difference thr ough the importation and assembly of auto parts that 
have the essential character of a motor vehicle.  At th e same time, China continues to give effect to its 
separate tariff provisions for auto parts and assemblies by classifying parts and assemblies under these headings when they are not used to circumvent the higher tariff rates on motor vehicles.  This ensures 
that the overall balance of market access arrangeme nts with respect to motor vehicles and motor 
vehicle parts is maintained. 
(ii) China's interpretation of its tariff schedule is c onsistent with the practice of other Members in 
preventing the circumvention of duties 
4.165  Numerous WTO Members, including all three complainants in this proceeding, have adopted 
measures that prohibit the use of domestic assembly operations as a means of circumventing  duties that apply to complete articles, whether they are ordinary customs duties or 
anti-dumping/countervailing duties.   Under Article 31 of the Vienna Convention,  this practice 
"constitutes objective evidence of the understanding of the parties" with respect to the distinction 
between the imposition of duties on complete artic les and the imposition of duties on the parts and 
components of those articles.
27 
4.166  This practice demonstrates that Members have applied the interpretive rules of GIR 2(a) to 
classify multiple shipments of parts and components as having the essential character of the complete 
article, and have done so where necessary to preven t the circumvention of duties that apply to the 
complete article.  The common objective of these measu res is to ascertain what Canada has referred to 
as the "commercial reality" underlying multip le imports of parts and components. 
                                                      
24 GATT Panel Report on EEC – Parts and Components , para. 4.37 (describing US argument). 
25 Appellate Body Report on EC – Chicken Cuts , para. 243. 
26 Appellate Body Report on EC – Chicken Cuts (AB) , para. 243 (quoting EC – Computer Equipment , 
para. 82).   
27 Appellate Body Report on EC – Chicken Cuts , para. 255.   WT/DS339/R 
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  4.167  In applying anti-circumvention measures, Member s have made the duty liability that arises at 
the time of importation conditiona l upon whether imported parts and components are used to 
assemble complete articles.  Members have also a dopted measures that track the final use of imported 
parts and components as a means of determining wh ether parts and components were imported for the 
purpose of circumventing duties th at apply to the complete article.  In connection with these 
measures, Members have imposed bonding or other secu rity requirements to ensure the collection of 
any duty liability that applies to the complete article. 
4.168  The measures adopted by China to prevent circum vention of its tariff rates for motor vehicles 
are entirely consistent with these practices of ot her WTO Members under like circumstances.  Under 
Article 31 of the Vienna Convention,  this practice demonstrates that China has properly interpreted its 
tariff provisions for "motor vehicles" to include the importation, in multiple shipments, of auto parts 
and assemblies that have the essential character of a motor vehicle when assembled.   
4.169  Moreover, because these anti-circumvention practices existed at the time of China's accession 
to the WTO, they constitute circumstances su rrounding the conclusion of China's Schedule of 
Concessions, and therefore bear upon the interpretation of the term "motor vehicles" under Article 32 
of the Vienna Convention . 
(iii) China's interpretation of its ta riff schedule is based on the condition of goods at the time of 
importation 
4.170  The measures that China has adopt ed to prevent circumvention of its tariff rates for motor 
vehicles are based on the demonstrated and declar ed intention of the manufacturer to assemble 
complete motor vehicles from multiple shipments of  auto parts and assemblies.  As the customs 
practices of other WTO Members demonstrate, this type of measure is consistent with the general 
principle that merchandise is ordinarily classified  based on its condition at the time of importation. 
4.171  The practice of all three complainants in th is proceeding demonstrates that there are 
circumstances under which Members will make a determination of duty liability based on the 
combination of multiple shipments of parts.  This is necessarily an element of preventing the 
circumvention of duties on complete articles, as refl ected in the measures that Members have adopted 
for this purpose. 
4.172  Members have also combined multiple shipme nts of parts and components for classification 
purposes in dealing with so-called "split shipme nts".  Under these measures, such as the split 
shipment regulation recently adopted by the Unite d States, customs authorities can base a tariff 
classification on the combination of multiple ship ments.  One circumstance in which customs 
authorities classify split shipments on this basis is where the importer intends to assemble parts and 
components into a complete article.  This type of measure is necessarily based on an understanding of 
the "condition as imported" rule that looks beyond the c ontents of a single import entry, and that rests 
instead on the stated intention of the importer to assemble separate shipments of parts and components 
into a complete article.   
4.173  These types of measures are consistent with the decision of the WCO that "the questions of 
split consignments and the classification of goods as sembled from elements originating in or arriving 
from different countries are matters to be settled by  each country in accordance with its own national 
regulations."
28  On this basis, Members have adopted practices under GIR 2(a) that permit the 
                                                      
28 World Customs Organization, Decisions of the Harmonized System Committee, Interpretation of 
General Interpretative Rule 2(a) , HSC/16/Nov. 95, Doc. 39.600 (CHI-29).  WT/DS339/R 
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  classification of imports based on the combination of multiple entries, including under circumstances 
in which the importer intends to assemble pa rts and components into a complete article. 
(iv) Any ambiguity concerning the measures should be resolved in China's favour under the 
principle of in dubio mitius 
4.174  China does not believe that there is any ambigu ity concerning the interpretation of the term 
"motor vehicles" as it relates to China's Schedul e of Concessions.  China considers that the 
interpretation of the term "motor vehicles" to whic h the challenged measures give  effect is consistent 
with the ordinary meaning of that term in contex t and in light of the object and purpose of the GATT, 
and is also consistent with the practice of other WTO Members under like circumstances. 
4.175  However, if the Panel were to identify any ambiguity in the meaning of the term "motor 
vehicles," or any ambiguity concerning China's au thority under Article II of the GATT 1994 to adopt 
the challenged measures, the Panel should apply the principle of in dubio mitius  so as to minimize any 
imposition on the sovereign authority of China to enforce its customs laws. 
4.176  The Appellate Body has affirmed that "if the meaning of a term is ambiguous, that meaning is 
to be preferred which is less onerous to the part y assuming an obligation, or which interferes less with 
the territorial and personal supremacy of a party, or  involves less general restrictions on the parties."
29  
The application of that principle in this case s hould lead the Panel to interpret the term "motor 
vehicles" to preserve for China the same scope of sovereign authority that other WTO Members have 
exercised to interpret and enforce their customs la ws, and to prevent the use of domestic assembly 
operations as a means of circumventing duties on complete articles. 
4. Claimants have failed to demonstrate a viol ation of Article III of the GATT 1994, the 
TRIMs Agreement, Part I, Article 7.2 of the Accession Protocol or Part I, Article 7.3 of the Accession Protocol  
4.177  China has demonstrated above that the measu res challenged in this proceeding are border 
measures subject to the disciplines of Article II of the GATT 1994.  The Panel should therefore 
evaluate the challenged measures under Article II. 
4.178  Because the challenged measures are border me asures, complainants' specific claims under 
Article III of the GATT 1994, the TRIMs Agreement,  Part 1.7.2 of the Accession Protocol, and 
Part I.7.3 of the Accession Protocol, are all without basis.  All of these claims are premised on the erroneous assertion that the challenged measures are internal measures. 
5. The United States and the European Co mmunities have failed to demonstrate a 
violation of the SCM Agreement 
4.179  The United States and the European Commun ities contend that China foregoes revenue 
within the meaning of Article 1.1 of the SCM Ag reement by not imposing its tariff rates for motor 
vehicles on all imports of auto parts and components.  They further contend that this "foregone 
revenue" is contingent upon the use of domest ic over imported goods, and thus constitutes a 
prohibited subsidy under Article 3.1(b) of the SCM Agreement . 
4.180  The United States and the European Commun ities claim under the SCM Agreement merely 
underscores their mischaracterization of the purpose of  the challenged measures.  The fact that China 
                                                     
 
29 Appellate Body Report on EC – Hormones , para. 165, n. 154.   WT/DS339/R 
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  has adopted measures to prevent the circumvention of  its tariff provisions for motor vehicles does not 
mean that China must impose the tariff rates for mo tor vehicles on all imported auto parts.  On the 
contrary, China must continue to give effect to its separate tariff provisions for auto parts, and assess 
imported auto parts at those rates when they are not used to circumvent the duties that apply to 
complete articles.  The United States and the European Communiti es claims under the SCM 
Agreement are therefore without basis.   
6. The complainants' claims in respect of China's Accession Protocol and Article XXIII of 
the GATT 1994 must fail 
4.181  In ways that are not entirely consistent with  each other, the complainants allege that the 
challenged measures violate the commitment that Ch ina made in paragraph 93 of the Working Party 
Report, incorporated by reference into the Accessi on Protocol and the WTO Agreement, concerning 
separate tariff lines for CKD and SKD kits.  In add ition, Canada alleges nullification and impairment 
of tariff benefits under Article XXIII:1(b) of the GATT 1994, also premised upon its interpretation of 
paragraph 93 of the Working Party Report. 
4.182  Paragraph 93 of the Working Party Report states: 
Certain members of the Working Party expressed particular concerns about tariff 
treatment in the auto sector .  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 semi-knocked down 
kits for motor vehicles.  If China created su ch tariff lines, the tariff rates would be no 
more than 10 per cent.  The Working Party took note of this commitment.
30 
4.183  Complainants have failed to demonstrate a prima facie violation of this limited and 
conditional commitment.  Complainants have neither alleged nor demonstrated that China has created 
separate tariff lines for CKD/SKD kits.  In fact, it is evident on the face of Decree 125 that China 
continues to adhere to the rule, established by GIR 2(a), that CKD/SKD kits are classified as complete 
motor vehicles.  Article 2 of Decree 125 states that "automobile manufacturers importing [CKD/SKD] 
kits may declare such importation to the customs in charged of the area where the manufacturer is 
located and pay duties, and these Rules shall not apply. "  This provision exists precisely because there 
is no doubt as to the proper tariff classification of imported CKD/SKD kits – they are classified as complete vehicles under all circumstances, as  complainants have acknowledged in other 
circumstances and as their own customs practices demonstrate.   
4.184  The apparent basis for the United States and Canadian claims under paragraph 93 is their 
assertion that China had a practice, prior to its accessi on to the WTO, of classifying CKD/SKD kits as 
"parts."  Even if it were possible to interpret paragraph 93 of the Working Party Report to require 
China to continue this alleged practice, the sole source of evidence on which they rely to establish the 
existence of this practice does not support their clai m.  In fact, it is clear from complainants' own 
review of China's pre-accession policies that Ch ina generally prohibited the assembly of motor 
vehicles from CKD/SKD kits prior to its accession to the WTO.  Moreover, during the only period in 
which China maintained separate tariff lines for CKD/SKD kits (1992 to 1995), the tariff rates for 
CKD/SKD imports were the same as the tariff rates for motor vehicles – not the lower tariff rates for 
parts and assemblies of motor vehicles. 
                                                     
 
30 Working Party Report, para. 93.    WT/DS339/R 
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  4.185  For these reasons, the various claims that compla inants assert based on their interpretations of 
paragraph 93 of the Working Party Report are without basis.   
7. Any inconsistency with the GATT 1994 is subject to the general exception under 
Article XX(d) 
4.186  The Panel may find, contrary to China's ar guments, that the challenged measures are 
inconsistent with one or more provisions of the GATT 1994, or that particular aspects of the 
challenged measures are inconsistent with the GAT T 1994.  Should the Panel make any such finding, 
China considers that the challenged measures are justified under Article XX(d) of the GATT 1994 as 
measures that are necessary to secure comp liance with China's customs laws.   
4.187  The challenged measures secure compliance with China's customs laws and regulations by 
preventing the importation and assembly of auto pa rts as a means of circumventing China's tariff 
provisions relating to motor vehicles.  They are therefore within the purview of Article XX(d). 
4.188  Applying the balancing test that the Appe llate Body most recently articulated in Dominican 
Republic – Import and Sale of Cigarettes,  the challenged measures are "necessary" because, inter alia,  
they further China's substantial in terest in collecting tariff revenues and preserving the effectiveness 
of its negotiated tariff concessions.  The measures c ontribute to the realization of these interests by 
ensuring that tariff classifications are based on the substance of what an auto manufacturer imports 
and assembles, and not the form of the shipments.  Moreover, the challenged measures have little or 
no restrictive impact on international trade, as their only purpose is to ensure that the correct tariff 
rates are collected.  The fact that the challenged measures had had no impact on trade and investment 
has been noted by several of the world's larg est auto manufacturers and auto parts suppliers. 
4.189  For these reasons, and in the event that the Pa nel finds that one or more aspects of the 
challenged measures is inconsistent with the GATT 1994, China has provisionally demonstrated that 
any inconsistency between the ch allenged measures and China's GATT obligations is subject to the 
general exception under Article XX(d). 
8. Conclusion 
4.190  For the reasons set forth in China's first written submission, as summarized herein, China 
requests the Panel to reject the claims raised by  the European Communities, the United States, and 
Canada.   
E. O
RAL STATEMENT BY THE EUROPEAN COMMUNITIES AT THE FIRST SUBSTANTIVE MEETING 
OF THE PANEL  
1. Introduction 
4.191  The co-complainants have already in their written submissions co-ordinated positions to 
facilitate the proper conduct of these panel proceedi ngs.  This is also the case today so we will be 
relatively brief in order to avoid unnecessary repetiti on.  In this opening statement, the European 
Communities will present its main claims.  The European Communities will demonstrate that the 
contested measures violate the TRIMs Agreement  and Article III of the GATT 1994.  Subsequently 
the European Communities will also address the key el ements that come up in China's first written 
submission with regard to Article II of the GATT 1994 and the SCM Agreement.  The European 
Communities reserves of course its full position on China's first written submission to its formal 
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  defence based on Article XX(d) of the GATT 1994 in its rebuttal submission although the European 
Communities associate itself with the observations the United States and Canada will make in a 
moment. 
4.192  However, before turning to the details of the ca se and in order to understand the issues in their 
proper context the European Communities must firs t say a few words about China's industrial policy 
in the automotive sector.  
4.193  China has a history of imposing charges on imported auto parts depending on the amount of 
domestic content in complete vehicles in order to promote local production of vehicles and auto parts 
in China.  Before WTO accession, China imposed hi gher charges on imported auto parts used in the 
domestic production of vehicles if the manufacturer importing these parts did not meet certain domestic content in the final vehicle produced.  This policy was based on its 1994 Automotive Industry Policy, which China had to remove as part of its Accession Protocol to the WTO. 
4.194  China has now decided to reintroduce its old po licy despite its explicit commitment not to do 
so. It has adopted the contested measures that im pose again local content requirements on vehicles 
manufactured in China.  
4.195  This case is based on simple and largely undisputed facts.  
4.196  In its Schedule of concessions, China has committed to a tariff rate of 25 per cent for 
complete vehicles and of 10 per cent for auto parts.   Previously this difference was even greater.  
However, in 2004, China again decided to stimulate the local production of auto parts. According to 
Article 4 of Policy Order 8, China's objective is to 
"Nurture a group of relatively strong auto-p arts manufacturers to achieve large-scale 
production such that they are able to partic ipate in the global auto parts supply chain 
as well as be internationally competitive." 
4.197  In order to foster this objective, China introduced measures that in many cases impose 
charges on imported auto parts that equal the full tariff rate on complete vehicles, i.e. 25 per cent 
instead of 10 per cent.  This results in an additi onal charge equal to the difference between the rates 
for vehicles and parts, typically 15  per cent.  These charges are imposed after the manufacture of the 
parts into vehicles and provided that the vehicles do not contain sufficient local content.  Domestic 
auto parts are exempt from these charges.  The eff ect of the measures is to discourage manufacturers 
from importing auto parts and, thus, to afford protection to domestic production. 
4.198  In sum, this case is about m easures that China introduced to protect its local auto parts 
industry from imports through a local content rule.  This case is about discrimination, and not – as 
China would like to present it – about tariff circumvention.  
4.199  Although based on very simple and largely undisputed facts that  consist essentially of the text 
of the measures, this case is very important since it is about the very core principles of the WTO 
system, namely the principles of non-discriminat ion and the security and predictability of the 
multilateral trading system.  Without adherence to these principles the system  established by the WTO 
Agreement would lose most of its meaning.  As a Me mber of the WTO, China has to adhere to these 
principles.   WT/DS339/R 
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  2. China's failure to respond to a prima facie case  
4.200  The European Communities and its co-complaina nts have established a prima facie case of 
inconsistency between the Chinese measures and Arti cle 2 of the TRIMs Agreement and Article III, 
paragraphs 2, 4 and 5 of the GATT 1994.  Accordi ng to established principles on the burden of proof, 
it is now for China to attempt to provide th e arguments and the proof to the contrary. 
4.201  However, in its first written submission China has decided to largely ignore these claims of 
the complainants and insists that the Panel must  first decide as a "threshold issue" whether the 
measures are "border measures" or not.  We wonder if and when China will address our main claims.  
4.202  This is all the more remarkable since an an alysis, in particular under the TRIMs Agreement,  
very clearly  requires no preliminary assessment as to whether a measure is a "border measure" or an 
"internal measure".  The European Communities is of the view that the approach taken by China risks 
to unduly delay these panel proceedings and compro mise due process.  This would be regrettable. 
3. The TRIMs Agreement and Article III of the GATT 1994 
4.203  The European Communities considers that the Chinese measures are inconsistent with the 
TRIMs Agreement and Article III, second, fourth a nd fifth paragraph of the GATT 1994.  Let me very 
briefly set out why. 
(a) The TRIMs Agreement 
4.204  The measures are inconsistent with Article 2 of the TRIMs Agreement.  
4.205  First, the measures are "investment measures".  They aim at the development of a local 
manufacturing capability for auto parts and finished motor vehicles in China.  In addition to the 
provision quoted in the introduction, this objective is  reflected in numerous other provisions of Policy 
Order 8, of Decree 125 and of Announ cement 4.  It is inherent to th is objective that the measures have 
a significant impact on investment in this sector.  The whole investment strategy of both local and 
foreign vehicle and part manufacturers is governed by the constraints laid down by the measures. 
4.206  Secondly, the measures are "trade-related" becau se they apply and relate only to imported 
parts. 
4.207  Finally, the measures fall squarely within the description of paragraphs 1 (a) and 2 (a) of the 
Illustrative List annexed to the TRIMs Agreement. 
4.208  In other words, the measures are trad e-related investment measures that 
• contain local content requirements,  and 
• restrict the importation of products used in local production. 
4.209  China's response to the analysis  by the European Communities is  limited to the statement that 
its measures are border charges and, therefore, do not fall under the TRIMs Agreement.  This is remarkable since an an alysis under the TRIMs Agreement does not require any preliminary position 
as to whether the measures are internal or border  measures.  Therefore, the European Communities 
can only underline the position it has taken in its first written submission and assume that China 
considers the measures as otherwise indefensib le under Article 2 of the TRIMs Agreement.  WT/DS339/R 
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  4.210  As the measures are precisely of the kind that  China specifically undertook to eliminate and 
cease to enforce as a condition of its accession to th e WTO, they are also in breach of China's 
Accession Protocol and in particular  Part I, Article 7.3 thereof. 
(b) Article III of the GATT 1994 
4.211  As with the TRIMs Agreement, China bases its entire defence stra tegy on the premise that the 
measures are border measures and therefore not "inter nal" within the meaning of Article III of the 
GATT 1994. The European Communities cannot agree with this position. 
4.212  First, the Chinese measures impose charges on imported auto parts depending on whether 
they are actually assembled and manufactured into complete vehicles that do not have sufficient local 
content.  Thus, they are not "imposed on or in co nnection with the importation" within the meaning of 
Article II(1)(b) of the GATT 1994.  In other words,  their application depends on how the parts are 
used after importation and, in particular, whether they are assembled in China into vehicles with an 
insufficient level of local content as set out by the measures. 
4.213  Secondly, the measures impose charges on auto parts not at the time of importation, but only 
after they have been manufactured.  
4.214  The internal nature of the measures is further illu strated by the fact that they apply directly 
only to vehicle manufacturers, rather than to the importers of the auto parts.  Thus, manufacturers 
have to pay charges even if they purchase parts on the Chinese internal market from suppliers that 
previously imported them.  This follows clearly from Article 29 of Decree 125. 
4.215  Contrary to China's argument, the declaration of imported goods under Article 15 of Decree 
125 does not make the charges border measures.  First, the declaration is only one in a series of acts manufacturers have to accomplish under the measures.  Secondly, the declaration itself does not concern the imported parts as presented at the borde r but a prediction about their future role in 
vehicles that are yet to be manufactured.  Thirdl y, the verification application under Article 19 of 
Decree 125 that is decisive for wh ich charges are imposed only occurs after the imported parts have 
been assembled and manufactured into whole vehicles.  
4.216  China also argues that the measures should be  categorized as border measures because they 
are administered by the customs authorities, cl assified as "ordinary customs duties" under Chinese 
law and because imported auto parts are "not in free circulation" within China.  In this respect, the 
European Communities would like to remind China of  its own position in its first written submission 
according to which this case " concerns the relationship between substance and form ".  If the formal 
categorisation of a charge as a customs duty and the formal treatment of imported parts under domestic law were sufficient to establish a c onnection with importation, WTO Members could 
determine themselves which GATT provisions apply to their charges. The Panel in EEC – Parts and 
Components  set out that " with such an interpretation the basic  objective underlying Articles II and III, 
namely that discrimination against products from oth er contracting parties should only take the form 
of ordinary customs duties imposed on or in connecti on with importation and not the form of internal 
taxes, could not be achieved ".
31 
4.217  Consequently, the Chinese measure s are internal measures within  the scope of Article III of 
the GATT 1994. 
                                                      
31 GATT Panel Report, on EEC – Parts and Components , para. 5.7.  WT/DS339/R 
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  4.218  The European Communities regrets that Chin a refuses to address the remainder of its 
arguments under Article III of the GATT 1994.  Ag ain, the European Communities can only assume 
that China considers its measures otherwise i ndefensible under Article III of the GATT 1994.  
Therefore, the European Communities will only give a very cursory overview of its arguments which 
are set out in greater detail in its first written submission. 
4.219  Domestic and imported auto parts are "like"  products both under paragraphs 2 and 4 of 
Article III of the GATT 1994 since the only distinction the measures make is on the basis of the origin 
of the products.  The consistent WT O jurisprudence is clear on this poi nt: the mere origin of the good 
cannot make an imported good "unlike" the domestic good. 
4.220  The measures are inconsistent with Article III: 2 of the GATT 1994 since they impose internal 
charges on certain imported auto parts, but not on lik e domestic parts.  Therefore, the charges applied 
to imported auto parts are necessarily "in excess of" the charges applied to like domestic products. 
4.221  In respect of Article III:4, the European Communities underlines that only imported auto parts 
may become subject to the charges and the cumberso me procedural requirements described in detail 
in its first written submission.  Such conditions  are bound to adversely modify the conditions of 
competition between domestic and imported auto pa rts on the internal Chinese  market. This occurs 
exclusively to the detriment of the imported parts.  Consequently, the European Communities is of the 
view that the measures are inconsistent  with Article III:4 of the GATT 1994. 
4.222  Furthermore, the measures are also inconsiste nt with Article III:5.  They constitute an 
"internal quantitative regulation" because they are concerned with the amounts and proportions of 
domestic and imported auto parts in manufactured ve hicles.  As vehicle parts are "products", which 
are processed and used during the assembly and manuf acture of vehicles, the measures also relate to 
the "mixture, processing or use of the products" with in the meaning of paragraph 5.  Finally, the 
measures also fulfil the third element of Article III: 5, first sentence.  They require that specified 
amounts or proportions of vehicle parts used in th e assembly and manufacture of vehicles are not 
imported and instead of domestic origin.  Vehicle ma nufacturers have to obtain domestic parts if they 
want to remain within the thresholds laid down by Articles 21 and 22 of Decree 125.  Consequently, 
the measures are inconsistent with Artic le III:5, first sentence of the GATT 1994. 
4.223  With regard to the claims under the second sente nces of Article III:2 and III:5, the European 
Communities refers to its first written submission. 
4. The "anti-circumvention theory" of China under Article II of the GATT 1994 
4.224  China's whole defence strategy is based on the position that the measures should exclusively 
be examined under Article II of the GATT 1994.  Although the European Communities would have 
no difficulty in confronting China under Article II of the GATT 1994, it is systemically very 
important not to accept China's premise for the anal ysis.  The categorisation of the additional charges 
and the cumbersome procedural requirements as pa rt of China's custom clearance process would 
seriously undermine the scope and effectiveness of the TRIMs Agreement and Article III of the 
GATT 1994. 
4.225  
However, as China will no doubt continue to insist on the premise of its defence, it is 
necessary to demonstrate the fundamental flaws th at its position has even under Article II of the 
GATT 1994. WT/DS339/R 
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  4.226  As mentioned already before, China's schedule of  concessions provides generally for a 25  per 
cent tariff on complete vehicles and 10 per cent or less on automotive part s. In addition, there are very 
important intermediary categories, which generally are also subject to the lower 10 per cent tariff. 
China conveniently ignores these in termediary categories as they entirely undermine China's defence 
strategy. 
4.227  According to their very explicit wording, the measures deem imported auto parts as complete 
vehicles if certain combinations or proportions are used in the manufacture of a vehicle.  In such a 
case, all imported auto parts of that vehicle will be subject to the 25  per cent duty on complete 
vehicles.  To put it in customs language: auto parts ar e classified as complete vehicles. It is therefore 
not the product as presented at the border that decides the tariff classification but rather its internal use 
after manufacture.  
4.228  It is undisputed that the basic standard for interpreting Members' schedule of concessions is 
the test under Article 31 of the Vienna Convention .  This test requires an analysis of the ordinary 
meaning of China's schedule of concessions in thei r context and in the light of their object and 
purpose.  It is also undisputed that the HS and the rules for its interpretation provide important context 
for the analysis. 
4.229  China pays only lip service to Article 31 of the Vienna Convention .  In truth, it simply fails to 
examine the relevant tariff headings under this test. 
4.230  As regards the ordinary meaning of the releva nt tariff headings, China simply shrugs this 
obvious complication for its position off with a couple of blatantly erroneous statements such as "the 
details of the specific tariff headings and tariff rat es at issue are not relevant to the disposition of the 
claims before the Panel".
32  The obvious intention is to draw attention away from the wording of the 
relevant tariff headings because they simply do not support China's position. 
4.231  When it comes to a contextual analysis, China tr ies to trick us again by drawing our attention 
to GIR 2(a) of the Harmonised System.  China conveniently jumps over GIR 1, according to which 
the terms of the headings and any relative Section or Chapter Notes are the first consideration in 
determining classification.  
4.232  As regards the object and purpose of tariff co mmitments, China makes anti-circumvention the 
main issue.  It is this "anti-circumvention theory" to which I shall now turn.  According to China, auto 
parts may be classified as complete vehicles in order to counter an alleged practice of circumventing 
the tariff rates for vehicles. 
4.233  The European Communities profoundly disagrees w ith the whole premise of China's first 
written submission.  There simply is no conspira cy to undermine China's customs tariffs on motor 
vehicles.  The only so-called evidence that China presents for its theory is a statement that the value of 
imported parts and components may have increased  since China became a member of the WTO33. 
Even if this were the case, the only thing that this could prove is that  the multilateral trading system is 
functioning as it should.  It is China that has c hosen to commit itself to a difference between the 
applicable tariff rates for vehicles and their parts.  
4.234  As the whole premise of China's defence is profoundly flawed, the European Communities 
would in principle not wish to enter its logic.  Howe ver, this would have the potential of leading to a 
                                                      
32 China's first written submission, para. 15. 
33 China's first written submission, para. 21.  WT/DS339/R 
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  total impasse where the parties refuse to address each others' claims.  Therefore, the European 
Communities will address the main elements of China's defence even if it carries the risk of entering a 
logic that rests on a fundamental flaw. 
4.235  In describing the measures, China attempts to paint a picture of neutral tariff classification 
where "the substance of a series of import transactions prevails over their form".
34  The measures are 
allegedly targeted against importers that "circumven t the higher tariff rate on the complete article", 
even though, according to China "t he commercial reality is that the manufacturer intends to assemble 
the complete article from im ported parts and components".35 
4.236  The simple reply to this is: No, there is nothing that is circumvented when a vehicle part is 
declared as a part when imported even when it, af ter manufacture ends up in a new complete vehicle.  
Manufacturing a vehicle out of imported parts does not amount to circumvention.  The complete 
vehicle and its parts are subject to different tariff headings.  This is normal; there is nothing that is 
circumvented.  
4.237  A rule that requires classification of parts dependi ng on how they are used in the final product 
would have drastic consequences for the present and fu ture state of international trade, dominated by 
global production chains where the production process is broken down into a multitude of steps and 
intermediate products produced by several companies in several countries. 
4.238  However, before dealing with the arguments of  China any further it is necessary to address 
what China fails to address, namely that its a llegedly neutral anti-circumvention measures are in 
reality enforcing local content requirements in the finished vehicle. 
4.239  On the basis of the theories th at China presents in its first written submission, the crucial 
criterion in its view is the intended end use of the product, not its objective characteristics as 
presented at the border.  Indeed, China refers to "d emonstrated intention of the auto manufacturer" as 
a basis for tariff classification.36  Of course China does not use the words local or domestic content. 
4.240  A simple example is sufficient to demonstrate how  the measures apply in reality: Let's take an 
example of 100 brake cylinders that are packaged and shipped together to China.  Of these, 30 will be 
used as spare parts, 40 will be fitted into complete vehicles that attain the necessary level of domestic 
content while the remaining 30 will be fitted into complete vehicles that do not attain the necessary 
level of domestic content. 
4.241  Of these brake cylinders 70 out of the 100 will under the measures be subject to the lower 
tariff on parts. To the 30 spare parts one has to add the 40 brake cylinders that are used in complete 
vehicles attaining the necessary domestic content.  Only  the 30 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. Of course, under a correct tariff classification all 100 brake cylinders should be classified as parts. 
4.242  There is nothing neutral about these rules even unde r the false logic that China presents in its 
first written submission.  The real criteri on is the level of domestic content.  
                                                     
 
34 China's first written submission, para 3. 
35 China's first written submission, para. 18. 
36 China's first written submission, para. 7. WT/DS339/R 
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  4.243  However, China goes even much further.  It is of the view that even if the 100 brake cylinders 
would be imported to China in, say, 20 different sh ipments at different times and would arrive to 
different ports from different parts of the world a nd be imported by different  and unrelated importers 
(e.g. vehicles manufacturers, parts importers, afte r-sales maintenance companies etc.).  China would 
still insist on applying its anti-circumvention theory.  In other words, it will still verify whether the 
brake cylinders will be used in a complete vehi cle or not and whether the complete vehicle will 
contain sufficient local content before deciding whet her to apply an additional charge on the products 
after they have already been manufactured in China. 
4.244  It is important to underline that there is no basis in China's tariff schedule or in the 
interpretative rules of the HS that would allow fo r such a drastic measure that undermines the whole 
system of tariff classification. 
4.245  Indeed, China uses the general rul es for the interpretation of the HS in a very selective if not 
abusive manner.  The HS rules simply do not co ntain the "anti-circumvention rule" that China 
suggests in its first written submission.  China comple tely jumps over the most important rule of the 
HS, that is, GIR 1 according to which the terms of the headings and any relative Section or Chapter 
Notes are the first consideration in determining classification.  If there is no doubt about the 
classification of a product on the basis of GIR 1, the other rules simply do not apply. This is the case in the overwhelming majority of situations. 
4.246  China repeatedly refers to GIR 2(a) of the HS .  However, it is remarkable how selectively 
China refers to this rule.  First of all, China ig nores the fact that the relevant chapter of the HS 
nomenclature, that is, Chapter 87 contains a speci fic application of that rule with very precise 
examples that cannot even remotely be compared to the situations foreseen by the contested measures.  
The European Communities has exam ined this rule already in its first written submission.  
4.247  However, what is perhaps even more remark able is that China uses even the general 
formulation of GRI 2(a) in a very selective manner. It is worth to quote GIR 2(a) to see this clearly.  
GIR 2(a) states: 
Any reference in a heading to an article shal l be taken to include a reference to that 
article incomplete or unfinishe d, provided that, as presented
, the incomplete or 
unfinished article has the essential character  of the complete or finished article . It 
shall also be taken to include a reference to that article complete or finished (or 
falling to be classified as complete or finished by virtue of this rule), presented 
unassembled or disassembled. [emphasis added] 
4.248  China ignores the two basic principles in this ru le, that is, the words "as presented" and "the 
essential character of the complete or finished article".  
4.249  In other words, the "anti-circumvention theory" presented by China igno res the fact that the 
tariff classification of a product is to be made as presented to customs at the border.  The measures 
completely disregard this by classifying the pr oduct after it has been used in manufacturing and 
irrespective of the fact that no other parts were pr esented to the customs at the same time.  This 
amounts to tariff classification at will. 
4.250  As regards the essential character criterion, th e European Communities would like to draw the 
attention of the Panel to the example China itself uses in its first written submission, at paragraph 19 
concerning alleged tariff circumvention.  China stat es: "a specific example illustrates the problem".   WT/DS339/R 
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  This is perhaps the only sentence with which th e European Communities can  agree. This example 
indeed illustrates the problem. A simple calculation will suffice: 
4.251  To recall, according to Article 21(2) of Decr ee 125, all imported parts will be automobile 
parts characterized as complete vehicles if any of the following combinations of assemblies are 
deemed imported: 
1. the two main assemblies (the vehicle body and engine) 
2. either of the two main assemblies as well as three of more other assemblies 
3. five or more assemblies, other than the main assemblies. 
4.252  Let us now combine some of the relevant pe rcentages in the table under paragraph 19 of 
China's first written submission on the basis of the criteria of Article 21(2) of Decree 125: 
1. The two main assemblies i.e. the vehicle body and the engine would amount to 29  
per cent of the value of the vehicle; 
2. One of the main assemblies i.e. the vehicl e body and three other assemblies i.e. the 
non-driving axle, the steering system and the braking system would amount to 21 per 
cent of the value of the vehicle 
3. five other assemblies i.e. the non-driving axle, the driving axle, the frame (or chassis), 
the steering system and the braking system  would amount to 17  per cent of the value of the vehicle. 
4.253  These very simple calculations on the basis of the example that China itself provided 
demonstrate that China applies the full vehicle duty to all imported parts if the vehicle contains certain 
imported assemblies that constitute only 17-29 per cent of  the value of the complete vehicle.  In other 
words, a combination of certain parts that amount to 17 per cent of the total value of the vehicle will be sufficient to classify all imported parts in that vehicle as a complete vehicle. And this irrespective 
of when, from where and by whom these parts were imported. 
4.254  It goes without saying that a combination of part s, which may have been imported to China at 
different times, from different parts of the world a nd been subject to internal transactions in China 
between importers of parts and the vehicle manufacturer and, which represent 17 to 29  per cent of the total value of the vehicle, cannot even remotely ha ve the essential character of a complete vehicle 
within the meaning of GIR 2(a) of the HS as it is applied under Chapter 87 according to the very 
explicit chapter notes. 
4.255  There is also another very simple way of de monstrating how manifestly erroneous China's 
position is. It is sufficient to read tariff line 87.06 entitled "chassis fitted with engines" together with 
its interpretative note.  A chassis fitted with engi nes would under the contested measures always be 
classified as the complete vehicle despite it being subject to a specific heading and normally subject to the lower 10 per cent duty.  The details have been set out in paragraphs 255 to 260 of the European 
Communities' first written submission. 
4.256  The European Communities is therefore of the vi ew that even under the entirely false premise 
on which China bases its defence, the arguments pres ented simply do not hold any water.  Although 
the European Communities would comfortably be pr epared to confront China even under the terms WT/DS339/R 
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  China wishes to argue the case, it is systemically ve ry important not to allow China to escape the main 
claims brought forward by the complainants.  In any event, China's measure s are inconsistent with 
Article II of the GATT 1994. 
5. Inconsistency of the Chinese Measures with the SCM Agreement 
4.257  With regard to Article 3 of the SCM Agre ement, China argues that its measures do not 
constitute a prohibited subsidy. According to Chin a, it does not forego revenue when it applies the 
tariff rate for complete vehicles only to those parts wh ich, in China's perception, circumvent this tariff 
rate.  China argues that the tariff rate for complete  vehicles cannot serve as the appropriate benchmark 
for parts in general because its Schedule of con cessions prevents it from imposing it on all parts. 
4.258  The truth is that China's Schedule of concessi ons prevents China from imposing the duty for 
complete vehicles on any parts.  If China were allo wed to impose the complete vehicle duty on certain 
parts, it would still be prevented from making this  dependent on the local content in the final 
manufactured vehicles.  As China does not impose the duty for complete vehicles on parts 
manufactured into vehicles that satisfy the lo cal content requirements, it is foregoing revenue 
otherwise due. 
6. Conclusion 
4.259  The European Communities is firmly of the view  that the measures under scrutiny in this case 
threaten the very basic structures of the multilate ral trading system.  These Measures circumvent 
China's core obligations u nder the covered agreements. 
4.260  For these reasons, all specified in detail in its first written submission, the European 
Communities requests that the Panel find that China has acted inconsistently with its obligations 
under the relevant covered agreements. 
F. O
RAL STATEMENT BY THE UNITED STATES AT THE FIRST SUBSTANTIVE MEETING OF THE 
PANEL  
4.261  For two reasons, the United States initial comments in  its oral statement will be brief.  First, 
the United States and our two co-complainants have  already submitted extensive written submissions, 
and both the European Communities and Canada are presenting oral statements.  And second, 
although China's first submission contains a consider able amount of material, very little of that 
material is relevant to the issues in this dispute.   Most notably, China presen ts an extensive discussion 
of the complainants' practices with regard to circumvention of antidumping duties, but this dispute has 
nothing to do with dumping.  And conversely, aside  from the threshold issu e, China does not even 
dispute the inconsistency of its measures with core ob ligations of Article III.  Indeed, China in fact 
appears to concede that one key aspect of its measures is inconsistent with Article III.   
4.262  As discussed in our first submission, China h as adopted measures that favor domestic auto 
parts over imported parts, so as to afford protecti on to the domestic production of auto parts.  These 
measures include a substantial charge – over and a bove customs duties – on imported auto parts, with 
no comparable charge on domestic auto parts.  Chin a's measures further favor domestic parts in that 
the additional charge only applies if domestically -produced autos include an amount (in volume or 
value) of imported auto parts that exceeds specifi ed thresholds.  And the measures include extensive 
record-keeping, reporting, and verification requirement s that apply if and only if domestic automobile 
manufacturers make use of imported auto parts.  WT/DS339/R 
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  4.263  These measures amount to clear and straightforw ard inconsistencies with China's national 
treatment obligations under Article III of th e GATT 1994.  In particular, these measures 
impermissibly result in internal charges on imported parts in excess of those applied on domestic parts 
(Article III:2);  the measures accord treatment less  favorable to imported parts with respect to 
requirements affecting internal sale, purchase, distri bution, and use (Article III:4);  and the measures 
directly or indirectly require that specified amounts or proportions of auto parts used in vehicle manufacturing must be supplied from domestic sources (Article III:5). 
4.264  China's defence is twofold – its measures all i nvolve customs duties, and those customs duties 
are consistent with Article II.  As the EC in par ticular outlined in its first submission, and as all the 
complainants will return to today, China's Article II argument is utterly without merit.  Were China to 
charge an import duty on imported auto parts of 25  per cent, China would be in outright breach of its 
Article II tariff bindings.   
4.265  But the clearly unfounded nature of China's Artic le II argument must not distract from a far 
more important point.  Namely, China does not impose a simple import duty of 25 per cent on auto 
parts.  To the contrary, China's measures are far more pernicious
 than the simple breach of a tariff 
binding.  Rather, the measures set up a complex, internal regulatory regime – the primary effect of which is to discriminate against imported auto part s, encourage the use of local content and pressure 
foreign parts manufacturers to re-l ocate their facilities and technolog y to China.  These pernicious 
aspects of discrimination would be present whether or not
 the level of China's charges on auto parts 
were above their specific bindings on auto parts.  Thus, it is of extreme importance to the United 
States that the findings in this dispute addr ess China's serious breaches of Article III.  
4.266  With one caveat, most of what China presents  as a defence does not even respond to the 
Article III inconsistencies inherent in its auto parts regime.  I would like to highlight this point by 
departing from the usual order of an Article III di scussion.  That is, I will first address Article III:4 
and Article III:5, and then return to Article III:2.   
4.267  Turning first to Article III:4, the Appellate Body has identified three distinct elements 
required to establish a breach:  (1) the imported and domestic products are "like products;"  (2) the 
measure is a law, regulation, or requirement aff ecting the internal sale, purchase, or use of the 
imported and domestic like products;  and (3) the imported product is accorded less favorable 
treatment than the domestic like product. 
4.268  The first element, the determination of "like pr oducts" is easily met here.  The only distinction 
between imported and domestic auto parts is thei r origin, and China does not dispute that imported 
and domestic auto parts are "like products" for purposes of Article III. 
4.269  The second element of an Article III:4 analysis is  that the measures aff ect the internal sale, 
purchase, distribution or use of the like products.  In  this instance, China's Policy Order 8, Decree 125 
and Announcement 4 work together to create an incen tive to purchase domestic auto parts.  First, the 
system levies a charge based on the types and total value of  imported parts used in the automobile.  
Second, the system imposes burdensome administrativ e recording requirements when imported parts 
are used in the manufacturing of vehicles.  These asp ects of its measure established a disincentive to 
purchase, use and distribute imported auto parts.  Thus the measures meet the second element of an 
Article III:4 analysis.  China also does not dispute this element.   
4.270  The third and last element for determining a breach of Article III:4 is to assess whether the 
measures accord less favorable treatment to importe d products relative to the domestic product.  Here, WT/DS339/R 
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  the measures treat foreign parts less favourably th an domestic parts by creating different competitive 
conditions for the parts.  This is done  in two, or perhaps three, ways. 
4.271  First, the level of China's charge on auto parts depends on the types and value of imported 
parts used in a complete vehicle.  If the thresholds  are exceeded, then an additional  charge is applied 
to each and every imported part included in the vehi cle.  In other words, leaving aside whether the 
absolute level
 of the charge is consistent with China's GATT obligations, the point here is that the 
level of that charge on say, Part A, changes based on whether Part B is imported or sourced 
domestically.  Thus, automobile manufacturers in China, independently of any question of the 
absolute level of China's customs duties, have a strong disincentive to make use of imported auto 
parts.  The measures accordingly alter the conditi ons of competition by creating a significant incentive 
to include domestic parts over imported parts.  And,  China does not dispute that this system provides 
less favorable treatment for imported parts.   
4.272  The second method by which the measures treat foreign parts less favourably than domestic 
parts is through the imposition of burdensome  administrative reporting requirements on any 
manufacturer who chooses to use imported auto part s in building an automo bile in China.  These 
requirements include; 
− a "self-evaluation" to determine the number of imported parts used in the assembly of 
a particular vehicle model, involving a catalogue of all the parts of each model it manufactures, and calculations of the thresholds for each assembly system and the overall price percentage of imported parts in the model; 
− a registration of the vehicle model, in cluding the annual production plan for the 
vehicle model;  a list of all domestic and fo reign suppliers;  and a detailed list of all 
imported and domestic parts used  in the model being filed; 
− a requirement to constantly update the regist ration to take into account changes in the 
source and relative price of various parts of every automobile model, as well as 
changes to individual automobiles;  
− monthly payments of charges, accompanied by the verification report, the previous 
month's total production figures, and a list of parts and components used by the 
manufacturer in the prior month to assemble completed vehicles;    
− and a requirement for the manufacturer to ma intain – with respect to all parts not 
imported by the manufacturer itself – records regarding the importer of record, and any evidence of duties and value-added taxes paid. 
4.273  None of these burdensome reporting requirements are necessary for manufacturers who 
choose to use only domestic auto parts to manufactu re automobiles in China.  Such administrative 
requirements thus create different and less favorable  competitive conditions for the imported parts.  
And, China does not dispute that these aspects of its measure provide less favorable treatment to 
imported parts.  
4.274  Third, in describing its measures, China asserts  that imported auto parts "are not in free 
circulation in the customs territory of China."
37  As noted in the US's first written submission, China's 
measures appear to require burdens ome "in-bond" requirements on all imported auto parts, but these 
                                                      
37 China's first written submission, para. 46.  WT/DS339/R 
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  measures do not appear to be enforced.  China, in  its first submission, however, appears to claim 
otherwise.  If indeed all imported parts in fact are subject to burdensome "in-bond" requirements that 
render them "not in free circulation," then for th is additional reason China is providing less favorable 
treatment to imported parts than to domestic parts.  Again, this breach of Article III:4 is independent 
from any question of tariff rates allowe d under China's Article II tariff bindings. 
4.275  To summarize, we have just gone through a st raightforward Article III:4 analysis.  China's 
measures plainly meet each one of the three elements  needed to establish a breach of Article III:4.  
And, China in its submission has not disputed any of these elements.   Moreover, with one caveat, the 
primary defense presented in China's first submissi on – namely, that its charges are customs duties 
and that imported parts may be classified as complete vehicles – does not even implicate any issue which might provide a defense to th is plain breach of Article III:4. 
4.276  To elaborate on this point, even if China's ch arges were considered "customs duties," and 
even if China were correct that it was entitled under its tariff bindings to charge a duty of 25 per cent 
on all imported parts, China's measures would st ill constitute a breach of Article III:4.  The 
Article III:4 breach, as just discussed, is based on the f act that the charge on any particular auto part 
will change depending on the types and value of other
 imported parts used in a complete vehicle, a 
system which creates a strong disincentive to the purchase and use of imported parts.  Similarly, the 
administrative burdens applicable only  to users of imported auto parts, and the burdens relating to the 
bonded status of imported auto parts, are inconsistent  with Article III:4, regardless of whether or not 
China's charges are considered "customs duties".  These breaches of Article III:4 would exist 
regardless of any issue related to Article II; ind eed, these breaches would exist even if China had not 
bound at all its tariff duties on auto parts.   
4.277  China's measures are also  inconsistent with Article III:5 of the GATT 1994.  And again, with 
one caveat, China's defense in its first submission do es not touch on any issue related to Article III:5.  
China's measures at issue impose additional charg es and burdensome administrative requirements if, 
among other things, the types and values of imported parts and components used by a car manufacturer exceed specified thresholds.  Given that these provisions are expressed in quantitative 
terms, they are by their nature "quantitative regul ations" under Article III:5.   Moreover, given that 
their terms specify the quantitative amounts of impor ted parts that would result in the charges and 
reporting requirements being applicable, the measures are also quantitative regulations that relate "to 
the mixture, processing or use of products in specified amounts or proportions" under Article III:5, 
and 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 char ge is assessed.  In its submission, China does not 
dispute this fundamental Article III:5 analysis.   
4.278  Furthermore, as for the breach of Article III:4, th is breach of Article III:5 exists regardless of 
any issue with respect to China's tariff bindings, or  with respect to whether or not the extra charge 
imposed by China is an internal  charge or a customs duty.  
4.279  Unlike in the case of Article III:4 and Article III:5, China's first submission does discuss a 
possible defense to the breach of the Article III:2 obl igations.  This defense, however, is unavailing.  
Moreover, China even appears to c oncede that at least some aspects of its measures are inconsistent 
with Article III:2.   
4.280  A determination of an internal charge's inconsis tency with Article III:2, first sentence is a two 
step process:  First, the imported and domestic products  at issue must be "like".  As explained in the 
US's first written submission, imported and domestic  auto parts are like parts for the purpose of 
Article III:2.  China does not contest this.  Second, the internal charge must be applied to imported WT/DS339/R 
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  products "in excess of" those applied to the like domest ic products.  In this case, when the types or 
value of the imported parts used in the assembly  of a vehicle in China exceed the thresholds 
established in the measures, the measures impose an internal charge on all imported parts in the 
vehicle.  Domestic parts are exempt.  Thus, the inte rnal charge applied to im ported parts is "in excess 
of" any charge imposed on domestic parts, resulting in a plain breach of Article III:2.  Again, China does not contest this.  
4.281  China's only defense to this plain breach of Article III:2 is to argue that its charges are 
customs duties instead of internal charges under Article III:2.  This defense is totally without merit.   
4.282  As discussed in the US's first written submission,  the distinction between  internal charges and 
customs duties has been addressed in prior panels under the GATT 1947.  In one of the first GATT 
1947 reports, Belgian Family Allowances , the Panel examined whether a particular charge should be 
treated as an "internal charge" within the scope  of Article III:2 of the GATT 1994 or an "import 
charge" within the scope of Article II.  The Panel concluded that because the charge (a) "was collected 
only on products purchased by public bodies for their own use and not on imports as such" and (b) 
"was charged, not at the time of importation, but when the purchase price was paid by the public body," the charge constituted an internal charge.   In other words, because the charge depended on the 
internal use of the product, it could not be considered a border charge.   
4.283  The issue was again addressed in  EEC – Parts and Components .  In that dispute, the GATT 
1947 Panel examined whether charges imposed to  allegedly prevent the circumvention of 
anti dumping duties should be analysed as customs duties or internal charges.  In making its 
determination, the Panel focused on "whether the char ge is due on importation or at the time or point 
of importation or whether it is collected internally."   The Panel noted that the duties were levied on 
finished products assembled or produced in the EE C and were not imposed at the time or point of 
importation.  Accordingly, the Panel concluded th at the EEC charges qualified as "internal charges" 
under Article III.   
4.284  As in Belgian Family Allowances  and EEC – Parts and Components , China's charges at issue 
in this dispute are internal ones, not border charges.  China's charges are not imposed at the time of, or 
as a condition to, the entry of the parts into Chin a.  Indeed, the measures at issue do not impose 
charges on all imported parts, but only on parts used by manufacturers in the assembly of new vehicles that exceed the thresholds established by China's measures.  
4.285  Instead of being border measures, China's meas ures at issue in this dispute are internal 
measures, the application of which turns on th e details of the post-importation manufacturing 
operations conducted within China.  All of th e following factors lead to this conclusion: 
− The determination of whether imported parts constitute "features of a complete 
automobile" is made based on the details of  the operations of an internal assembly 
process, rather than on the conditions of the parts at the time of entry.  
− Under the measures, all of the parts of a completed vehicle are combined for the 
determination of whether the 25 per cent ch arge applies, regardless of the countries 
from which those parts originate, when or wh ere they entered the territory of China, 
or who imported them.  Even if a part has b een imported by a supplier, and even if the 
supplier has already paid customs fees and duties, the part is nonetheless grouped 
together with parts imported by the manufacturer itself when making the 
determination.    WT/DS339/R 
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  − The 25 per cent charge is imposed not on the importer, but on the manufacturer – 
whether or not the manufacturer is actually the importer of the part in question.   
4.286  China's first submission contains what appears to be an important concession on the part of 
China with respect to its argument that its measures impose customs duties, not internal charges.  In 
particular, footnote 20 of its first written submission provides: 
In some cases, a manufacturer may assemble a vehicle using a certain number of 
imported parts and components that it has purchased from a third party in China.  In those cases, the manufacturer is liable for any difference between the amount of duty that was assessed on the imported parts at the time of importation and the amount of 
duty that should have been assessed based on their use in the assembly of a complete 
imported vehicle.  As discussed in Part IV.G [of China's first written submission], this provision is necessary to prevent the use of third-party importers as a means of circumventing the tariff provisions for complete motor vehicles.  
Part IV.G, referred to by China in this footnote , is the section in China's first written submission 
stating that any breaches of other GATT article s are justifiable under Article XX(d) of the 
GATT 1994.  Thus, the way the United States reads this footnote, and we think it is fair, is that China 
is conceding that the imposition of a charge on a part imported by a third party is an internal charge – 
not a customs duty – inconsistent with Article III,  but that China nonetheless has an Article XX(d) 
defense. 
4.287  This is a key concession.  The consideration of , and application of charges on, parts imported 
by third parties are not incidental aspects of China' s measures.  Rather, they are an integral part of 
China's measures.  The number or value of parts im ported by third parties ca n be determinative of 
whether charges are imposed on all
 imported parts used in a domestically produced vehicle.  
Furthermore, and more fundamentally, under China's an alysis, there really is nothing to distinguish 
the charge imposed on parts imported by third parti es and parts imported by the manufacturer.  If, as 
China appears to concede, the charge  on the parts imported by a third party is an internal charge, the 
charge on the parts imported by ma nufacturers must be as well.   
4.288  In its first written submission,  China tries to distinguish Belgian Family Allowances  and EEC 
– Parts and Components , but its efforts are unsuccessful.  Fi rst, China argues that the measures 
involved in those two cases are different from its m easures.  But the measures in every dispute are 
different.  The point here is that in both tho se cases, like in the present dispute, the charge was 
imposed upon the internal sale of the product, not upon importation.  Consequently, regardless of the 
label applied to the charge, the charge was an internal one subject to Article III disciplines.  
4.289  Second, China argues that its measure is diffe rent because it is imposed for the purpose of 
collecting customs duties.  But this type of argumen t was explicitly considered and rejected in EEC - 
Parts and Components .  To quote from that report:  "[T]he Panel first examined whether the policy 
purpose of the charge  is relevant to determining the issue of whether the charge is imposed in 
'connection with importation' in the meaning of Artic le II:1(b). ...  The relevant fact ... is not the 
policy purpose attributed to the charge but rather whether the charge is due on importation or at the 
time or point of importation or whether it is collected internally."  
4.290  Applying that reasoning here, whether or not, as China claims, its charge is adopted for the 
policy purpose of collecting an amount equal to a cu stoms duty to which China believes it is entitled, 
that charge is an internal one, subject to Article III disciplines.   WT/DS339/R 
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  4.291  To summarize the Article III discussion, the Un ited States has established breaches of Article 
III:2, III:4, and III:5.  China's defense – that the ch arge under its measure is a customs duty consistent 
with Article II bindings – relates only to the Artic le III:2 breach, and even then China appears to 
concede that its measures breach Article III with resp ect to those parts imported by a third party.   
4.292  I would now like to turn to the "caveat" that I have mentioned several times.  That is, the 
caveat to the statement that nothing in China's first written submission even touches on a possible defense to its Article III violations.  At most, a ll of the discussion in China's first written submission 
about the proper classification of imported auto part s and its Article II bindings appears to be an 
attempt to invoke an Article XX(d) exception to its Article III breaches, as sketched out vaguely in the 
last section of China's first written submission.    
4.293  As a result, the United States submits that the proper mode and order of analysis in this 
dispute should be as follows.  The Panel shoul d first examine China's measures under Article III 
disciplines, and – as the United States has shown, find them to be inconsistent with those obligations.  
To the extent that China's discussion of tariff cla ssification and Article II bi ndings have any relevance 
in this dispute, it would be as part of Chin a's attempt to meet its burden of establishing an 
Article XX(d) defense to its Article III breaches.   
4.294  In the United States' view, any Article XX(d) defense by China would be tantamount to the 
following argument:  that China wish es to breach Article II, and is thus justified to commit a primary 
breach of Article III.  In other words, the United States submits that China does not even have the 
beginnings of an Article XX defense to its Article III breaches.  
4.295  Turning now to China's tariff classification argument, the United States submits it is 
completely without merit.  The argument is based only on GRI 2(a), but China misreads it, and ignores other interpretive notes as well as the entir ety of China's schedule of tariff commitments. 
4.296  GRI 2(a) has two parts, neither of which amounts to anything approaching China's 
interpretation.  First, GIR 2(a) provides that incomplete products may be classified as complete ones, 
if they have their essential character.  It does not  come close to allowing, as China contends, for 
China, for example, to classify a brak e cylinder as a complete automobile.   
4.297  Second, GIR 2(a) allows importers to present an unassembled product for tariff treatment as 
the assembled product.  The key idea here, which is  confirmed by the interpretive notes cited by 
China itself, is that the importer "presents" the un assembled product to the customs authority.  There 
is no notion in GIR 2(a) that a customs authority is supposed to seek out all entries of diverse parts, by 
different importers, from different suppliers, and even of different national origin, and then proceed to 
collect them into some fictitious unassembled product,  to then be classified as the assembled product.   
4.298  China also ignores the very first General Rule of  Interpretation for the HS, GIR 1.  That rule 
provides that "classification should be determined  according to the terms of the headings and any 
relative section or chapter notes."  In addition, Chin a ignores the HS chapter h eadings specific to auto 
parts, and its own schedule of tariff commitments containing detailed descriptions of various auto 
parts and auto assemblies and subassemblies.  It is impossible to read China's schedule, with all its 
detailed descriptions of auto parts, and to co nclude that nonetheless all auto parts used for 
manufacturing purposes must be classified as complete autos.  Rather, as both a matter of simple logic 
and as an application of GIR 1, auto parts and auto  assemblies imported into China must be classified 
in accordance with the specific tariff he adings listed in China's schedule.    WT/DS339/R 
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  4.299  Consider, for example, an automobile radiator .  China's schedule has a specific subheading 
for radiators (87089100).  There is no basis under Chin a's schedule or the GIRs for China to classify a 
shipment of radiators as "unassembled vehicles," in stead of under the tariff line provided in China's 
schedule specifically for radiators.   
4.300  China's Working Party Report further confirms that  China may not try to classify auto parts as 
complete vehicles.  Part I.1.2 of the Accession Protocol provides that the Protocol, which includes the commitments referred to in paragraph 342 of the Work ing Party Report, shall be an integral part of 
the WTO Agreement.  Paragraph 342 of the Working Party Report includes China's commitment 
reproduced in paragraph 93 of the Working Party Report.  As a result, China's commitment in 
paragraph 93 of the Working Party Report is an inte gral part of the WTO Agreement.  China does not 
appear to dispute this.   
4.301  Paragraph 93 of the Working Party Report provides,  
Certain members of the Working Party expressed particular concerns about tariff 
treatment in the auto sector .  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 semi-knocked down kits for motor vehicles.  If China created su ch tariff lines, the tariff rates would be no 
more than 10 per cent.  The Working Part y took note of this commitment.   
4.302  This paragraph shows that Members were con cerned about the tariff treatment of CKDs and 
SKDs kits, and wanted to ensure that they were subj ect to a duty of no more than 10 per cent.  China's 
interpretation of this paragraph, as set out in its  first submission, does not withstand even limited 
scrutiny.  According to China, Members did not really care about the tariff treatment of CKD and 
SKD, kits but only cared about the tariff treatment of  these items if they had a separate tariff line, and 
that China is thus free to charge a much higher rate  of duty so long as China classified those items in 
some existing subheading.  China can present no reason why any Member in any circumstance would 
have such an intention, and there is no reason.  In short, the only reasonable interpretation of the 
Working Party Report is that China committed to imposing no greater than a 10 per cent duty on CKD 
and SKD kits.   
4.303  The existence of this commitment on CKD and SKD kits highlights the untenable nature of 
China's assertion that it is entitled to impose 25 pe r cent duties on all imported parts when certain 
thresholds are met.  These thresholds are triggere d when far fewer imported parts than in CKD and 
SKD kits are included in the assembly of the complete vehicle.  
4.304  China also has no basis for asserting, as it does in its first written submission, that many other 
WTO Members have put in place measures in any way similar to China's regime for imported auto 
parts.  For example, China cites a US regulati on (Exhibit CHI-27) regarding "multiple conveyances" 
as somehow being supportive of China's proposed interp retation of GIR 2.  But, to the contrary, the 
regulation shows precisely the opposite.  As explaine d in the regulation, it covers entities which, due 
to their size and nature, cannot be shipped in a single  conveyance, and instead must be imported in an 
unassembled or disassembled condition.  The rule wa s adopted for the convenience of importers, who 
wanted
 their products classified as the complete product under GIR 2, but could not previously do so 
because the entity was too large to fit on a single co nveyance (usually meaning a single ship).  The 
rule eases customs regulations to allow a disassem bled product to benefit from GIR 2 even if the 
product must be imported on more than one ship.  No thing in this rule is anything like China's auto 
parts regime, which requires that separate shipments of parts must receive the tariff treatment of a complete vehicle.  Indeed, the US regulation goes out of its way to assure importers that they "may, of WT/DS339/R 
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  course
, continue to file a separate entry for each portion of an unassembled or disassembled shipment 
as it arrives, if they so choose ."38  
G. ORAL STATEMENT BY CANADA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL  
1. Introduction 
4.305  As we have set out in our subm issions, and as just highlighted by our co-complainants, China 
has failed to comply with its basic obligation, pursuant to Article III of the GATT 1994, to afford 
national treatment to automobile parts imported for use in the production of Chinese automobiles.  It 
has also established domestic content requirements that stand in clear conflict with the TRIMs 
Agreement. And it has failed to abide by commitme nts it made in its accession to the WTO, including 
that with respect to the tariffs applicable to  parts and complete and semi knock-down kits. 
4.306  China mischaracterizes its measures as consistent with its Schedule of Concessions and 
thereby consistent with Article II of the GATT 1994,  which China does in place of dealing squarely 
with its violation of Article III.  
4.307  To begin by setting this dispute in context,  China is a rapidly growing economy.  Its 
government has clear strategies for the development of key industrial sectors, including automobile production.  As a result, China has become one of the world's largest automobile producers in only a 
few short years. It is a remarkable economic success story. 
4.308  Foreign suppliers to this sector  have sought to benefit from the growth in Chinese automobile 
production.  They have invested in the Chinese ma rket, have expanded production as the industry has 
expanded, and as required have exte nded global supply chains to provi de the capacity and technology 
that the market demands.  These business decisions, and the economic benefits to China that have 
flowed from them, have come as a direct result of the elimination of protectionist measures on China's accession to the WTO.  These protectionist measur es included preferential treatment for vehicles 
manufactured in China that met certain domestic -content thresholds.  Unfortunately, with the 
introduction of the measures, those domestic -content thresholds have returned.  
4.309  Automobile production is a complex industria l process.  Massive amounts of capital and 
materials are required to develop, produce and sel l automobiles.  One new family sedan represents 
many years of investment in design and development, as well as long input chains with many, sometimes overlapping suppliers.  
4.310  Automobile parts are shipped according to exac ting logistical requirements.  In many cases, a 
single part – say, a fastener – will move from one supplier to anothe r, undergoing various 
transformations en route to its final inclusion in a finished vehicle. And, for many parts, these supply chains move them not only from factory to factory, but from country to country. 
4.311  Of course, in such a complex manufacturing pr ocess, where thousands of individual parts 
make up a finished vehicle, many parts are not ascribed to the production of specific vehicles. Instead, 
they are bought and sold in large volumes and sh ipped as required to production facilities.  China 
ignores this complexity in an effort to justify its measures as a necessary solution to a simple problem 
of what it calls "circumvention". 
                                                     
 
38 Exhibit CHI-27, at 31,922, emphasis added.  WT/DS339/R 
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  4.312  The nature of the dispute is, however, simple.  At issue is the well-established obligation of 
national treatment.  WTO Members may not discriminate between products imported into their territory and like domestic products. And China's measur es, in violation of this obligation, are merely 
domestic-content requirements that deny nationa l treatment to imported automobile parts. 
4.313  In its submission, China has done an admirable j ob of obfuscating this fact.  It has attempted 
to establish as a basic premise that the essential natu re of automobile parts imported into China may 
not be assessed with any certainty on their presen tation at the border.  And, importantly, it has 
suggested, without substantiation, that much of th e trade of these parts is aimed at avoiding Chinese 
tariffs, and that this avoidance is illegitimate.  
4.314  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 to allow for the effective administration of customs laws and regulations.  Canada and other WTO Members recognize this 
flexibility in their laws and regulations.  But, Ca nada does not accept that this gives Members the 
freedom to define importation as it suits them, and thereby undermine the commercial certainty 
afforded by the principle of national treatment.  China does not address in any meaningful way the 
clear relationship of its measures to the obligations  set out in Article III of the GATT 1994 and fails  
even to answer the basic case against it.  
4.315  In its Article XX defence, China presents no compelling evidence that such measures are 
necessary.  It also fails completely to answer the claim that the measures amount to anything other 
than a disguised restriction on internal trade.  
2. Legal issues 
(a) China has not answered the case under Article III of the GATT 1994 
4.316  Canada agrees with China that this case pres ents the question of whether Article II or 
Article III applies to charges imposed on imported pa rts used in Chinese manufacturing.  Where we 
differ, and significantly, is how that question must be  answered.  The charges at  issue are internal, as 
Canada's first written submission describes in detail, and therefore subject to the disciplines set out in 
Article III. 
4.317  China argues that its measures are somehow dis tinct from those considered in previous GATT 
and WTO decisions.  This argument rests on China's faulty claim that a charge it describes as a customs duty under its domestic law must therefore be a customs duty within the meaning of 
Article II.  To give effect to this fiction, Chin a notionally determines that imported automobile parts 
are "in bond", until such time as it applies a final, in ternal charge to them. And China only applies this 
final charge once the part is included in a vehicle produced in China. 
4.318  China gives two purported justifications for treati ng imported auto parts this way.  First, it 
argues that there is no clear dividing line between part s and a complete article made up of those parts.  
Its second and related claim is that a difference in  classification, and a resulting difference between 
the tariffs assigned for parts and the complete artic le, results in what China calls "circumvention".  
4.319  Regarding the first purported justification, there may indeed be instances when an article is an 
incomplete or unfinished product on importation, but has all of the essential characteristics of a 
complete or finished product.  The HS permits cu stoms officials to classify such a product as a whole 
product, provided that classification is based on presentation at the border.  For example, the HS 
specifically permits a vehicle otherwise complete but missing its engine to be classified as an WT/DS339/R 
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  automobile. Likewise, the practice of many customs authorities is to classify a kit, presented in one 
unit at the border, and consisting of all parts necessary to construct a whole vehicle, under the six-
digit tariff sub-heading for whole vehicles. 
4.320  Let us leave aside the fact that such kits are often further categorized at the eight-digit level 
under a separate, and lower, tariff rate.  In mo st cases, parts shipped to gether will properly be 
classified either as parts or as an intermediate cate gory provided for in the HS.  For example, a chassis 
to which is attached an engine, a drive and non-dr ive axle, brakes, and steering – in other words, a 
good that has all of the essential characteristics of  a whole vehicle except for the body – even if 
already assembled, cannot properly be classified as a whole vehicle under the HS.  
4.321  Instead, such a combination has its own categor y, namely chassis with engines attached, 
under tariff line 87.06.
39  Significantly for this case, China's bound tariff rate for this intermediate 
category is the same rate as for parts, and not the much higher rate for whole vehicles.  The fact that 
the intermediate category is bound at the parts rate  is presumably the reason that China ignores this 
category, while suggesting that a Member has gr eat discretion under the HS to classify various 
combinations of parts as whole vehicles.  That the intermediate category exists at all is clear evidence 
that there is no such discretion.    
4.322  The determination of whether a good has the essen tial characteristic of a different, finished 
good occurs on importation – that is, when it first p asses the border.  At that point, a "snapshot" is 
taken of the product. A Member's customs laws and regulations should provide for an objective 
determination of how that snapshot is taken, a nd how related duties are assessed.  Those laws and 
regulations, in accordance with internationally acce pted principles, may include flexibility to allow 
for payment of duty at a date after importation, or permit importers to challenge the accuracy of 
classification decisions. They may also provide for the testing of goods where the accuracy of the 
classification is at issue.  
4.323  While customs practices include procedures that ma y apply after the snapshot is taken and the 
products have entered the customs territory of a Me mber, Members do not take new snapshots at their 
discretion.  They certainly do not, or should not, take a snapshot of an imported good after  it has been 
transformed during manufacturing. 
4.324  Article II of the GATT 1994 allows Members to apply tariffs on importation "subject to the 
terms, conditions or qualifications set forth" in their Schedules. As the written submissions of the 
complainants have established and the jurisprude nce makes clear, border charges can only be applied 
based on presentation of goods at the border .  A Member may impose conditions at the time of 
presentation, but only if the Member's Schedule so provides.  Nowhere in China's Schedule is there 
any term, condition or qualificati on that permits what the measures accomplish.  Nowhere is there a 
justification for a condition allowing for a determ ination, contrary to established classification 
practice, that an automobile part in China's internal  market is something other than what the snapshot 
at the border clearly showed it to be.  
4.325  A few useful conclusions may be drawn from the application of the measures: 
• The levy of a 15 per cent additional charge on parts bears no relation to the snapshot 
of the condition of the parts as presented at  China's border.  Two identical imported 
parts will be treated differently based up on what happens to them within China. 
                                                      
39 Exhibit JE-2.  WT/DS339/R 
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  • The measures are not restricted to the situation where a single manufacturer imports 
all the parts necessary to manufacture a vehicl e from a single foreign supplier, or even 
from a single foreign country.  They apply to arm's-length parts manufacturers in 
China that import parts to manufacture a product that, in turn, will be used by a variety of other arm's-length parts manufact urers.  All of this occurs before the 
transformed parts are finally sold to a vehicle manufacturer. 
4.326  For all of China's attempts to confuse the issue, the EEC  – Parts and Components decision 
makes clear that the measures apply internally  and do not fall under Article II of the GATT 1994.
40  In 
that case, the panel found that the EEC's measure, which imposed a charge on certain parts, based on a 
claim that such a charge was necessary to avoid circumvention of anti-dumping duties on manufactured vehicles, was inconsistent with Artic le III of the GATT 1994 and could not be justified 
under Article XX.  That conclusion applies even mo re strongly to China's measures, which impose a 
charge on all imported parts, regardless of origin, regardless of who purchases them, and not based on 
an earlier investigation.  
4.327  China returns again and again to its misrep resentation of the language of the panel in EEC  – 
Parts and Components . It points to the general administrative flexibility held by customs officials that 
allows them to review and challenge pr evious assessments of goods.  Nothing in EEC  – Parts and 
Components  suggests that a classification review can be  used to deny national treatment.  The 
invocation, out of context, of the customs practices  of other Members only serves to confuse the real 
issue.  Whatever flexibility exists in customs ta riff classification, it does not extend to tracing 
imported parts in the manufacturing process and cla ssifying those parts as the finished product into 
which they are incorporated.  Th at is an internal measure. 
4.328  The measures not only track and reclassify go ods well after importation, but they also link 
that classification to the use of domestic products.  That is, discrimination is linked intrinsically to the 
investment measures established by Decree 125 and Announcement 4
41, and to China's express 
preference for domestic over imported parts.  These measures, and the charges that they impose, apply 
only to imported parts.  They are, then, trade-related, in violation of Article 2 of the TRIMs 
Agreement , and inconsistent with China's Accession Protocol .  These points and those relating to 
China's violations of GATT Articles III:2, III:4 and III:5 are explored in Canada's written submission. 
(b) China's GATT Article XX defences 
4.329  This recourse is both explicit and implicit. 
4.330  How is this so?  China makes a clear, albeit p assing reference to Article XX(d).  This is its 
first, and express recourse to Article XX.  Yet China's primary argument, made ostensibly under 
Article II of the GATT 1994, is merely a reinvention of what is, for all intents and purposes, the same 
Article XX defence.  
4.331  China justifies its measures by arguing that they are required to prevent importers from taking 
what China characterizes as efforts to "circumven t" customs duties.  Canada agrees with the 
observations made by the European Communities in respect of this flawed "anti-circumvention" 
theory, and would add the following.  In order to defend against this alleged problem, China suggests 
that importation can be made on a "conditional basis" , that condition being the overall use of domestic 
                                                      
40 GATT Panel Report on EEC –Parts and Components , para. 5.8. 
41 Exhibits JE-27 and JE-28, respectively. WT/DS339/R 
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  content. But such conditions are not permitted by Article II, nor, as China would have it, does the 
panel in EEC  – Parts and Components suggest that they are.  
4.332  China needs to invent this concept of "impor tation subject to conditions", as it is not assessing 
charges on products at the time of their importation.  Instead, it is imposing an internal charge on the 
theory that such a charge is n ecessary to prevent "circumvention" of customs duties.  Just as in EEC  – 
Parts and Components , such a charge cannot be defended on th e basis that it is really a customs 
charge.  As a result, China's only recourse is to Article XX. 
4.333  As the Appellate Body noted in Dominican Republic – Import and Sale of Cigarettes , the 
analysis of a measure under Article XX is two-tiered.
42  The measure at issue must be provisionally 
justified under the specific exception in Article XX, in this case Article XX(d). The onus of that 
justification is on China.  China must then satisfy  the requirements of the chapeau of Article XX.  
That is, the measure cannot be applied in a manner constituting an arbitrary or unjustified 
discrimination, or a disguised restriction to trade. 
4.334  To rely on Article XX(d), China must prove tw o elements:  the measures must be designed to 
"secure compliance" with laws or regulations that are not themselves inconsistent with some provision of the GATT 1994; and the measures must be "necessar y" to secure such compliance.  Whether a 
measure is "necessary" involves a balancing of factors, notably the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the 
common interests or values protected by that law or regulation, and the accompanying impact of the 
law or regulation on imports or exports.  A me asure cannot be necessary if a more reasonable 
alternative is available, assessed in the light of those three factors. 
4.335  China's measures are neither designed to secure compliance, nor necessary.  They cannot be 
necessary.  A Member cannot qualify or reduce commi tments, such as that made in respect of 
Article III of the GATT 1994, in order to apply its Sc hedule.  Yet, China has made clear that, in its 
view, the measures are necessary to "implement a nd enforce" its Schedule. China's defence here 
appears to be founded on the following logic: 
• The measures concern parts imported into China; 
• if those parts were shipped together in one shipment, they could under the HS have 
been classified as a whole vehicle; 
• vehicle manufacturers are "evading" the tariff on whole vehicles by shipping parts 
separately; and, therefore, 
• China is justified in imposing an internal  charge on those parts to impede this 
"evasion". 
4.336  China's defence ignores the fact that parts are imported both by vehicle and parts 
manufacturers, are sold and undergo further pro cessing in various locations by various independent 
parts manufacturers within China.  More fundament ally, China's defence fails to identify a problem 
that makes the measures necessary.  At paragraph 19  of its first written submission, China cites the 
example of shipments from company Z in Korea as an illustration of the problem supposedly inherent 
in trade in automobile parts.  Even if one accepts that the company Z example represents a 
classification issue, which Canada does not, this ex ample shows only that a large portion of imported 
                                                      
42 Appellate Body  Report on  Dominican Republic –Import and Sale of Cigarettes , at paras. 64-70.  WT/DS339/R 
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  parts were used in a vehicle that was assembled in  China.  It offers no evidence concerning the timing 
of shipments, or their frequency, or anything else that  relates to the core issu e of the condition of the 
goods on presentation at the border.  That is, it offers no evidence of any tariff "evasion".  
4.337  China maintains a theory that all imported part s used in automobile manufacturing in China 
can be classified as a fi nished product.  According to this definition of evasion, it is difficult to 
imagine any discipline on the application of customs rules where a higher rate of duty can be found to 
apply to an imported product. In that context, any classification  could be justified as "necessary" 
under Article XX, by virtue of reliance on different  classifications set out in a Member's Schedule. 
4.338  In terms of the chapeau of Article XX, the application of the measures results in an arbitrary 
and unjustifiable discrimination agains t imported parts, and a clear restriction on trade.  The measures 
are not targeted at specific companies that have been  found to "evade" tariffs.  Nor are they restricted 
in their impact to vehicle manufacturers, which ar e the only ones that, under China's theory, could be 
perpetrating this "evasion".  This is quite aside from whether imported parts exceeding the thresholds 
set out in the measures could even constitute a whole vehicle under the Harmonized System.  
4.339  This is quite aside from whether imported pa rts exceeding the thresholds set out in the 
measures could even constitute a whole vehicle under the HS.  It is perhaps because of that 
arbitrariness that China elects to distinguish between the notion of commonly understood bonding 
requirements, the application of wh ich are limited in scope, and the expansive security deposit system 
that is applied to parts imported into China.  
3. Conclusion 
4.340  Articles III and II of the GATT 1994 are mutually  supporting, that is true.  Yet they are 
entirely distinct obligations: Article II relates to the charges that a WTO Member may apply to 
imported goods at its border; Article III relates to what a WTO Member does after those products pass 
the border. Consequently, a violation of Article III cannot be justified merely by invoking Article II.  
A WTO Member may justify internal measures that  violate Article III on the basis that they are 
necessary to secure compliance with customs law, and are therefore defensible under Article XX(d).  
But China in this case has not met its burden for establishing such a defence. 
4.341  An otherwise-internal measure cannot become a border measure just because a Member says 
it does.  The jurisprudence makes that clear.  Chin a has provided oblique and irrelevant references to 
Member practice to confuse this issue, but it has not  provided a justification for the inconsistency of 
its domestic-content requirements with its WTO comm itments.  Decree 125 a nd its related measures 
amount, simply, to a violation of China's obligation to provide national treatment to imported auto parts under Articles III:2, III:4 and III:5 of the GATT 1994, as well as a violation of Article 2 of the 
TRIMs Agreement.  As a result, the measures constit ute a clear violation of the essential principle of 
non-discrimination in international trade.  
H. O
RAL STATEMENT BY CHINA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL  
1. Introduction 
4.342  This disputes concerns China's sovereign right to  enforce its tariff schedule, and to obtain the 
benefit of the reciprocal and mutually advantageous  market access arrangements that it negotiated in 
connection with its accession to the WTO.  Under the Schedule of Concessions that China negotiated 
with other WTO Members, it is entitled to maintain a higher rate of duty on motor vehicles than the 
rate of duty on parts of motor vehicles.  This ta riff rate difference has impor tant revenue and market WT/DS339/R 
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  access implications for China.  Th e question presented in this dispute is whether China can adopt 
measures to enforce its tariff schedule and preserve the value of the market access arrangements that it negotiated when it joined the WTO. 
4.343  The position of the complainants in this dispute is that the difference in tariff rates between 
motor vehicles and parts of motor vehicles in Ch ina's Schedule of Concessions is effectively 
unenforceable.  Let me provide the Panel with a specifi c example.  As China demonstrated in its first 
written submission, there is an auto manufacturer in  China that imports 90 per cent of the parts and 
components to assemble a particular vehicle model.  It imports these parts and components from its 
own affiliates, and from a single country.  There is no question that China could properly classify 
these parts and components as a motor vehicle if they  were to enter China in a single shipment.  
According to the complainants, however, the auto ma nufacturer can evade the higher rate of duty that 
applies to motor vehicles merely by importing th ese parts and components in separate shipments. 
4.344  China does not agree that the Schedule of Concessions that it negotiated is effectively 
unenforceable.  Nor does China believe that this resu lt is consistent with maintaining the security and 
predictability of tariff concessions.  The measures that  China has adopted to enforce its tariff schedule 
are consistent with its obligations under Article  II of the GATT 1994, and consistent with the 
commitments that it made when it joined the WTO. 
2. The issue presented in this dispute   
4.345  It suits the complainants' purpo ses to make this dispute appear significantly more complicated 
than it is.  The question presented to the Panel is really quite simple:  Can China, consistent with its 
WTO obligations, classify multiple shipments of auto  parts and components based on their substance, 
instead of their form?  The complainants' position is, in effect, that the GATT requires China to give effect to form over substance.  In their view, im porters have unfettered discretion to structure their 
imports of parts and components as they see fit, and the GATT prohibits national customs authorities 
from looking behind that structure to discern the commercial reality of what the importer is bringing 
into the country.   
4.346  If we look at a continuum of possible imports , we can see where the complainants' logic 
leads, and what this case is actually about: 
• Let's begin with the case of a completely assembled motor vehicle.  No one would 
reasonably dispute that this is a "motor vehicle," even though it is necessarily 
comprised of the parts of motor vehicles.   
• What if we removed the tires, the seats, and the doors?  Clearly, no one is going to 
drive anywhere in this vehicle, and yet it is nonetheless a "motor vehicle" under GIR 2(a) of the HS because it has the es sential character of a motor vehicle.   
• Now let's imagine that we take all of the parts necessary to assemble a particular 
motor vehicle and place them, entirely unassembled, in a shipping container.  Under GIR 2(a), this is still a "motor vehicl e," because GIR 2(a) encompasses unassembled 
parts and components of the complete article , provided that the parts and components, 
when assembled, have the essential character of the complete article.   
• Finally, let us suppose that we place less than 100 per cent of the parts necessary to 
assemble a motor vehicle in our shipping cont ainer.  Let's imagine, for example, that  WT/DS339/R 
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  we take out the radiator, the windows, the tires, the battery, the seats, and the doors.  
It would still be a motor vehicle under GIR  2(a), provided that the parts and components in the shipping container have the essential character of a motor vehicle 
when assembled. 
• So now we come to what this dispute is all about:  What if we take our shipping 
container of parts and components that have the essential character of a motor vehicle, 
and divide them into, for example, four shipping containers?  And instead of importing these shipping containers in a singl e consignment, what if we import them 
in four separate consignments over four consecutive weeks?  Did we import a motor 
vehicle, or did we import parts and co mponents of a motor vehicle?  Most 
importantly, should we be entitled to pay the lower duty rate that applies to parts and 
components of motor vehicles simply because we took our single shipping container and divided it into four  shipping containers?  That is th e issue presented in this case.   
4.347  The necessary consequence of the complainants' position is that an auto manufacturer that 
assembles the same vehicle model from the same im ported parts and components can avoid the higher 
duty rate on motor vehicles solely by importing th e parts and components in several shipments instead 
of one shipment.  Nothing in Article II of the GATT 1994, nothing in China's Schedule of Concessions, and nothing in the HS sup ports this arbitrary result.   
3. The challenged measures interpret and en force China's tariff provisions for motor 
vehicles 
4.348  China has demonstrated in its first written s ubmission, and will con tinue to demonstrate 
throughout these proceedings, that the measures challe nged in this dispute implement and give effect 
to a proper interpretation of China's tariff provisions  for motor vehicles.  China has interpreted the 
term "motor vehicles" in its Schedule of Concessions to encompass the importation of auto parts and 
components that have the essential character of a comp lete motor vehicle, without regard to whether 
those parts and components enter China in one shipment  or in multiple shipments.  This interpretation 
is entirely consistent with ordinary me thods of treaty interpretation under the Vienna Convention.  
4.349  Without reviewing all of the interpretive ar guments set forth in China's first written 
submission, China would like to emphasize two points.  First, the interpretation of the term "motor 
vehicles" that China has adopted is consistent  with the object and purpose of the GATT.  The 
Appellate Body has recognized that "a basic object and purpose of the GATT 1994, as reflected in 
Article II, is to preserve the value of tariff con cessions negotiated by a Member with its trading 
partners, and bound in that Member's Schedule."
43  The Appellate Body has likewise observed that the 
tariff concessions negotiated by Members are intended to be "reciprocal and mutually  
advantageous."44   
4.350  Preserving the value of reciprocal and mutually  advantageous tariff concessions is necessarily 
a two-way street.  It is fully consistent with th is object and purpose for China to preserve the value, 
from both a revenue and market access perspective,  of the higher bound duty rates that it negotiated 
for motor vehicles.  It is not consistent with this object a nd purpose to conclude that auto 
manufacturers can evade the higher tariff rates on motor vehicles by importing parts and components 
in multiple shipments, when those parts and co mponents would have been classified as a motor 
vehicle had they entered China in a single shipment. 
                                                      
43 Appellate Body Report on Argentina – Textiles and Apparel , para. 47.   
44 Appellate Body Report on EC – Chicken Cuts , para. 243 (emphasis added).   WT/DS339/R 
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  4.351  The second point that China would like to emphasize is that it is entirely consistent with 
international customs practice for China to apply GIR 2(a) to multiple shipments.  The WCO has 
specifically affirmed that the classification under GIR 2(a) of goods assembled from multiple 
shipments of imported components is a matter to be  resolved by each country  in accordance with its 
national laws and regulations.  This means that the interpretive principles of GIR 2(a) can be applied 
to multiple shipments of parts and components on th e basis of the importer's demonstrated practice of 
assembling imported parts and components into a complete article.   
4.352  This application of GIR 2(a) is confirmed and reinforced by the subsequent practice of WTO 
Members in classifying multiple shipments of part s and components on the basis of the importer's 
demonstrated practice of assembling those parts and components into a complete article.  One of the 
circumstances in which Members have done this is where it is necessary to prevent the circumvention 
of duties that apply to complete articles.   
4.353  Once it is recognized that there is no absolute and inviolate rule against applying GIR 2(a) to 
multiple shipments, much of the complainants' cas e against the challenged measures simply falls 
away.  A necessary consequence of applying GIR 2(a) to multiple shipments is that customs 
authorities need some form of administrative pr ocess to keep track of how companies import and 
assemble parts and components into complete articl es.  That is what the challenged measures do.  
What the complainants characteriz e as an internal measure is not hing more than the process that 
China has adopted for establishing the intention of an auto manufacturer to import and assemble parts 
and components that have the essential character of a complete motor vehicle, and to keep track of the 
parts and components that the auto manufacturer imports for this purpose.   
4. The threshold issue before the Panel: Interpreting the scope of Article II 
4.354  This brings China to the critical threshold issue before the Panel:  Whether the measures 
challenged in this dispute are border measures s ubject to Article II of the GATT 1994, or whether 
they are internal measures subject to Article III of  the GATT 1994.  The Panel must resolve this issue 
at the outset to determine which set of disciplines is relevant to its eval uation of the challenged 
measures.   
4.355  The relationship between Article II and Article III is of critical systemic importance to the 
operation of the GATT, and yet there is little in th e text of the GATT itself to define the boundary 
between these two sets of disciplines.  Given how im portant these two articles are to the functioning 
of the international trade system, it is also surp rising that there is little GATT or WTO jurisprudence 
concerning the relationship between  Article II and Article III.   
4.356  There are two general points that are relevant to this threshold issue.  First, it is evident from 
the context of the GATT, as well as from its object and purpose, that the relationship between Article II and Article III is binary.  That is, a measu re is either a border measure subject to Article II 
or an internal measure subject to Article III, but it cannot be both simultaneously.   
4.357  The second general point is that the classificati on of a measure under Article II or Article III 
is necessarily independent of an evaluation of whethe r the measure is consistent with the relevant set 
of disciplines.  The classification of the measure l ogically precedes the determination of conformity.   
4.358  With these two general points in mind, we can exam ine the scope of Article II.  Article II:1(a) 
states that "each contracting party shall accord to the commerce  of the other contracting parties 
treatment no less favourable than that provided for" in the relevant Schedule of Concessions.  In the 
context of an article that concerns the imposition of  customs duties, it is reasonable to interpret the  WT/DS339/R 
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  term "commerce" to be synonymous with "imports."   Thus, in broad terms, we know that Article II 
concerns charges that Members impose upon imports of products from other countries. 
4.359  Article II:1(b) states that the products of othe r Members "shall, on their importation into the 
territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth 
in that Schedule, be exempt from ordinary custom s duties in excess of those set forth and provided 
therein."  Thus, measures that fall within the scope of Article II are measures that Members 
(1) impose upon the products of other Members "on their importation" into the customs territory, and 
(2) concern the imposition of "ordinary customs du ties" set forth in the Member's Schedule of 
Concessions.    
4.360  It is evident from the arguments of the parti es that much of the disagreement concerning the 
classification of the challenged measures ultimately relates to the meaning of the term "on their 
importation" in Article II:1(b).  Much of the di spute before the Panel comes down to whether the 
challenged measures do or do not impose charges on motor vehicles "on their importation" into the 
customs territory of China. 
4.361  What does it mean for a measure to impose duti es on products "on their importation" into a 
Member's customs territory?  We know that the te rm "on their importation" is not limited to the 
imposition of customs duties at the exact point in time and space at which products from another country cross the border.  We know this because there is probably not a single national customs system in the world that operates on this basis.   As China demonstrated in its First Written 
Submission, national customs authorities routinely make classification dete rminations and impose 
customs duties long after the point at which goods have crossed the border.   
4.362  If the scope of Article II is not defined by the time or place at which the charge is collected, 
then how is it defined?  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."
45  The panel did not elaborate upon what it means for a charge 
to be imposed "conditional upon the importation of a product …"  Nor did it discuss the textual or 
contextual basis for its interpretation.  Bu t we can use the panel's interpretation in EEC – Parts and 
Components  as at least the beginning of a proper interpretation of Article II under the Vienna 
Convention . 
4.363  Let us recall, in this regard, that Article II concerns the manner in which Members impose 
customs duties and other types of border charges on imports from other Members.  It is consistent 
with this context to interpret the term "on thei r importation" to encompass charges that Members 
impose as a condition of the importation of products fro m other countries.  In the specific context of 
Article II:1(b), first sentence, the condition of impo rtation must relate to the obligation to pay an 
ordinary customs duty of a type set forth in the Member's Schedule of Concessions.   
4.364  Interpreting the term "on their importation"  to include measures that Members impose 
"conditional upon the importation of a product" is likew ise consistent with the object and purpose of 
the GATT.  As I have already noted, the Appellate Body has stated that a basic object and purpose of 
the GATT is to preserve the value of tariff concessions negotiated by Members.  It is consistent with 
this object and purpose to interpret Article II to  encompass conditions that Members impose upon the 
entry of products into their customs territory, and that serve to preserve the value of its negotiated 
tariff concessions. 
                                                      
45 GATT Panel Report on EEC – Parts and Components , para. 5.5 (emphasis added).   WT/DS339/R 
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  4.365  These considerations inform the Panel's assess ment of what it means for a charge to be 
imposed "conditional upon" the importation of product s into a country.  China agrees with the panel 
in EEC – Parts and Components that the manner in which a Member characterizes a particular charge 
cannot determine whether the charge is one that is "conditional upon" the im portation of a product.  
Rather, consistent with the context of Article  II and the object and purpose of the GATT, China 
considers that a charge is "conditional upon" the importation of a product if the charge bears an 
objectively ascertainable relationship to the fulfillment of a customs liability.
46  For the reasons that 
China has explained, the time or place at which th e charge is assessed is not determinative; what 
matters is whether the charge objectively relates to  a duty obligation that arose as a condition of the 
importation of the product.   
5. The challenged measures are border meas ures within the scope of Article II 
4.366  The measures challenged in this dispute are with in the scope of Article II because they bear 
an objective relationship to the fulfillment of a cu stoms liability.  The me asures ensure that the 
importation and assembly of auto parts and compone nts receives the same customs treatment without 
regard to whether the parts and components enter Ch ina in one shipment or in multiple shipments.  
The measures thereby give effect to China's ta riff provisions for motor vehicles, and preserve the 
value of the tariff concessions that China negotiated in connection with its accession to the WTO.   
4.367  The relationship between the charges that  China imposes under Decree 125 and the 
fulfillment of a customs obligation is objectiv ely ascertainable from the manner in which the 
measures operate.  China has provided a detailed desc ription of how the measures operate in its First 
Written Submission, but it is important  to highlight several key features: 
− First, the auto manufacturer determines wh ether it will assemble a particular vehicle 
model – let's call it the X900 – from importe d parts and components that China would 
classify as having the essential character of a moto r vehicle if they were to enter China in 
a single shipment.  Let's assume for the sake of illustration that the X900 meets one or 
more of the thresholds under Decree  125 for a complete motor vehicle. 
− Thereafter, when the auto manufacturer imports parts and components to assemble the 
X900, it must: first, enter parts and components for the X900 separately from parts and components for other vehicle models; second, d eclare at the time of importation that the 
parts and components are part of a larger collection of imported parts and components 
that, when assembled together, have the essentia l character of a motor vehicle; and third, 
provide a customs bond for those entries.   
− The X900 parts and components that the auto manufacturer imports on this basis remain 
in a bonded status.  The Customs General Administration of China collects the applicable customs duties on these parts and components when the auto manufacturer fulfills its stated intention to assemble them into an X900 – a motor vehicle that the manufacturer 
has previously verified as having the essential character of a complete motor vehicle.  
The Customs General Administration assesses th e applicable duties only on the imported 
auto parts and components in that vehicle, and in accordance with ordinary methods of 
customs valuation.   
                                                     
 
46 The European Communities has referred to this as the "objectively as certainable purpose of a levy."  
EEC Comments on the Panel Report on EEC –Parts and Components , L/6676 (16 May 1990) at 2.    WT/DS339/R 
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  4.368  These conditions that China attaches to the impor tation of auto parts and components provide 
the administrative mechanism for applying the interpre tive rules of GIR 2(a) to multiple shipments.  
These are the conditions of importation that allo w China to ascertain the commercial reality of 
whether an auto manufacturer has assembled a vehi cle from imported parts and components that have 
the essential character of a motor vehicle.  China h as already demonstrated that  it is consistent with 
GIR 2(a) to classify multiple imports of parts and components on the basis of the importer's practice of assembling those parts and components into a comp lete article.  The conditions that China attaches 
to the importation of auto parts and components do nothi ng more than establish and give effect to that 
intention. 
4.369  For these reasons, the charges that China im poses under the challenged measures bear an 
ascertainable relationship to the fulfillment of  a duty obligation that arose as a condition of 
importation.  Unlike the measures at issue in EEC – Parts and Components,  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 fulfills its stated intention to import 
and assemble parts and components that have the es sential character of a motor vehicle, 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. 
4.370  It is simply not the case, as the complainants have suggested, that no determination of duty 
liability is ever based on what happens to an importe d article after the point of importation.  There are 
many situations in international customs practice in  which this happens.  China will focus on one such 
instance: The US inward processing regime that  it calls "Temporary Importation Under Bond," or 
"TIB".   
4.371  Under the US TIB rules, an importer can ente r articles into the United States conditionally 
free of duty if the importer intends to alter or pro cess that article and export it from the United States 
within a period of one year.  The importer pays no du ty at the time of importation, but is required to 
provide a bond.  The importer declares at the time of importation that it intends to alter or process the article and re-export it within one year.  If the importer does not alter or process the article within one 
year, it is, of course, liable for th e duty that it would have paid had it not entered the article on the 
condition of re-exportation. 
4.372  The US TIB system involves a determination of duty liability that is based on what happens 
to the article after the point of importation – was it altered or processed and re-exported, or did it 
remain within the United States after a period of a y ear?  However, the fact that the determination of 
duty liability is contingent upon what happens to the imported article does not mean that any duties 
that the United States thereby imposes are "internal" charges under Article III.  Rather, they are border 
charges because they relate back to a condition that attached at the time of importation.  The importer 
declared that it was going to use the imported artic le for a particular purpose, and provided a bond to 
secure that commitment.  The final determination of  duty liability is deferred until the condition that 
attached at the time of importation is either fulfilled or  not fulfilled.  Even though this occurs after the 
point of importation, any charge that the Unite d States imposes under these rules bears an objectively 
ascertainable relationship to the satisfaction of a duty liability.  It is therefore a border measure. 
4.373  The measures challenged in this dispute are bor der measures for the same reason that the US 
TIB rules, and other examples like it, are border measures – all of these measures objectively relate to 
the fulfillment of a customs obligation.  In the case of  the measures challenged here, that obligation is 
to pay the applicable duty rate for motor vehicles on imports of parts and components that have the 
essential character of a motor vehicle.   WT/DS339/R 
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  6. The challenged measures do no t impose excess customs duties 
4.374  Once it is properly established that the challe nged measures are border measures within the 
scope of Article II of the GATT 1994, the question th en becomes whether these measures result in the 
imposition of ordinary customs duties in excess of t hose set forth in China's Schedule of Concessions.  
China perceives only three possible arguments that the challenged measures result in the imposition of 
excess customs duties.  Each one of these arguments is without basis. 
4.375  The first argument is the argument advanced by  the European Communities in its first written 
submission, to the effect that China's tariff rates fo r motor vehicles apply only to imports of complete 
motor vehicles.
47  We know this is wrong, because GIR 2(a) plainly provides that something less than 
100 per cent of the parts and components of an ar ticle can be classified as the complete article 
provided that they have the essential character of the complete article, and without regard to their state 
of assembly or disassembly.   
4.376  The second possible argument is that the cha llenged measures result in the imposition of 
excess customs duties because, as Canada puts it, "the  only relevant factor" in customs classification 
is what is in the shipping container when it crosses the border.48  We know this is wrong, among other 
reasons, because the WCO has stat ed that the classification of articles assembled from multiple 
shipments of imported parts and components is a matter to be determined under national law, and 
because there are numerous circumstances in wh ich WTO Members combine multiple shipments for 
classification purposes, including when necessary to prev ent the circumvention of duties that apply to 
the complete article. 
4.377  The third possibility is that the complainants simply disagree with where China has drawn the 
line for purposes of the essential character test.49  As China illustrated in its first written submission, 
GIR 2(a) necessarily gives rise to a continuum of pa rts and components that could be said to have the 
essential character of a complete article.  If the compla inants are of the view that China has drawn the 
line at the wrong point along this continuum, the complain ants must identify, either to this Panel or to 
the HS Committee of the WCO, the specific combinations of parts and components that, in their view, do not have the essential character of a motor vehicl e.  This determination can only be made on the 
specific facts of each combination.  China does not  consider that the complainants have made any 
such showing.  In any event, even if the complain ants were able to demonstrate that the challenged 
measures result in the imposition of excess customs duties when applied to a specific combination of 
parts and components, this would not mean that the measures result in the imposition of excess 
custom duties in all cases. 
7. Conclusion 
4.378  China has thus demonstrated, first, that the challenged measures are border measures subject 
to Article II of the GATT 1994.  It follows that the complainants' claims based on the contrary 
assertion that the measures are internal measures subject to Article III of the GATT 1994 are without 
basis.  The complainants' claims under the TRIM s Agreement and China's Accession protocol must 
fail for the same reason.  Secondl y, China has demonstrated that, as border measures, the challenged 
measures do not result in the imposition of ordinary customs duties in excess of those set forth in 
China's Schedule of Concessions.  The measures therefore do not violate China's WTO commitments under Article II of the GATT 1994. 
                                                     
 
47 The European Communities' first written submission, para. 245. 
48 Canada's first written submission, para. 115.   
49 See, e.g., Canada's first written submission, para. 143.    WT/DS339/R 
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  4.379  In conclusion, China would respectfully suggest  that, as these proceedings continue, the Panel 
keep the following questions in mind: 
• First, what is the specific interp retive basis under Article 31 of the Vienna Convention  
for the complainants' position that China is not allowed to classify multiple shipments 
of auto parts and components on the basis of  the manufacturer's demonstrated practice 
of assembling those parts and components into a complete motor vehicle?  In 
particular, where is this prohibition to be found (1) in the GATT 1994, (2) in China's Schedule of Concessions, (3) in the Harmonized System, or (4) in relevant decisions 
of the WCO? 
• Second, how do the complainants believe that  it is consistent with the security and 
predictability of tariff concessions that were  meant to be mutually advantageous to 
conclude that importers can pay a lower ra te of duty based on nothing other than the 
fact that they import parts and components in multiple shipments instead of one 
shipment? 
• Third, with respect to the scope of Article II, how does the complainants' 
interpretation of the term "on their import ation" comport with ordinary methods of 
treaty interpretation, including the object and purpose of the GATT and the subsequent practice of WTO Members?  Is it a practical and workable interpretation, 
and does it recognize the realities and complexities of contemporary customs 
practices? 
• Finally, when the complainants seek to di stinguish their own customs practices or the 
customs practices of other WTO Members fro m the measures that China has adopted, 
have the complainants explained how tho se alleged distinctions detract from the 
relevance  of those practices to the interpretive issues in this dispute?  It should not be 
sufficient for the complainants to assert that  they undertake certain customs practices, 
such as classifying multiple shipments of pa rts and components on a combined basis, 
only in what they perceive to be different  contexts – the question is whether those 
alleged differences in context matter  to whether it is releva nt subsequent practice 
under Article 31 of the Vienna Convention .  In short, are these distinctions that make 
a difference, or are they distinctions that are merely convenient? 
4.380  China believes that the complainants' answers to  these questions will help to narrow and focus 
the issues in this dispute.  China looks forwar d to questions from the Panel and to the parties' 
discussions of these matters.   
I. SECOND WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES  
1. Introduction 
4.381  China has conceded on the detailed arguments  made by the European Communities under 
Article 2 of the TRIMs Agreement and Article III of the GATT 1994 since it does not even begin 
rebutting the prima facie  case brought by the complainants. Inst ead, its entire defence strategy is 
based on the premise that the majority of the measures should only be examined under Article II of 
the GATT 1994 and on the basis of an unprecedented in terpretation of the Harmonised System.  The 
arguments put forward by China put in question th e very basic principles of the WTO Agreement and 
the GATT 1994. WT/DS339/R 
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  2. Factual background 
4.382  China portrays a fundamentally flawed and unrealistic image of the automotive industry 
which "conspires" to circumvent China's tariff rate s on whole vehicles.  In reality, vehicle production 
is a highly complex process, involving a constant inflow of parts from various origins through long 
supply chains to manufacturing facilities where co mplex technologies are integrated.  One single 
vehicle model can contain thousands of different pa rts from all over the world.  Many of these would 
be used interchangeably in several different models  if China's Measure did not require an artificial ex 
ante identification of their destination in a particular model. 
4.383  After requiring manufacturers to artificially identify all the parts used in a specific vehicle 
model and to declare imported parts as complete vehi cles (which in reality are just parts), China now 
boldly uses this as "evidence" of a circumvention c onspiracy.  This "anti-circumvention theory" was 
invented ex post  to justify measures which were actually adopted to "[n]urture a group of relatively 
strong auto-parts manufacturers" (Article 4 of Policy Order 8).  It also ignores that nothing is 
circumvented if vehicle manufacturers decide to import auto parts and manufacture them into vehicles 
in China. 
3. Legal argument 
(a) The violation of the TRIMs Agreement and the Accession Protocol of China relating to the 
TRIMs Agreement 
4.384  The measures are inconsistent with Article 2 of the TRIMs Agreement  in conjunction with 
paragraphs 1(a) and 2(a) of the Illustrative List and China's Accession Protocol to the WTO.  Contrary 
to China's only defence in this resp ect, these claims do not require any ex ante  determination of 
whether the measures are "internal" or not. 
4.385  The European Communities reiterates that th e measures are "investment measures" and 
"trade-related". For the reasons already set out in the first written submission of the European 
Communities, they are covered by paragraphs 1(a) and 2(a) of the Illustrative List to which Article 2.2 
of the TRIMs Agreement refers.  Therefore, they must  be considered to be in consistent with Articles 
III:4 and XI:1 of the GATT 1994 and, consequently, Ar ticle 2.1 of the TRIMs Agreement. China also 
violated its commitments in Part I, Articles 1.2 (in connection with paragraphs 203 and 342 of the 
Working Party Report) and 7.3 of its Accession Protocol. 
(b) The violation of Article III of the GATT 1994  
4.386  China has, in spite of the  prima facie case established by the complainants and explicit 
requests from the Panel, still not responded to th e claims under Article III of the GATT 1994.  
Instead, it bases its entire defence strategy, as fo r the claims under the TRIMs Agreement, on the 
premise that the measures are not "internal".  China' s obstructive silence with re gard to the essence of 
the main claims in these proceedings can only mean that it concedes the inconsistency of its measures 
with Article III of the GATT 1994. 
(i) The "internal" nature of the measures 
4.387  Contrary to China's view, the measures do not impose "ordinary customs duties" within the 
meaning of Article II: 1(b), first sentence of the GATT 1994.  WT/DS339/R 
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  4.388  "Ordinary customs duties" are financial charges in the form of a tax and imposed on products 
"on their importation into the territory".  They n eed to be distinguished from internal charges under 
Article III:2 that are imposed on products already "im ported into the territory".  In a temporal sense, 
the term "on importation" means that ordinary cu stoms duties are normally collected "at the time or 
point of importation" (see Interpretative Note Ad Article III).  The term "on importation" also has a 
material aspect limiting it to charges due because of importation of the product, and not because of 
other events or criteria, e.g. the amount of local c ontent in products into which the imported product is 
subsequently assembled. 
4.389  China's attempts to extend the scope of the te rm "on importation" to cover an indefinite 
"process of importation" and all charges that " bear[] an objective relationship to the administration 
and enforcement of a valid customs liability " find no support in the wording, context and purpose of 
Article II:1(b), first sentence. 
4.390  The charges imposed on imported auto parts under the measures are no ordinary customs 
duties, but internal charges.  They are not collected at the time or point of importation, but internally 
after assembly and manufacture.  This is not affect ed by the declaration and the duty guarantee to 
which China refers, inter alia  since both focus on the way in which the imported parts will be used 
internally within China, rather than on th e contents of a consignment upon importation. 
4.391  Furthermore, the charges under the measures are not due because of importation of the auto 
parts.  Their imposition rather depends on whether th e imported auto parts are verified as automobile 
parts characterized as complete vehicles which in  turn depends on whether the imported parts are 
assembled into vehicles with an insu fficient level of local content.  Irrespective of how auto parts are 
presented "on importation", charges are imposed on th e basis of how the auto parts are used after 
importation in China. 
4.392  For Article 29 of Decree 125, which provides fo r charges even if manufacturers purchase auto 
parts on the Chinese internal market from suppliers  that previously imported them, China had to 
implicitly acknowledge that these are "internal" char ges (allegedly justified under Article XX(d) of 
the GATT 1994).  The European Communities considers that Article 29 of Decree 125 cannot be isolated in that respect from the remainder of the measures. 
(ii) The violation of Articles III:4, III:2 and III:5 of the GATT 1994 
4.393  As set out in detail in the first written submission of the European Communities, imported 
and domestic auto parts are "like" within the meaning of Articles III:4, III:2 and III:5 of the 
GATT 1994.  The measures constitute generally app licable "laws, regulations and requirements 
affecting [the] internal sale, offering for sale, purchas e, transportation, distribution, or use" within the 
meaning of Article III:4 and treat imported auto pa rts "less favourably" than like products of Chinese 
origin.  As regards Article III:2, the internal charges applied to imported auto parts are "in excess of" 
those applied to the like domestic products.  The measures are also inconsistent with Article III:5 
since they constitute an "interna l quantitative regulation relating to the mixture, processing or use of 
products in specified amounts or proportions" which "requires … that any specified amount or proportion" of auto parts used in the assembly and manufacture of vehicles "must be supplied from 
domestic sources" and not imported.
50 
                                                      
50 In the alternative, the measures are inconsistent with the second sentences of Articles III:2 and III:5 
respectively. WT/DS339/R 
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  (iii) Accession Protocol  
4.394  China also acted inconsistently with its obligations under the WTO Agreement  as set out in its 
Accession Protocol, in particular Part I, Article 7.2 of the Accession Protocol  by introducing non-
tariff measures that are inconsistent with Article III, paragraphs 2, 4 and 5 of the GATT 1994 and not 
justified under the provisions of the WTO Agreement . 
(c) Alternatively: the measures are inconsistent with Article II:1 (a) and (b) of the GATT 1994 
4.395  It is important to emphasise from the outset that China's arguments do nothing less than 
undermine the whole system of tariff classification and the object and purpose of the WTO agreement 
and the GATT 1994 namely "the security and pr edictability of the reciprocal and mutually 
advantageous arrangements directed to the substa ntial reduction of tariffs and other barriers to 
trade".
51  
(i) The HS in the context of WTO law 
4.396  In the context of this case there is a rare point  of agreement between the parties: the HS is 
relevant and constitutes context  for purposes of interpreting tariff commitments in the WTO Members' 
Schedules.  This has been confirmed by the Appellate Body.52  The European Communities considers 
that the HS could also fulfil the criteria in Article 31(3)(c) of the Vienna Convention as a "relevant 
rule[] of international law applicable in the relations between the parties".  
4.397  However, there is considerable disagreement on how the relevant parts of the Chinese tariff 
schedules should be interpreted.  More fundamentally , there is considerable disagreement on the very 
basic rules on which the HS is founded. 
4.398  It is of paramount importance to underline that when goods are classified in the HS it is 
always done on the basis of the objective characteristi cs of the product at the time of importation, that 
is, as imported and presented to customs on a shipme nt-by-shipment basis.  The intentions of the 
importer and differing duty rates are irrelevant.  With the exception of China, this is the position 
shared by all parties to this dispute, including the third parties that have addressed Article II of the 
GATT 1994 in their submissions.  More importantly , this position was confirmed by the Appellate 
Body in EC – Chicken Cuts:   
We agree with the Panel that, in characterizing a product for purposes of tariff 
classification, it is necessary to look exclus ively at the "objective characteristics" of 
the product in question when presented for classification at the border.53 
(ii) GIR 1: Motor vehicles vs. parts thereof 
4.399  GIR 1 is the backbone of the application and inte rpretation of the HS and, hence of the tariff 
schedules of most WTO members such as China's. Th e overwhelming majority of tariff classification 
situations are decided on the basis of GIR 1, which reads as follows: 
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 
                                                      
51 Appellate Body Report on EC – Chicken Cuts , para. 243. 
52 Appellate Body Report on EC – Chicken Cuts para. 199.   
53 Appellate Body Report on EC – Chicken Cuts  para. 246.  WT/DS339/R 
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  the headings and any relative Section or Chapter notes and, provided such headings 
or Notes do not otherwise require , according to the following provisions. (emphasis 
added) 
4.400  GIR 1 is very clear: there is a clear hierarchy between the rules.  If the classification can be 
determined according to the terms of the head ings and any relative Section or Chapter notes , other 
rules are simply not applicable.  
4.401  At the level of China's tariff schedules, there is no ambiguity on where complete vehicles, 
intermediate products and parts of  complete vehicles should be classified. They are very clearly 
subject to different tariff headings.  
4.402  Therefore, the other rules and in particular GIR 2(a) on which China bases its entire defence 
strategy are simply not applicable at the level of  the tariff headings and without considering a very 
specific shipment as presented to customs at the border.   
4.403  This means also that in the overwhelming majority of cases it is a simple task to interpret the 
notions of "motor vehicle" and "parts"54 of such motor vehicles under Article 31 of the Vienna 
Convention as the European Communities has demonstrated  in its first written submission. It is 
important not to lose sight of the simplicity of this case from the point of view of tariff classification at the level of China's tariff schedules: the fundame ntal difference between the ordinary meanings of 
the words in the tariff headings is confirmed by their context and object and purpose.  
(iii) The exceptional situations in casu subject to GIR 2(a) 
4.404  China bases its entire defence strategy on GI R 2(a).  The European Communities considers 
that GIR 2(a) is of extremely limited relevance for the present case.  Recourse to GIR 2(a), which is one of the "following provisions" within the meaning of GIR 1, can only be relevant in very specific 
individual cases "as presented" to customs,  and not at the level of Chin a's tariff schedules generally as 
China insists. 
4.405  Apart from the very limited relevance of GIR 2(a) for the present case, the European 
Communities wishes to stress that China's defence st rategy is based on an unprecedented reading of 
GIR 2(a).  China has in the course of the proceedings  put forward a wide range  of evolving and often 
inconsistent arguments.  
4.406  The European Communities considers that the "mu ltiple shipments" theory invented by China 
ignores the plain wording of GIR 2(a), in particular that the classification must be determined on the 
basis of the article "as presented", and is not su pported by the WCO Decision to which China refers. 
China also ignores the "essential character" element contained in GIR 2(a).  Furthermore, China 
obviously construed its "multiple shipments" theory ex post  since nothing in the wording of the 
measures refers to GIR 2(a).  It is also worth noting that China appears to apply its "multiple 
shipments" theory exclus ively in the automobile sector, and only since 2004 – which happens to 
coincide with the moment in which China decided to  "[n]urture a group of relatively strong auto-parts 
manufacturers".55 (Article 4 of the Automotive Policy Or der). Furthermore, China's "multiple 
                                                      
54 China continuously insists that the key question before the Panel is to interpret the notion of "motor 
vehicle" in China's tariff schedules. This is not correct as a proper analysis requir es to examine the relevant 
words in all relevant tariff headings starting with "p arts and accessories" of motor vehicles, "chassis fitted with 
engines" etc. 
55 Article 4 of Policy Order 8. WT/DS339/R 
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  shipments" theory is not supported by any allege d anti-circumvention practice of WTO Members.  
The European Communities consider s also that China's arguments on the importer's intention are 
contradictory and irrelevant for th e case.  Finally, the application by China of GIR 2(a) to CKD and 
SKD kits in a systematic way is not consiste nt with that rule, which is to be applied in casu . 
(iv) Conclusion 
4.407  The European Communities has demonstrated that  under each of the criteria in Article 57 of 
Policy Order 8, Article 21 of Decree 125 and Article 13 of Announcement 4, the measures require to 
classify auto parts as complete vehicles in viola tion of the HS nomenclature and, as a result, impose 
on auto parts the higher 25 per cent duty on complete vehicles instead of the bound duty rate of 10 per 
cent for auto parts. 
4.408  This establishes that the measur es are as such inconsistent w ith China's obligations under 
Article II of the GATT 1994.  The mere fact that there may be exceptional individual instances where a large combination of parts as presented to customs at the border in a single consignment would 
qualify as a complete vehicle pursuant to GIR 2(a) of  the HS and in the light of the Chapter note to 
Chapter 87 cannot exempt the Chinese measures from being, as such
, incompatible with Article II of 
the GATT 1994 when it has been established that their application will necessarily result in WTO 
violations. 
(d) No justification under Article XX(d) of the GATT 1994 
4.409  China has not established that the violations of the GATT 1994 are justified under 
Article XX(d) of the GATT 1994.  The measures fall neither under paragraph (d), nor do they satisfy 
the requirements of the chapeau of Article XX. 
4.410  Contrary to China's allegation, the measur es are not necessary to secure compliance with 
"China's tariff schedule relating to imports of 'mot or vehicles'".  The measures explicitly do not intend 
to secure compliance with China's tariff schedule, but to develop th e Chinese auto parts industry.  A 
justification of the Article II infringement is excluded since measures providing treatment less 
favourably than the schedule cannot secure complian ce with the latter. The justification of the 
Article III infringement also fails.  China has not demonstrated a real problem of tariff evasion.  The measures are unsuitable to enforce the schedule si nce they impose charges amounting to complete 
vehicles tariffs in cases where there are no imports of complete vehicles.  China has also failed to show that measures less burdensome than the local  content requirements, administrative procedures 
and internal charges under the measures, for example investigations in individual instances of alleged 
evasion, would be insufficient to secure  compliance with its tariff schedule. 
4.411  China has not even attempted to show that its  measures satisfy the chapeau of Article XX and 
consequently failed in its burden of proof.  In any ev ent, they do not since they result in both arbitrary 
and unjustifiable discrimination and also constitute a disguised restriction on trade.  The primary 
purpose of the measures is to afford protecti on to domestic industry from imported competition. 
(e) The measures are inconsistent with  Article 3 of the SCM Agreement  
4.412  Were the Panel to find that the measures fa ll under Article II of the GATT 1994 and that 
China is entitled to impose the tariff rate fo r vehicles on the imports of auto parts, quod non , the 
measures would in any case be a prohibited subsidy pursuant to Articles 3.1(b) and 3.2 of the SCM 
Agreement.  WT/DS339/R 
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  4.413  The measures constitute a financia l contribution within the meaning of Article 1.1(a)(1)(ii) of 
the SCM Agreement. Imported auto parts satisfying the local content requirements of the measures 
are charged at 10 per cent.  The revenue "other wise due" follows from the "definitive, normative 
benchmark" of Article 28 of Decr ee 125 which charges 25 per cent on imported auto parts that do not 
satisfy the local content requirements. China's st atement that the 25 per cent duty and the 10 per cent 
duty treatment "are not the same 'fiscal situations' for purposes of making a proper comparison" is not further substantiated. 
4.414  The measures also confer a benefit within the meaning of Article 1.1(b) of the SCM 
Agreement and are contingent upon the use of do mestic over imported goods within the meaning of 
Article 3.1(b) of the SCM Agreement. 
4. Conclusion 
4.415  The measures are inconsistent with Article 2 of the TRIMs Agreement, Articles III:4, III:2 
and III:5 of the GATT 1994 and China's Accession Protocol , and are not justified under Article XX(d) 
of the GATT 1994. In the alternative, they violate Article II of the GATT 1994 or Article 3 of the 
SCM Agreement.  
J. S
ECOND WRITTEN SUBMISSION OF THE  UNITED STATES  
1. Introduction 
4.416  China's measures amount to clear and straightfo rward inconsistencies with China's national 
treatment obligations under Article III of th e GATT 1994.  In particular, these measures 
impermissibly result in internal charges on imported parts in excess of those applied on domestic parts 
(Article III:2); the measures accord treatment less  favorable to imported parts with respect to 
requirements affecting internal sale, purchase, dist ribution, and use (Article III:4); and the measures 
directly or indirectly require that specified amounts or proportions of auto parts used in vehicle manufacturing must be supplied from domestic sources (Article III:5).  For the same reasons, China's 
measures amount to a domestic content requirement that is inconsistent  with China's obligations under 
Article 2.1 and Paragraph 1(a) of Annex 1 of the TRIMs Agreement. 
4.417  China's defense is twofold – its measures all i nvolve customs duties, and those customs duties 
are consistent with Article II.  In the event the Panel agrees with the United States and its co-
complainants that China's measures are subject  to Article III of the GATT 1994 and the TRIMs 
Agreement, China has not even attempted to a ssert a defense – aside from a vague reliance on 
Article XX(d) - to these plain breaches of its WTO obligations.   
4.418  Moreover, the defense under Article II is based not on the text of China's schedule of tariff 
commitments.  To the contrary, China does not di spute that its measures impose a charge on imported 
parts that is higher than the rate set out in Chin a's schedule.  Rather, China's defense is based on a 
single rule of interpretation (GRI 2(a)) of the Harmonized System, and on the explanation that its 
measures are required to prevent the "circumvention" of classification under GIR 2(a) through the 
ruse of "split shipments" of pre-organized kits of automotive parts.    
4.419  The United States will address and refute the tw o main assertions – one factual and one legal 
– that underlie China's defense of its measures.  As discussed in the next section below, the 
importation of bulk shipments of parts is routinely undertaken by automotive plants around the world, and such bulk shipments cannot be analogized to Chin a's hypothetical case of the "split shipment" of a WT/DS339/R 
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  pre-organized kit.  As discussed in the last secti on, the HS has only limited, specific relevance to the 
interpretation of WTO obligations, and even then, GI R 2(a) does nothing to support China's measures.  
2. China's analogy between the routine import of auto parts for manufacturing purposes 
and the hypothetical case of a kit separate d into "split shipments" is fundamentally 
flawed 
4.420  China's defense is built on a simple paradigm : that of a kit (either an SKD or CKD) 
containing all parts of a single automobile, or at least all parts of what amounts to something with the essential characteristics of an automobile.  Under Ch ina's customs laws, China argues, it treats such 
kits as complete automobiles.  No w, China asks rhetorically, should an importer be allowed to change 
the tariff treatment of the kit by the simple expedien cy of splitting that kit into two boxes?  Of course 
not, asserts China.  China simply and reasonably has adopted a measure to address that problem of "circumvention."   
4.421  This dispute, however, does not
 turn on questions of split shipments of kits.  The reason is 
that China's measures – although purportedly adopt ed to prevent importers from splitting kits to 
circumvent duties on whole cars – is vastly broader than  that.  It sweeps in not just a kit broken into 
two separate boxes, but all modes of parts supply used by modern manufacturers.  That is, it sweeps together all imported parts from different suppliers , from different countries, purchased at different 
times, and even parts produced within
 China if such parts have insuffici ent local content.  All this is 
done without any evidence of intent on behalf of the importer to "circumvent" the whole vehicle duty.  
Thus, there is no match between the measure actuall y adopted, and China's paradigm of the kit split 
into separate boxes.   
4.422  In response, China further argues that collecti ons of imported parts – even if sourced from 
different places at different times – are conceptually the same as a kit.  After all, in both cases, at 
some point, the parts will be used to make an automobile.   
4.423  This is the point at which China's argument, based  on the paradigm of a kit in split shipments, 
completely falls apart.  In commercial realities, a k it is totally different from the streams of parts used 
in manufacturing operations.  An operation that asse mbles kits is different than a full-fledged, 
automobile manufacturing plant with full logistical  capabilities to handle bulk shipments of parts.  
And most auto manufacturing plants are not in the business of assembling discrete kits.   
4.424  Rather, manufacturing plants assemble automobiles using parts held in their inventories.  The 
parts are sourced from around the world.  They arrive  at different times in different quantities.  Some 
parts are defective.  Some are damaged in assembly .  Some are used for testing.  Some parts are 
common to multiple models.  In these nor mal commercial operations, there is never  a box or "kit" 
containing all the imported parts used in a single vehicle.  
4.425  Moreover, it would be fantastically expensiv e for a commercial manufacturer to create and 
use such a box of parts.  To do so, the manufacturer  would have to build or employ a warehouse in a 
location outside of China.  The manufacturer woul d need to import and/or ship bulk shipments of 
parts to the warehouse, and then unpack all parts from various sources.  The manufacturer would need 
to hold inventories.  The manufacturer would then ha ve to make kits by collecting one of each part 
used in a vehicle.  All parts would then need to be  repacked.  When the kit arrived at the factory in 
China, the kit would have to be broken back into part s.  The parts to be used in that plant would need 
to be resorted and placed in inventory for use on th e assembly line.  And the parts to be assembled by 
other operations in China would need to be repacked , for a second time, and then shipped to the parts 
producer.  No commercial operation would ever work this way.     WT/DS339/R 
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  4.426  In short, China has no basis for comparing the streams of parts used by a manufacturing plant 
to the conduct of purported "circumvention" involved  in splitting a kit before import.  The imported 
parts used by manufacturing plants are not and cannot be put into kits.  This is the commercial reality, 
and does not, as China asserts, raise any issue of  "circumvention."  Thus, the purported goal of 
China's measures – merely to stop "circumvention" in the form of splitting preorganized kits – is in no 
way consistent with actual scope and operation of China's measures.  Rather, contrary to China's 
argument about "circumvention", the measures as  actually constructed impose a local content 
requirement on all automobiles manufactures in China,  and thus are plainly intended to encourage the 
growth of the domestic parts industry by discrim inating against imported auto parts.   
3. China cannot rely on GIR 2(a) as the basis for the defense of its measures  
(a) GIR 2(a) only relates to the interpretation of China's obligations under its schedule of tariff 
commitments and not to the interpretation of other WTO obligations 
4.427  China's defense to all of the claims of th e United States are based on GIR 2(a).  That 
interpretive rule, however, has only limited relevance to the legal issues in this dispute.  In particular, 
the rule is only relevant with regard to the inte rpretation of China's schedule of tariff commitments.  
The rule is not
 relevant to the consideration of Chin a's obligations under Article III of the GATT 
1994, or to the question of whether China's additiona l charges on imported parts are to be considered 
either as "ordinary customs duties" under Article II: 1(b), or as internal charges under Article III:2.   
4.428  In EC - Chicken Cuts , the Appellate Body made the limited finding that the HS Convention 
could be "context" for interpreting a Member's tari ff schedule with respect to agricultural products.  
The Appellate Body's reasoning was that GATT Contracting Parties agreed that the HS was to be used for the basis of Uruguay Round tariff negotiations for agricultural products, and that this agreement in 
turn served to qualify the HS as "context" under Article 31(2)(a) of the Vienna Convention in 
interpreting Member's schedules of tariff commitments  in this specific regard.  The Appellate Body 
made no finding that the HS was context for the interpretation of the GATT 1994, or for any other 
elements of the WTO Agreement.  
4.429  China's extensive reliance on GIR 2(a) seem s to imply that China believes that the 
interpretive rule, although relevant fo r interpreting China's tariff schedul e, also has some sort of spill-
over interpretive effect with regard to meaning of  other WTO obligations.  Any such view, however, 
is without basis and directly contrary to the text and the longstanding interpretation of the 
GATT 1994. 
4.430  In particular, the content of a Member's ta riff schedule cannot be used as a defense to 
breaches of the GATT 1994 obligations (aside of cour se from questions of breaches of tariff bindings 
under Article II).  And, a fortiori , if a Member's tariff schedule is not a defense to a breach of other 
GATT 1994 obligations, neither may a document (such as GIR 2(a)) used as "context" for interpreting 
the schedule be used as a defense to a breach of  the GATT 1994 obligations.  As explained by the 
GATT panel in US - Sugar : 
Article II gives contracting parties the possibility to incorporate into the legal 
framework of the General Agreement co mmitments additional to those already 
contained in the General Agreement and to  qualify such additional commitments, not 
however to reduce their commitments under ot her provisions of that agreement. . . . 
[T]he Panel found that Article II:1(b) does not permit contracting parties to qualify 
their obligations under other provisions of the General Agreement and that the provisions in the United States GATT Schedul e of Concessions can consequently not WT/DS339/R 
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  justify the maintenance of quantitative restric tions ... inconsistent with the application 
of Article XI:1 
4.431  The Appellate Body reaffirmed this principle in its report on EC-Export Subsidies on Sugar .  
Accordingly, any question with regard to whether Ch ina's measures are consistent with its schedule of 
tariff commitments, and any materials used to inte rpret those commitments, are distinct from – and 
not relevant to – the issue of whether or not China' s measures are consistent wi th other obligations of 
China under the WTO Agreement.   
(b) The dispositive issues in this dispute do not turn on GIR 2(a) or any other issue of tariff 
classification 
4.432  GRI 2(a) also provides no support for China' s defense because the dispositive issues in this 
dispute do not turn on any issues of tariff classificat ion.  In particular, the United States has shown 
that China's measures are in breach of Article III of the GATT 1994, the TRIMs Agreement, and the 
SCM Agreement, and that questions of tariff classi fication and tariff bindings under Article II are not 
relevant to those claims.    
4.433  Turning first to Article III:4, the Appellate Body has identified three distinct elements 
required to establish a breach:  (1) the imported and domestic products are "like products;" (2) the 
measure is a law, regulation, or requirement aff ecting the internal sale, purchase, or use of the 
imported and domestic like products; and (3) th e imported product is accorded less favorable 
treatment than the domestic like product.  In its  first submission, the United States explained that 
China's measures plainly meet each one of the th ree elements needed to establish a breach of 
Article III:4.  Questions of tariff classification play no role in the Article III:4 analysis, and China in 
its submissions has not otherwise disputed an y of the elements which establish a breach of 
Article III:4.  
4.434  Moreover, China's main argument – that its charges are customs duties and that imported 
parts may be classified as complete vehicles – does not even implicate any issue which might provide 
a defense to this plain breach of Article III:4.  In other words,  even if China's charges were 
considered "customs duties," and even if China we re correct that it was entitled under its tariff 
bindings to charge a duty of 25 per cent on importe d parts used for manufacturing purposes, China's 
measures would still constitute a breach of Article III:4 .  The Article III:4 breach is based on the fact 
that the charge on any particular auto part will change depending on the ty pes and value of other 
imported parts used in a complete vehicle, a sy stem which creates a strong disincentive to the 
purchase and use of imported parts.  Similarly, the administrative burdens applicable only to users of 
imported auto parts are inconsistent with Article III:4, regardless of whether or not China's charges 
are considered "customs duties."     
4.435  China's tariff classification defense is also not ap plicable to China's breach of Article III:5 of 
the GATT 1994.  And, as for the breach of Article III: 4, this breach of Article III:5 exists regardless 
of any issue with respect to China's tariff bindings, or  with respect to whether or not the extra charge 
imposed by China is an internal  charge or a customs duty.  
4.436  Finally, turning to China's br each of the first sentence of Ar ticle III:2, China in its first 
submission does present a defense.  As will be explai ned below, this defense is without merit, and 
GIR 2(a) – as for China's other breaches (other than w ith respect to the alternative claim of a breach of 
Article II:1(a)) – again is not relevant to the analysis.    WT/DS339/R 
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  4.437  At the outset, however, the United States notes that  China has not disputed that China's extra 
15 per cent charge on imported parts (above and beyond ordinary customs duties) is inconsistent with 
Article III:2 if – as the United States submits – the ch arge is an internal one, and not an ordinary 
customs duty.    
4.438  Turning to whether the additional charges are "o rdinary customs duties" or internal charges, 
under the finding set out in Belgium Family Allowances  and EEC – Parts and Components , China's 
charges at issue in this dispute can only be consider ed as internal ones.  China's charges are based not 
on the goods as entered, and not even on the importer's declaration at the time of importation, but 
instead on the goods as finally manufactured – within China
 – into whole vehicles.  As the United 
States emphasized at the first substantive meeting,  China imposes at the border a revenue bond based 
on the 10 per cent duty rate for parts,  and applies the extra charge only if  an imported part (1) is 
actually used in the manufacture of a vehicle, and (2 ) only if that vehicle fails to meet the domestic 
content requirements set out under China's measures.  As in EEC – Parts and Components,  the charge 
must be evaluated based on its substance – not its title – and a charge which is assessed based on the 
level of local content contained in an interna lly manufactured product can only be considered an 
internal charge under Article III:2.   
4.439  In its first submission, China tries to distinguish Belgium Family Allowances  and EEC – Parts 
and Components , but those efforts are unsuccessful.  China argues that its measures are different 
because its measures are impos ed for the purpose of collecting cust oms duties.  As an initial matter, 
China's argument is circular – the whole issue is whether or not the charg es are in fact "ordinary 
customs duties" under Article II; China's argument si mply assumes the conclusion.  Furthermore,  this 
type of argument about the purpose of the charge  was explicitly considered and rejected in EEC  – 
Parts and Components .  To quote from that report: "[T]he Panel first examined whether the policy 
purpose of the charge  is relevant to determining the issue of whether the charge is imposed in 
'connection with importation' in the meaning of Article II:1(b). . . . .  The relevant fact . . . is not the 
policy purpose attributed to the charge but rather whether the charge is due on importation or at the 
time or point of importation or whether it is collected internally."  
4.440  The United States would also emphasize that, ag ain, issues of tariff classification and the 
meaning of GIR 2(a) have no relevance to the que stion of whether China's additional charges are 
internal charges or instead are ordinary customs duties.  That question turns only on the text and 
interpretation of Article II a nd Article III of the GATT 1994.  In contrast, questions of tariff 
classification, and issues concerning the meaning of GI R 2(a) and its relevance to the interpretation of 
China's schedule of tariff commitments, only  arise if China's additional charges are considered 
ordinary customs duties under Article II.   
4.441  Finally, the United States notes that its additional claims – under Article 2.1 and 
Paragraph 1(a) of Annex 1 of the TRIMs Agre ement, under Articles 3.1(b) and 3.2 the SCM 
Agreement, and under Parts I.7.2 and  I.7.3 of the Accession Protocol and paragraph 203 of the 
Working Party Report – again do not turn on any issu es of tariff classification or the meaning of 
GIR 2(a).   
4.442  To summarize, the United States has establishe d breaches of Article III:2, III:4, and III:5 of 
the GATT 1994, of the TRIMs Agreement, and of th e SCM Agreement.  China's only defense – that 
its classification of imported parts as whole vehicles is correct under the principles set out in GIR 2(a) 
– is not even relevant to analysis under those provisions of the WTO Agreement. WT/DS339/R 
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  (c) GIR 2(a) would not provide China with a defense under Article II of the GATT 1994 
4.443  As the United States has explained, China's additional charges on imported auto parts are 
internal charges, subject to obligations under Article III:2 of the GATT 1994, and not "ordinary 
customs duties" under Article II of the GATT 1994.  Even aside from this fact, GIR 2(a) of the 
Harmonized System would not provide a defense to China's plain breach of its tariff commitments (if 
the charges are considered tariffs) in its schedule.   
4.444  Before proceeding to a consideration of GIR 2(a) itself, the United States emphasizes that 
China's entire defense under Article II is based on GI R 2(a).  In other words, China does not contest 
that its measures apply tariffs on auto parts that  are higher than the 10 per cent rate generally 
applicable to auto parts under China's schedule of tariff commitments.  Rather, China's only defense is 
that under its tariff schedule, when read in conjunc tion with GIR 2(a), China reserved itself the right 
to treat imported parts used for manufacturing purposes  as if those parts were complete vehicles.   
4.445  In addition, the United States notes its disagreem ent with China's contention that GIR 2(a) 
should be considered as "context" for the purpose of interpreting China's schedule of tariff 
concessions.  The United States takes note of the Appellate Body findings in EC - Computer 
Equipment  and EC - Chicken Cuts .  Those two reports, however, are quite careful and limited in their 
reasoning, and do not express an across-the-board rule  that the HS is "context" for the purpose of 
every part of every Member's sch edule of tariff commitments.  In EC - Computer Equipment , the 
Appellate Body found that the Panel should ha ve examined the Harmonized System (including 
Explanatory Notes), but the Appellate Body did not specify whether the HS fit under the customary 
rules of interpretation reflected in Article 31 or under Article 32 of the Vienna Convention .  In EC - 
Chicken Cuts , the Appellate Body did find that the HS was "context" under  the customary rules of 
interpretation reflected in Article 31(2)(a) of the Vienna Convention , but the reasoning in that report 
was carefully limited to the facts and circumstances of that particular dispute.  In particular, the 
Appellate Body emphasized that during the Urugua y Round, tariff negotiations for agricultural
 
products  were based on the HS, and the Appellate Body refers to a "Modalities" document – 
applicable only to agriculture – which confirmed th is understanding of the ne gotiators.  The Appellate 
Body reasoned that these particular facts and ci rcumstances established an "agreement" among all 
parties that the HS would be used in the inte rpretation of scheduled commitments on agricultural 
products.  In short, these findings in EC-Chicken Cuts  regarding the HS are only directly applicable to 
schedules negotiated during the Uruguay Round, and on ly with respect to agricultural products.   
4.446  Accordingly, the findings and reasoning in EC -  Chicken Cuts  do not apply directly to the 
present dispute, because this dispute does not involve a schedule negotiated during the Uruguay Round and does not involve agricultura l products.  And, China has presented no basis for finding that 
there was a comparable "agreement " (like the one during the Uruguay Round on agricultural products) 
among WTO Members concerning China's tariff negotiations on industrial goods.  
4.447  The United States does agree, however, that th e HS can certainly be relevant in the 
interpretation of China's schedule.  In particular, under the customary rules of interpretation reflected 
in Article 32 of the Vienna Convention , the HS can be a "supplementary means of interpretation".  
Given that China's schedule is plainly based on the HS nomenclature, the HS Convention can in 
appropriate cases amount to "prepa ratory work and the circumstances of conclusion" with regard to 
the negotiation of China's tariff schedule. 
4.448  Turning now to China's tariff classification argument based on GIR 2(a), the argument does 
not withstand scrutiny.  GIR 2(a) states in full:    WT/DS339/R 
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  Any reference in a heading to an article shal l be taken to include a reference to that 
article incomplete or unfinished, provide d that, as presented, the incomplete or 
unfinished article has the essential character of  the complete or finished article. It 
shall also include a reference to that artic le complete or finished (or falling to be 
classified as complete or finished by virt ue of this rule), presented unassembled or 
disassembled.   
4.449  Two aspects of GIR 2(a) are apparent on its f ace.  First, although China has based its case 
entirely on a "circumvention" theory, nothing in this rule of interpretation mentions anything about 
"circumvention."  Second, the rule uses the la nguage "as presented" and "presented," which makes 
clear that customs authorities are to classify the goods in the co ndition as presented to customs upon 
importation.  There is no notion in GIR 2(a) that a customs authority should seek out all entries of 
diverse parts, by different importers, from different s uppliers, at different times,  and even of different 
national origin, and then proceed to collect them in to some fictitious unassembled product, to then be 
classified as the assembled product.   To the contrary, if China's interpretation of GIR 2(a) were 
adopted, the words "as presented" and "presented" w ould be rendered absolutely without meaning.   
4.450  China also ignores the object and purpose of the HS Convention.  In relevant part, the 
Preamble to the Convention provides:   
THE CONTRACTING PARTIES TO THIS CONVENTION, established under the 
auspices of the Customs Co-operation Council, 
DESIRING to facilitate international trade, 
DESIRING to facilitate the collection, comparison and analysis of statistics, in particular those on international trade, DESIRING to reduce the expense incurred by redescribing, reclassifying and recoding goods as they move from one classification system to another in the course 
of international trade and to facilitate th e standardization of trade documentation and 
the transmission of data, CONSIDERING the importance of accurate and comparable data for the purposes of international trade negotiations,  CONSIDERING that the Harmonized System is  intended to be used for the purposes 
of freight tariffs and transport statistics of the various modes of transport, . . . 
CONSIDERING that the Harmonized System  is intended to promote as close a 
correlation as possible between import a nd export trade statistics and production 
statistics . . . .  
4.451  Two aspects of the object and purpose of the Convention, as set out above, are notable for the 
purpose of this dispute.  First, nowhere is there any mention of "circumvention" or any other similar 
concept.  Indeed, the notion of "circumvention" is not set out anywhere in the Convention.   
4.452  Second, two key objects and purposes of the Co nvention are (i) to establish uniform tariff 
nomenclature rules for the purpose of comparing tr ade statistics (between exports and imports, and 
between different parties to the Convention), and ( ii) to facilitate international trade.  China's 
interpretation of GIR 2(a), however, is totally at odds with these express objects and purposes of the 
Convention.  Under China's interpretation, every party to the Convention must classify bulk imports 
of manufacturing parts as whole products, based on criteria to be developed and applied by each 
party.  If this were true, the comparability of trad e statistics collected by different members would be 
destroyed.  Also, the comparability between import and export statistics would be destroyed – China's measures apply only to imports, and do not app ear to require that China perform a similar 
"automobile parts characterized as complete vehi cles" analysis for exports of auto parts.  WT/DS339/R 
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  4.453  China's interpretation of GIR 2(a) is also at  odds with the object and purpose of facilitating 
trade.  Under China's measures, goods are not classifi ed as imported at the border, but only after the 
goods have been used in manufacturing, and only af ter the manufacturer has completed and verified a 
complex analysis of the local content of the final product.  This intricate, complicated system for 
classification destroys the certainty and predictab ility of tariff classification, and can only serve as a 
serious impediment to trade.   
4.454  China's submissions also wrongly ignore that the Convention is an international agreement 
that imposes obligations on its Members; the Conve ntion does not, as China implies, serve as some 
sort of instrument that provides "permission" to WTO Members to depart from WTO obligations or to 
classify products at will.  The pertinent ob ligations in the Convention are as follows:   
Article 3: Obligations of Contracting Parties 1. Subject to the exceptions enumerated in Article 4: 
(a) Each Contracting Party undertakes, except as provided in subparagraph (c) of this 
paragraph, that from the date on which this Convention enters into force in respect of 
it, its Customs tariff and statistical nomenc latures shall be in conformity with the 
Harmonized System. It thus undertakes that, in respect of its Customs tariff and 
statistical nomenclatures:  (i) it shall use all the headings and subheadings of the Harmonized System 
without addition or modification, together  with their related numerical codes; 
 (ii) it shall apply the General Rules for the interpretation of the Harmonized 
System and all the Section, Chapter and Subheading Notes, and shall not modify the scope of the Sections, Chapters, headings or subheadings of the Harmonized System; and 
 (iii) it shall follow the numerical sequence of the Harmonized System.   
4.455  These obligations require parties to the Conven tion to "use all the headings and subheadings 
of the HS without addition or modification, together  with their related numerical codes," and to apply 
the GIRs.  As the United States and its co-complai nants have pointed out, China in its submissions 
ignores the most fundamental of the GIR's:  GIR 1 provides that "classification should be determined according to the terms of the headings and any rela tive section or chapter notes."  The United States 
submits that the reason China in its submissions ha s ignored GIR 1 is plain:  China's measures are 
directly contrary to GIR 1.  In particular, the HS has headings specific to auto  parts, but instead China 
under its measures classifies auto parts as whole vehicles.   
4.456  Furthermore, the fact that the application of the GIRs is obligatory undercuts China's 
arguments.  That is, if China is right that GIR 2( a) provides for the classification of bulk auto parts 
used in manufacturing as the complete, manufactured product, then the obligation to classify parts in 
this manner would apply to each and every party to the Convention.  Yet, China has failed to provide 
any evidence that any other party to the Convent ion has adopted measures at all comparable to 
China's measures on auto parts.  Moreover, China has conceded that even China itself does not use 
similar classification schemes for parts other than auto parts.  In sum, either (a) every party to the 
Convention, and China itself with respect to all goods except auto parts, is acting inconsistently with 
the obligations under the Convention to apply the GIRs (including GIR 2(a)), or (b) GIR 2(a) – as it 
plainly states in the text – applies to goods "as pr esented," and China's treatment of auto parts is 
inconsistent with GIR 2(a).  For the reasons stated above, the United States submits that ( b) – 
GIR 2(a) applies to goods as presented upon impor tation – is the only possible answer.    WT/DS339/R 
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  K. S
ECOND WRITTEN SUBMISSION OF CANADA  
1. Introduction 
4.457  China has attempted to turn a dispute respecting the consistency of the measures with China's 
WTO obligations into a dispute where the main issue is the interpretation of a single, and non-
binding, WCO document.  
4.458  China has skirted a number of key issues in its de fence. It has not disproved that the measures 
give rise to clear domestic-content requirements.  It has not provided any evidence that "tariff 
circumvention" even exists as a legal concept, nor explained how the simple process of importation 
can last for as long as the measures provide.  Ho wever, China agrees that the volume and value 
thresholds in the measures can be applied to produc ts imported into China by a third-party supplier 
even though China admits those parts should be the s ubject of national treatment.  This demonstrates 
how arbitrary and discriminatory the measures truly are. 
4.459  Canada emphasizes that it is the WTO Agreement th at is at issue in this dispute. China is 
strictly bound by the negotiated concessions for auto parts, as understood at the time of its accession. 
Members cannot manipulate tariff concessions so as to  undermine the certainty afforded to traders by 
the GATT discipline of non-discrimination, which Ch ina does by relying incorrectly on Article II of 
the GATT 1994 so as to reduce the scope of its obligation under Article III of the GATT 1994. Canada demonstrates this by reference to the prin ciples of treaty interpretation. China also cannot 
justify its measures under Article XX(d) of the GATT 1994. 
2. Importation and the scope of national treatment 
(a) China ignores the principle of non-discrimination in international trade 
4.460  The principle of non-discrimination informs Articles I, II and III of the GATT 1994.  
However, China has failed completely to reconcile  its manipulation of negotiated tariff concessions 
with the very object and purpose of the GATT's non-discrimination provisions. Article II of the 
GATT 1994 cannot be read in isolation.  It forms pa rt of the universe of non-discrimination provisions 
that support the very legal and commercial certainty that the measures undermine.  Article III exists to prevent discrimination against imported products, by protecting expectations of an equal competitive 
relationship between importe d and domestic products.  
4.461  While China insists that it is merely "enforci ng" undisputed tariff lines, the heart of this 
dispute remains the limited extent to which or dinary customs duties imposed in accordance with 
Article II:1(b) may impinge on the broad protection against discrimination provided by Article III of 
the GATT 1994, and China's failure to provide that protection.  
(b) Ordinary customs duties may only be imposed based upon the physical state of products as 
they arrive at the border 
4.462  Ordinary customs duties can be imposed on imported products "on their importation", 
meaning based upon the state of a product as presen ted at the border.  The reference to "on" 
emphasizes a single event. The ordinary meaning of "importation" refers to the physical act of products being brought across the border into a country, an interpretation supported by the 
GATT 1994 generally, GATT acquis , the WTO Appellate Body and even the WCO. WT/DS339/R 
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  4.463  Border charges other than ordinary customs duties have a greater (although still temporally 
limited) period during the "importation" stage during which they can be assessed. This is evident from 
the difference in language used to  describe when such charges may be imposed ("in connection with" 
the importation; or "at any time on the importation").  But once a product has entered the territory of a 
Member and is available for internal use within a Member, any charges on the imported  product based 
on its state must comply with the national treatment obligations of Article III, and Article II is in no 
way applicable.   
4.464  As China alleges that its measures impose ordina ry customs duties, any flexibility during the 
"importation" stage is not relevant to this dis pute. Regardless, the measures apply well after the 
process of importation is complete and therefore must be internal measures. 
4.465  Even if there were some flexibility to de fer assessments of ordinary customs duty on a 
product past the point of its physical entry into Ch ina (which Canada says there is not), none of 
China's justifications withstand scrutiny.  
4.466  China says that the charges are really applied at  the border because vehicle manufacturers are 
required to self-evaluate whether a vehicle is d eemed imported prior to importing parts for that 
vehicle. But that self-evaluation amounts only to a prediction  of what will happen in the 
manufacturing process. Self-evaluation is theref ore nothing more than a mechanism for the 
administration of an internal charge, whether or not at the border.  
4.467  China suggests that products may be in "custo ms control", and by necessary implication not 
in the internal market, by the simple expedient of imposing financial security and bookkeeping 
requirements.  This suggestion is without merit, as the "bonding" in the measures does not restrict the 
internal use of the products. 
4.468  The measures do not impose charges based on the state of products as they arrive at the 
border, as is demonstrated by an examination of the ordinary meaning of Article II of the GATT 1994, 
read in the context of Article III of the GATT 1994 and in the light of the object and purpose of 
China's Schedule.  Therefore, they are not ordi nary customs duties, nor are they other charges 
permitted by Article II of the GATT 1994.  As a result, the measures can only be internal charges 
applied in violation of Article III and the TRIMs  Agreement. 
(c) China misapplies the HS and its Explanatory  Notes in imposing charges to auto parts as 
presented at the border 
4.469  The HS of classification and its Explanatory Notes, as they were used in negotiating a 
Member's Schedule, are to be taken into account as context for the interpretation of the meaning of 
that Schedule. Contrary to China's suggestion, th ere is no discretion to ignore selected Explanatory 
Notes. 
4.470  Classification is relevant in interpreting the obligation in Article II:1(b) of the GATT 1994 
not to charge duties greater than the amount set out in China's Schedule, because classification of the 
proper category of a product is an essential first step for assessing duty. 
4.471  In order to classify properly a product as it is pr esented at the border, it is first necessary to 
look to the appropriate headings. Significantly for th is dispute, a "chassis fitted with engine" (87.06) 
is clarified in that heading' s Explanatory Note as covering
 "motor vehicles without bodies ".   WT/DS339/R 
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  4.472  The measures ignore these headings and impo se three separate thresholds for domestic 
content, all of which are inconsistent with China's WTO obligations. 
4.473  Article 21(1)  of Decree 125 considers that parts imported as CKD and SKD kits are 
automobile parts characterized as complete vehicl es. China's Accession Protocol requires that such 
parts be charged at a 10 per cent rate, regardless of classification. 
4.474  Article 21(2)  of Decree 125 considers that parts in a vehicle are Automobile parts 
characterized as complete vehicles if a certain number of Assemblies are Deemed Imported.  These thresholds present two violations of Article II of  the GATT 1994.  First, deemed imported assemblies 
are classified based upon the number or value of key parts even though for the most part there is no 
heading for such assemblies, and d espite the thresholds being very selective.  Second, even assuming 
that all the parts in a Deemed Imported Assembly  are imported and contained in a single shipment, 
the thresholds do not accurately classify parts. 
4.475  Article 21(3) of Decree 125 considers that parts used  in a vehicle are automobile parts 
characterized as complete vehicles if they constitute more than 60 per cent of the value of all parts 
used in manufacturing the vehicle. There is nothing in  any part of the HS that suggests that value may 
be used to classify products. As a result, the appli cation of Article 21(3) inevitably leads to duties 
imposed based on an incorrect classification, and c onsequently violates Article II of the GATT 1994. 
4.476  As it is the general practice of customs author ities to classify goods based on their state as 
presented at the border, it is not necessary to look to the isolated customs cases c ited by China. But, in 
any event, China has not shown a pattern of acts sh owing subsequent practice of other Members that: 
(1) is common, consistent and discernible;  and (2) must imply agreement among WTO Members to support key controversial aspects of the meas ures. Notably, China has not shown that: 
• a WTO Member may deem that parts have the "essential character" of the complete 
vehicle based on the volume thresholds contained in the measures; nor that  
• value thresholds can be used as a classification tool. 
4.477  The only feature of the measures that could be accepted customs classification is the 
classification of parts as a complete vehicle where those parts, contained in a single shipment, have the essential character of a whole vehicle (CKD or SKD kits). Ironically, such parts have been 
exempted from coverage under the measures, so the only use of the measures has been to classify 
parts contrary to Article II:1(b).  
(d) Article II of the GATT 1994 does not allow Members to impose higher ordinary customs 
duties on separate shipments of auto parts on the theory that they can be classified as a whole 
vehicle 
4.478  China also claims that it may classify as one product multiple shipments of parts from 
different exporters to different des tinations and at different times.  Again, China has not demonstrated 
a common, consistent and discernible practice among WTO Members that ordinary customs duties permitted under Article II of the GATT 1994 may be applied to separate ship ments classified as if 
they arrived together.  
4.479  In the absence of any subsequent practice, Ch ina has relied heavily on a passing statement by 
the HS Committee to the effect that split shipme nts are permitted under national law.  But that 
reference to split shipments was not included in th e GIRs or the Explanatory Notes, was based on WT/DS339/R 
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  isolated practice that did not include motor vehicl es or their parts, specifically was not intended to 
cover parts used for the manufacturing process, has not been shown to have been relied upon when 
negotiating China's tariff commitments, and was not reflected in Member practice at the time of 
China's accession.  
4.480  China has also cited the anti-dumping practice of the European Communities and the United 
States.  However, that practice cannot be evidence of  subsequent practice to interpret Article II:1(b), 
first sentence, nor China's Schedule. 
(e) Regardless of classification, China is required by its commitments on accession to charge 
unassembled or partially assembled vehicles a duty rate of 10 per cent  
4.481  All parties agree that paragraph 93 of the Working Party Report creates binding obligations 
on China.  
4.482  The ordinary meaning of that paragraph, read in  the light of its object and purpose, would be 
ignored if China were at liberty simply never to introduce a separate tariff line for CKD and SKD kits.  
Further, since the purpose of the paragraph is to address the particular concern of Members to 
maintain preferential treatment for CKD and SK D kits, a good-faith interpretation, based on the 
understanding of Members at the time of China's accession, requires China to apply the 10 per cent 
rate to these products.  
4.483  This understanding is confirmed by the circumstances surrounding the conclusion of the 
Accession Protocol.  Prior to its accession, China provided preferential tariff treatment to parts with 
the essential character of whole vehicles in two ways: classifying them as parts, or classifying them in 
a separate tariff line at a lower rate than for assembled vehicles.  
4.484  The understanding of the parties at the time of China's accession was that the 25 per cent duty 
for complete vehicles would apply only to vehicles imported in assembled condition .  As a result, 
China's denial of a 10 per cent rate of duty to pa rts, imported together in one shipment with the 
essential character of a whole vehicle, is a violati on of paragraph 93 of th e Working Party Report. 
(f) Non-violation nullifica tion and impairment 
4.485  If the Panel finds, contrary to Canada's submi ssions, that paragraph 93 of the Working Party 
Report allows China both to classify CKD and SKD k its as whole vehicles and to charge them a duty 
of 25 per cent, this must constitute a non- violation nullification and impairment under 
Article XXIII:1(b) of the GATT 1994 of Canada's legitim ate expectation to a 10 per cent tariff rate for 
CKD and SKD kits.  
3. The measures cannot be justified under Article XX(d) of the GATT 1994 
(a) China has mischaracterized a Article XX(d) of  the GATT 1994 defence to an Article III 
violation as a defence under Article II 
4.486  China concedes that it must rely on Article XX( d) to defend all aspects of the measures which 
are internal.  However, it suggests that auto part s imported directly by vehicle manufacturers may be 
covered by the measures pursuant to Article II.  In  truth this argument is simply an Article XX(d) 
defence to a violation of Article III of the GA TT 1994 and the TRIMs Agreement: that it has enacted 
the measures to "enforce" China's Schedule to preven t "tariff circumvention".  China's whole defence  WT/DS339/R 
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  to Canada's complaint could only validly be br ought under Article XX(d) if China showed an 
independent GATT-consistent law or regulation that the measures are designed to enforce.  
4.487  Further, even if any aspect of the measures is  properly considered to be ordinary customs 
duties (which Canada disputes), the measures violat e Article II by providing less favourable treatment 
for auto parts than required under China's Schedule.  Again, China can only defend that violation if it 
can establish that Article XX(d) applies.  
(b) Test for justifying measures under Article XX(d)  
4.488  GATT Article XX(d) allows a Member to enact a WTO-inconsistent measure if it is 
necessary to enforce WTO-consistent laws, including laws relating to "customs enforcement". China 
must show both that the measures are provisionally justified under paragraph (d) and that they are 
applied in a manner consistent w ith the requirements imposed by the chapeau of Article XX.  China 
has not and cannot do so. 
(c) The measures are not justified under of Article XX(d) 
4.489  When read collectively, in the light of Po licy Order 8 and on their face, the measures are 
clearly designed to promote China's domestic auto part s industry.  Only in rare cases do the thresholds 
under the measures apply to what are properly classifi ed as whole vehicles.  As such, they cannot be 
designed to secure compliance with China's Schedule. 
4.490  The measures are also not "necessary", as is demons trated by reference to the various factors 
that establish the necessity for GATT-inconsistent  measures.  China says that tariff arbitrage 
constitutes "circumvention", but that is not a rec ognized concept in customs practice and China has 
not explained why importers should not be able to take advantage of tariff rates mutually agreed to by 
Members.  In any case, China has presented no eviden ce that this "tariff circumvention" is happening. 
There is no legal foundation to the claim that tariff ar bitrage is improper.  Ch ina has presented no real 
evidence that this arbitrage, even  if styled as "tariff evasion", actually occurs with any frequency, let 
alone with any intent.  And China simply alleges th at it should be receiving additional tariff revenues.  
The measures cannot contribute to rectifying a problem that does not exist.  
4.491  Further, the measures are significantly trade-restri cting.  They apply to all imported auto parts 
based on arbitrary thresholds that presume tariff arbitrage in all instances.  Not only must companies 
plan to avoid importing parts at leve ls that approach the threshold limits, but the measures also require 
auto parts manufacturers that import auto parts to sign contracts with vehicle manufacturers 
guaranteeing levels of domestic conten t in the parts they supply.  In sum, it is clear that the measures 
are not necessary to secure compliance, do not protect  vital or common interests, and are excessively 
trade-restricting.  
(d) The measures do not satisfy the requirements of the chapeau of Article XX 
4.492  The measures result in both arbitrary and unjustif iable discrimination.  They are rarely, if 
ever, applied to imported parts that could properly be classified as complete vehicles.  Equally 
important, China has failed to give any justification for the discrimination against imported auto parts, 
aside from ex post facto  rationalizations that the measures are appropriate because some vehicle 
producers apparently use imported parts that exceed the thresholds in the measures.  
4.493
 The measures are also a disguised restricti on on trade.  China has admitted the measures 
apply to auto parts that are in internal trade.  Th ere is no question that the application of the measures WT/DS339/R 
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  adversely affects the conditions of competition betw een imported and domestic parts.  And, as noted 
above, the primary purpose of the restriction is to  afford protection to the domestic automotive 
industry from imported competition.  
L. S
ECOND WRITTEN SUBMISSION OF CHINA  
1. Introduction 
4.494  China considers that the parties' submissions and statements to the Panel have significantly 
narrowed the scope of the parties' disagr eements concerning the challenged measures. 
4.495  First, the complainants can no longer deny th at there is a legitimate issue of customs 
administration concerning the relationship between  motor vehicles and parts of motor vehicles. 
4.496  Second, the complainants now appear to acknow ledge that there are circumstances in which 
the importation of parts and components in multiple sh ipments can constitute a form of tariff evasion.  
The complainants also appear to acknowledge that customs authorities can undertake "investigations," 
and consider "evidence," to determine whether mu ltiple shipments of parts and components have the 
essential character of the complete article. 
4.497  Third, the parties now appear to agree that the time and place at which a charge is collected is 
not the determinative consideration in evaluating whet her that charge is subject to the disciplines of 
Article II or Article III.  Rather, the issue is whethe r the charge is one that a Member is allowed to 
impose by reason of the importation of the product, or, alternatively, whether the charge relates to the 
status of a product after it has been imported. 
4.498  Finally, China considers that the complainants ' submissions have revealed their true position 
on when China's higher bound duty rates for motor vehicles would apply.  The answer is "never." 
4.499  As China will demonstrate in this rebuttal subm ission, China considers that this re-framing of 
the issues and claims before the Panel leads to th e conclusions that (1) the challenged measures must 
be analysed in the light of China's rights and ob ligations under Article II of the GATT 1994; and that 
(2) so analysed, the challenged measures give eff ect to a proper interpretation of China's tariff 
commitments for "motor vehicles" and do not result in the imposition of ordinary customs duties in excess of those set forth in China's Schedule of Concessions. 
2. The challenged measures do not impose ordina ry customs duties in excess of those set 
forth in China's Schedule of concessions 
4.500  In particular, China considers that the central  issue before the Panel is whether China can 
interpret the term "motor vehicles" to include the im portation, in multiple shipments, of auto parts and 
components that have the essential character of a motor vehicle within the meaning of GIR 2(a). 
4.501  The Panel has now had the benefit of extensive discussion of GIR 2(a) by the parties.  The 
complainants have challenged two distinct aspects of  how China has interpreted and applied GIR 2(a) 
in the context of Decree 125.  First, the complain ants have challenged where China has drawn the line 
for purposes of the essential character test under GIR 2( a), an issue of parts vs. wholes.  Second, the 
complainants have challenged China's application of  GIR 2(a) to classify multiple shipments of parts 
and components on the basis of their common assembly into a finished article, an issue of form vs. 
substance.  WT/DS339/R 
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  4.502  GIR 2(a) provides the rules by which cust oms authorities define the boundaries between 
complete articles and parts of those articles, i.e., between parts and wholes.  At the outset of this dispute, the EC took the position that there is a "c lear separation" between motor vehicles and parts of 
motor vehicles.  This argument leads to the conclu sion that China's tariff rates for motor vehicles 
apply in only one circumstance:  When the importe r imports a completely finished motor vehicle, 
fully assembled, with absolutely no parts missing.  Th e absurdity of this position is apparent.  In this 
regard, the complainants do not agree among themselves. 
4.503  China draws the Panel's attention to this apparent disagreement among the complainants 
because it illustrates two important points concerning the application of GIR 2(a).  First, the 
complainants cannot reasonably take the position that there is a "clear separation" between complete 
motor vehicles and parts of motor vehicles.  Sec ond, this apparent disag reement among the parties 
highlights the critical context that GIR 2(a) provid es in resolving the relationship between complete 
articles and parts of those articles. 
4.504  For China's tariff provisions for motor vehicles to have any meaning whatsoever, it is self-
evident that China must  apply GIR 2(a) to resolve the relati onship between parts and wholes.  The 
complainants' case against the challenged measures ther efore cannot arise from the fact that China has 
drawn a line between motor vehicles and their part s.  Rather, the complainants' case against the 
challenged measures must concern where  China has drawn the line. 
4.505  China considers that the principal issue in th is dispute is whether customs authorities may 
classify multiple shipments of parts and component s on the basis of their common assembly into a 
single article. 
4.506  In China's view, the resolution of this form  vs. substance issue is informed by three 
considerations:  (1) the interpretation of the term "as presented" in GIR 2(a);  (2) the complainants' 
own practice and admissions in respect of the applic ation of GIR 2(a) to multiple shipments; and (3) 
the practices of the complainants and other WTO Members in respect of measures to prevent the 
evasion of higher duty rates that apply to complete articles. 
4.507  Specifically, the interpretive i ssue is whether the term "as presented" allows customs 
authorities to base a classification determination upon evidence that a shipment of parts and components is related to other shipments of pa rts and components through their common assembly 
into a single article.  As early as 1960s, the No menclature Committee of the Customs Cooperation 
Council (the precursor to the WCO) decided that the application of GIR 2(a) to goods assembled from 
multiple shipments of parts and components, incl uding parts and components arriving from different 
countries, was a matter "to be settled by each country in accordance with its own national 
regulations."  In 1995, the HS Committee reaffirmed this prior interpretation of GIR 2(a) within the 
context of the HS. 
4.508  Under Article 8 of the HS 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 ar e "deemed to be approved" by the WCO if no 
member objects to its adoption within a speci fied period.  The 1995 decision concerning the 
interpretation of GIR 2(a) was unanimously adopt ed by the HS Committee, and no member objected 
to its adoption within the specified period.  It is therefore an authoritative interpretation of GIR 2(a) 
adopted by the WCO. 
4.509  As China explained in its answers to Panel questions, the Appellate Body has specifically 
affirmed the relevance of decisions adopted by th e HS Committee, and by the WCO itself, concerning WT/DS339/R 
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  the interpretation of the General Interpretative Rules.  In this  case, the WCO has adopted an 
interpretation of GIR 2(a) that is directly relevant  to the interpretive issue before the Panel.  The 
necessary consequence of the WCO's decision is that the term "as presented" does not preclude 
consideration of whether the parts and components in a particular shipment are related to other 
shipments of parts and components through th eir common assembly into a complete article. 
4.510  Indeed, without some means of enforcing th e boundaries between parts and wholes that 
customs authorities establish in accordance with GIR 2(a), an importer could choose its preferred 
tariff classification even in respect of a single  shipment of parts and components.  GIR 2(a) would 
serve no effective purpose within the HS. 
4.511  China does not consider that the complainan ts have offered a plausible alternative 
interpretation of the term "as presented" that is consistent with the interpretation adopted by the 
WCO, or that is consistent with the purpose of the rule within the HS.  Not surprisingly, their 
preferred strategy is to try to avoid the implica tions of the WCO's interpretation by dismissing it as 
"not legally binding."  These attempts to dismiss the significance of the WCO's interpretation of GIR 
2(a) miss three important points.  First, as explai ned above, the Appellate B ody has expressly referred 
to interpretations of the GIRs adopted by the HS Committee and the WCO as relevant to a panel's 
assessment of how the GIRs affect the interpretation of a Member's Schedule of Concessions.  Second, the complainants have failed to take in to account Article 8 of the HS Convention, which 
provides that interpretations of the GIRs adopted by the HS Committee are deemed to be approved by 
the WCO if no member objects to their adoption.  Third, and most fundamentally, their argument 
misses the point of the decision itself.  The nature of the interpretation that the WCO has adopted is 
not one that would "bind" members of the WCO, in the sense that it would compel them to reach a specific classification determination on the facts of particular cases.  The significance of the WCO's interpretation, as pertinent to this dispute,  is that the term "as presented" does not preclude  the 
application of GIR 2(a) to multiple shipments of parts and components, whether or not a particular 
WCO member chooses to apply GIR 2(a) in this manner. 
4.512  The complainants' second line of defense is to mischaracterize the interpretation of GIR 2(a) 
adopted by the WCO.  Oddly, the complainants  focus on the decision of the HS Committee as it 
relates to split consignments, and pay almost no a ttention to the decision of the HS Committee as it 
relates to the "classification of goods assembled from elements originating in or arriving from 
different countries." 
4.513  Despite their best efforts to confuse the i ssue, the complainants cannot refute the only 
straightforward reading of the WCO's interpretation of GIR 2(a) – that the classification of goods assembled from multiple shipments of parts and com ponents is a matter to be decided by each country 
in accordance with its natio nal laws and regulations. 
4.514  As China will demonstrate next, the credibility of  the complainants' interpretation of GIR 2(a) 
suffers a further blow when it is compared to thei r own statements and practice.  The complainants' 
own statements and practices are not fully in accord with their understanding of GIR 2(a) as stated before the Panel in this case. 
4.515  As China demonstrated in its first written subm ission, the measures that it has adopted to 
prevent the evasion of its higher duty rates on motor vehicles are indistinguishable from measures that 
other WTO Members, including the complainants, have adopted to prevent the evasion of both 
ordinary customs duties and anti-dumping duties.  It  is important to recall the specific purpose for 
which China cited the practice of WTO Members in respect of measures to prevent the circumvention 
of anti-dumping duties.  The subsequent practice th at China established is that WTO Members have  WT/DS339/R 
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  adopted measures to address the circumstance in which a complete article is subject to a higher rate of 
duty than the rate of duty that applies to parts and components of that article. 
4.516  The subsequent practice that China has establishe d, and that no party has disputed, is that 
WTO Members have adopted measures to ensure that the importation and assembly of parts and 
components cannot be used to evade the higher rate of  duty that applies to the complete article.  The 
only question is whether the validity of this pr actice, from a WTO perspective, should depend upon 
the type of duty that gives rise to the differential in duty rates between the complete article and parts 
of that article. 
4.517  The complainants' primary assertion is that "anti-dumping duties and the circumvention of 
such duties are governed by the rules of Article VI of the GATT 1994 and the Anti-Dumping Agreement, not Article II of the GATT 1994."  The pr oblem with these contentions is that there are, 
in fact, no "rules" in either Article VI of the GATT 1994 or the Anti-Dumping Agreement that 
address the question of whether WTO Members can impose anti-dumping duties on imports of parts 
and components of a product that is subject to an anti-dumping measure.  The suggestion that the 
"rules" of Article VI and the Anti-Dumping Agreement "legally recognize" this practice, in contrast to 
the "rules" of Article II, is simply false. 
4.518  The complainants also invoke the remedial purpose of anti-dumping duties as a reason why 
the resolution of the parts vs. whole and form vs. s ubstance issues should be different in the context of 
anti-dumping duties as compared to ordinary customs du ties.  This is, in China's view, a curious form 
of results-oriented reasoning.  It is beyond dispute that ordinary customs duties serve a "purpose."  
The problem with the complainants' "remedial purpose" argument is that they have yet to explain why 
the purpose  of anti-dumping duties is more important than the acknowledged purpose  of ordinary 
customs duties. 
4.519  The United States suggests that there is some  meaningful difference between ordinary 
customs duties and anti-dumping duties because anti-dumping duties are defined by reference to the 
scope of the investigation, not by reference to tari ff lines.  This is yet another distinction without a 
difference.  Anti-dumping measures and tariff provisions both refer to specific products. 
4.520  Finally, the complainants refer to the Decision on Anti-Circumvention  adopted at the 
conclusion of the Uruguay Round to support their view that measures to prevent the circumvention of anti-dumping duties are "different."  However, the complainants do not appear to agree on what the 
significance of this decision is.  The European  Communities, for its part, states that the Decision on 
Anti-Circumvention  "recognises that uniform rules on anti-circumvention of anti-dumping measures 
have not been defined ."  This would suggest that there are no rules that would either allow or disallow 
the application of anti-dumping duties to the parts a nd components of a product that is subject to an 
anti-dumping measure. 
4.521  The complainants have failed to establish why the practices of WTO Members in respect of 
anti-dumping duties (or countervailing duties, for that matter) are not relevant to the interpretation of China's Schedule of Concessions, a nd to a consideration of the t ypes of measures that China may 
adopt to prevent the evasion of the higher duty rate for motor vehicles that it negotiated. 
4.522  The Appellate Body has recognized that "a basic object and purpose of the GATT 1994, as 
reflected in Article II, is to preserve the value of tariff concessions negotiated by a Member with its 
trading partners, and bound in that Member's Sche dule."  The Appellate Body has likewise observed 
that the tariff concessions negotiated by Members are intended to be "reciprocal and mutually 
advantageous." WT/DS339/R 
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  4.523  As China has explained, it is consistent w ith this object and purpose of the GATT 1994 to 
interpret the term "motor vehicles" in China's Sc hedule of Concessions in a manner that preserves the 
value, from both a revenue and market access perspective, of the higher bound duty rates that it 
negotiated for motor vehicles.  On the contrary, th e logical conclusion of the complainants' arguments 
in respect of paragraph 93 of the Working Party Re port is that China's tariff provisions for motor 
vehicles would never  apply.  This conclusion cannot possibly be consistent with the object and 
purpose of preserving the value of reciprocal and mutually advantageous tariff concessions.  The 
effective resolution of the customs relationship betw een a complete article and parts of that article 
does not pose a systemic risk either to the security  of tariff concessions under Article II, or to the 
national treatment disciplines of Article III.  As Chin a has explained, the resolution of this issue does 
not lead to the result that Members may classify arti cles on the basis of their end-use, and it does not 
lead to the result that Members may impose discrim inatory measures on imported products merely by 
characterizing the measures as border measures under Article II.  China's position is simply that 
Members may interpret and enforce their Schedules of Concessions in accordance with the rules of 
the HS, and in accordance with the principle that tariff arrangements should have meaningful effect. 
3. The challenged measures are subject to the disciplines of Article II of the GATT 1994 
4.524  China believes that the parties have reached s ubstantial agreement on the principles that are 
relevant to determining whether a pa rticular measure or charge is subject to the disciplines of Article 
II or to the disciplines of Article III.  As China w ill discuss below, measures and charges that China is 
allowed to adopt within the framework of Artic le II cannot be challenged under Article III or the 
TRIMs Agreement. 
4.525  The term "on their importation" in Article II:1( b), first sentence, is not limited to the exact 
point in time and space at which products from another country cross the border.  Because the scope of Article II is not defined by the time or place at which the charge is collected, there must be some 
other basis to determine whether a particular charge  or measure applies to imported products "on their 
importation" into the customs territory of a Member .  Applying this understanding of the term "on 
their importation," the characterization of a particular  charge in relation to Article II will depend upon 
the reason  or event  that triggered the imposition of the char ge.  If the measures fulfil a "valid customs 
liability," they are measures that are subject to the disciplines of Article II of the GATT 1994. 
4.526  This inquiry returns the analysis to the interp retation of China's tariff provisions for "motor 
vehicles," and, in particular, to the question of wh ether China may classify multiple shipments of auto 
parts and components on the basis of their common assembly into a complete article.  An important 
part of this analysis is the meaning of the term "as presented" in GIR 2(a), and the practice of other WTO Members in resolving the relationship between complete articles and parts of those articles in 
the context of customs administration.  Under Decree 125, the fact that a shipment of auto parts is one 
of a series of related shipments of auto parts is  evident on the face of the customs declaration when 
the goods are presented at the border.  By declaring th at a shipment of auto parts is for a registered 
vehicle model, the manufacturer is declaring (1) that the shipment is one of a series of shipments of auto parts that the manufacturer w ill assemble into a specific motor ve hicle; and (2) that through this 
series of shipments, the manufacturer will import a group of auto parts and components that, in their 
entirety, have the essential character of a motor ve hicle.  For these reasons, the charges that China 
assesses and collects pursuant to Decree 125 fulfil a valid customs liability. 
4.527  The conclusion that the challenged measures are subject to the disciplines of Article II is 
reinforced by the fact that the challenged measures do not constitute a form of internal regulation, and 
do not impose internal charges, within the meani ng of Article III of the GATT 1994.  The delineation 
between Articles II and III of the GATT 1994 requir es an understanding of the terms "importation"  WT/DS339/R 
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  and "imported."  Until these customs formalities, u nder the challenged measure, are complete, the 
CGA retains customs control over these entries, and the parts and components are not in free 
circulation within China.  Therefore, the custom s duties are not charges th at China imposes upon auto 
parts and components from other countries after they are "imported." 
4.528  There is a critical threshold issue before th e Panel concerning the characterization of the 
challenged measures in relation to China's rights and obligations under Article II and Article III of the 
GATT 1994.  China has demonstrated above that  the challenged measures are subject to the 
disciplines of Article II because they relate to and impose charges that China is allowed to impose by 
reason of the importation of products into its customs territory.  Chin a has further demonstrated that 
the challenged measures impose charges on products " on their importation" into its customs territory, 
and not on "imported" products.  If the challenged measu res are subject to the disciplines of Article II, 
China does not consider that the challenged meas ures can be analysed under Article III of the 
GATT 1994 or the TRIMs Agreement. 
4.529  The United States takes the position that the ch aracterization of the charges that China 
collects under the challenged measures is irreleva nt to whether these charges are subject to the 
disciplines of Article III.  Canada, at a minimum, appears to reject the United States' argument outright.  China believes that if a particular measure  implements and collects a charge that a Member 
is allowed  to impose in accordance with Article II, it cannot  be the case that the same charge must be 
in conformity with the requirements of Article III.  The Appellate Body in EC - Banana III , which is 
relied upon by the US, did not find that the same  aspects of a particular measure can be subject, 
simultaneously, to the requirements  of both Article II and Article III.  The Appellate Body report in 
EC – Bananas III  confirms the critical importance of identifying the specific purpose of a particular 
measure or charge in relation to a Member's right s and obligations under Ar ticle II and Article III. 
4.530  While Canada rejects the United States' claim that the characterization of a charge is 
irrelevant to whether that charge should be anal ysed under Article II or Article III, it nonetheless 
contends that "the administrative  burdens imposed by the measures on imported auto parts must be 
assessed under Article III:4."  Again, China believes th at if a Member imposes a customs procedure to 
ensure the collection of customs duties that it is allowed to impose under its Article II commitments, 
those measures are necessarily customs measures.  Customs procedures do not violate Article III merely because the importer might consider these procedures to be a burden. 
4.531  The European Communities asserts that "t he TRIMs Agreement does not require a 
preliminary assessment as to whether a measure is a 'border measure' or an 'internal measure'."  To 
establish a violation of Article 2 of the TRIMs Agreement , the complaining Member must 
demonstrate the application of a trade-related inv estment measure "that is inconsistent with the 
provisions of Article III or Article XI of the GA TT 1994."  Neither the EC nor any other party has 
alleged a violation of Article XI of the GATT 1994.  The European Communities' claim under the 
TRIMs Agreement must therefore rest on its claim that the challenged measures violate Article III of 
the GATT 1994.  To establish a claim of violation under Article III, the European Communities must 
demonstrate that the measures at issue are "interna l measures."  China therefore does not perceive any 
basis for the EC's position that the TRIMs Agre ement, unlike the GATT 1994, does not require a 
threshold determination as to whether the measures at issue are within the scope of Article II or 
Article III. WT/DS339/R 
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  4. The complainants have failed to establish a prima facie violation of the commitment that 
China made in paragraph 93 of the Working Party Report 
4.532  The complainants have failed to establish a prima facie violation of the commitment that 
China made in paragraph 93 of the Working Party Report.  A necessary element of this claim is a 
showing that China has created separate tariff lines for CKD/SKD kits.  The complainants have failed 
to demonstrate that China has created separate ta riff lines for CKD/SKD kits.  Therefore, this claim 
must fail.  China considers that the Panel should stop its analysis at this juncture, as it is evident that 
the complainants' claim under paragraph 93 lacks foundation. 
5. The complainants have failed to establish a violation of the SCM Agreement 
4.533  China does not understand the basis for the cl aim of the United States and the European 
Communities concerning revenue fore gone under Article 1.1(a)(1)(ii) of the SCM Agreement.  The 
Appellate Body has stated 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 other rules 
of taxation of the Member in question."  The b asic problem with the argument of the United States 
and the European Communities is that they have fa iled to "identify and examine fiscal situations 
which it is legitimate to compare." 
6. The challenged measures would be justified under Article XX(d) if the Panel were to 
identify any violation of the covered agreements 
4.534  China considers that the challenged measures prope rly interpret and give effect to its tariff 
provisions for motor vehicles, in accordance with th e rules of the HS and in accordance with the 
practice of other WTO Members under like circumstances; and, therefore, are fully consistent with its 
rights and obligations under Article II of the GATT 1994. 
4.535  China has explained that the issue of "circumventi on" in this case is a question of ensuring the 
proper tariff classification of parts and components that have the essential character of a motor 
vehicle.  Canada and the United States, at leas t, appear to recognize that breaking parts and 
components into multiple shipments can constitute a form of "tariff evasion". 
4.536  China does not consider that WTO Members mu st have recourse to Article XX(d) of the 
GATT 1994 in order to interpret and enforce th eir tariff schedules in accordance with the HS.  
However, the Panel may nonetheless consider that China needs a separate b asis within WTO law to 
enforce its tariff rate provisions for motor vehicles.  The Panel may also find that, contrary to China's 
explanations, the rules of the HS do not provide a b asis for China to give meaningful effect to the 
higher duty rates that it negotiated for motor vehicl es, because these rules provide no basis for China 
to distinguish between motor vehicles and parts of motor vehicles, whether in one shipment or in 
multiple shipments.  Finally, the Panel may find that  one or more elements of the challenged measures 
result in the imposition of internal charges, or othe rwise constitute an impermissible form of internal 
taxation or internal regulation, in violation of Article III of the GATT 1994 or the TRIMs Agreement.  
In any such circumstance, or in respect of any othe r violation of the covered agreements that the Panel 
may identify, China considers that the challenge d measures are justified under Article XX(d) as 
measures that are necessary to secure co mpliance with China's customs laws. 
4.537  The complainants cannot credibly dispute, at th is stage in the proceedings, that there is a 
legitimate and complex question of tariff classification and customs administration concerning the 
relationship between motor vehicles and parts of moto r vehicles.  In addition, China has demonstrated 
that, in the absence of any means of defining a nd enforcing the boundary between motor vehicles and  WT/DS339/R 
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  parts of motor vehicles, China's tariff provisions for motor vehicles are essentially unenforceable.  If 
China had no means of looking past these ploys the importers may adopt, the result would be that importers would never have to pay the tariff rates app licable to motor vehicles.  In effect, there would 
be no "motor vehicles" entering China – only "parts". 
4.538  China believes that GIR 2(a), as interpreted by the WCO, has already resolved these issues of 
customs interpretation and enforcemen t, such as "parts vs. wholes" and "form vs. substance."  But if 
GIR 2(a) did not exist, China (along with other customs authorities) would still need a means of 
defining and enforcing the boundary between parts an d wholes.  This is what the challenged measures 
do – they ensure the effective enforcement of Chin a's tariff provisions for motor vehicles by defining 
what constitutes a motor vehicle, as distinct from parts of a motor vehicle, and by enforcing that boundary without regard to the manner in which the importer structures or documents its import 
transactions. 
4.539  In its first written submission, China reviewed  the jurisprudence concerning the meaning of 
"necessary" under Article XX(d).  To summarize, the Appellate Body has described the term 
"necessary" as involving a weighing and balancing of: (1) the relative importance of the interests or values furthered by the challenged measure; (2) the contribution of the measure to the realization of 
the ends pursued by it; and (3) the restrictive im pact on international commerce.  The challenged 
measure must be compared to other "reasona bly available", WTO-consistent alternatives. 
4.540  With respect to the first factor, it cannot be dou bted that the collection of tax revenues is an 
important interest of WTO Members, and especially  for developing country members.  Likewise, the 
enforcement of negotiated tariff concessions is al so an important objective for Members, and for 
developing country Members in particular.  With respect to the second factor, China has presented 
clear evidence that the challenged measures furt her China's objective of ensuring the effective 
enforcement of its tariff provisions for motor vehicles.  China has documented specific motor vehicle 
models that are assembled in China from impor ted parts and components that have the essential 
character of a motor vehicle, and that are imported into China in multiple sh ipments.  In the absence 
of the challenged measures, auto manufacturers w ould evade the higher duty rates that apply to motor 
vehicles because of the manner in which they have structured their imports of parts and components 
for these and other vehicle models.  China has also  presented evidence that the specific circumstance 
referred to by the United States – an auto manufact urer "who is splitting a CKD shipment into two or 
more separate boxes" – is a specific circumstance to which the challenged m easures have responded.  
While China does not consider that this is the only circumstance in which customs authorities can 
respond to the evasion of higher duty rates that apply to a complete article, it is certainly a circumstance that is addressed by the challenged me asures.  In respect of the third factor under the 
"necessary" standard, China has already noted that the measures do not materially affect imports of 
motor vehicles or motor vehicles parts, other than in the entirely legitimate respect that importers 
must pay the higher tariff rates for motor vehicl es when they import collections of parts and 
components that have the essential character of a motor vehicle.  Notwithstanding the "burden" that complainants claim that the measures impose, ma jor car manufacturers and auto parts manufacturers 
have reported that the measures have had little or no impact on their operations in China.  The only 
auto manufacturers who are affected are those who assemble motor vehicles in China from imported 
parts and components that have the ess ential character of a motor vehicle. 
4.541  Finally, in respect of the existence of other reasonably available, WTO-consistent 
alternatives, China has already e xplained why the challenged measures are not inconsistent with its 
rights and obligations under Article II, or with the ru les of the HS.  As the predicate for this discussion 
is that the Panel has found otherwise, at least in  some respect, China does not believe that there are WT/DS339/R 
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  other reasonably available alternatives to secure  compliance with its tariff provisions for motor 
vehicles. 
4.542  The chapeau to Article XX permits WTO Members to invoke the general exceptions listed in 
items (a)-(j) "[s]ubject to the requirement that such  measures are not applied in a manner which would 
constitute a means of arbitrary or unjustifiabl e discrimination between countries where the same 
conditions prevail, or a disguised restriction on international trade …".  The challenged measures do 
not discriminate between countries where the same  conditions prevail.  The challenged measures 
apply equally to all imported auto parts and com ponents, regardless of their origin.  The measures 
entail no discrimination, let alone discrimination that  is arbitrary or unjustifiable in relation to 
countries where the same conditions prevail.   No r do the challenged measures constitute a disguised 
restriction on international trade. 
4.543  In respect of the chapeau to Article XX  and the Appellate Body's statement in US – Shrimp , 
China considers that the question before the Panel is whether China has drawn these lines in a manner 
that preserves the tariff provisions that it negotiate d for motor vehicles, while at the same time giving 
meaningful effect to its separate tariff rates for parts and components of motor vehicles.  China 
submits that the balance it has struck in the cha llenged measures is a reasonable one, and gives "due 
regard both to the legal duties of the party claiming the exception and the legal rights of the other parties concerned."  China is allowed to give effect  to its tariff provisions for motor vehicles, and to 
ensure that substance prevails over form, while the complainants will continue to export large 
quantities of auto parts to China that are not in an y way affected by the measure, and that are subject 
to the applicable duty rates for parts.   
4.544  Under Article 29 of Decree 125, an auto ma nufacturer who purchases imported parts and 
components from a third party in China, and uses these parts and components in the assembly of a 
registered vehicle model, is liable for the differe nce between the amount of any duty that the importer 
has already paid in relation to the importation of  those parts and components, and the duty rate 
applicable to a collection of imported parts and co mponents having the essential character of a motor 
vehicle.  China considers that any charges that it collects pursuant to  Article 29 of Decree 125 relate 
to the administration and enforcement of China's tari ff provisions for motor vehicles, as they relate to 
the proper classification of a specific collection of imported parts and components that, in their entirety, have the essential character of a motor vehi cle.  China has acknowledged, however, that this 
aspect of Decree 125 is conceptually different in rela tion to Article II, because the original importer of 
these third-party parts and components has, in most  cases, already completed the customs formalities 
in respect of these imports, and the goods are no longer subject to control. 
4.545  China considers that Article 29 of Decree 125 is  justified under Article XX(d) for reasons that 
are similar to those set forth above.  In the absen ce of Article 29 of Decree 125, auto manufacturers 
could evade duty liability for complete motor vehi cles by arranging to import parts and components 
through suppliers.  As China explained at the first su bstantive meeting, this is of particular concern in 
the automobile industry, in light of the close commercial relationships among auto manufacturers and 
parts suppliers. 
7. Conclusion 
4.546  For the reasons set forth in this submission, China requests the Panel to reject the claims 
raised by the European Communities, the United States, and Canada.  WT/DS339/R 
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  M. O
RAL STATEMENT BY THE EUROPEAN COMMUNITIES AT THE SECOND SUBSTANTIVE MEETING 
OF THE PANEL  
1. Introduction 
4.547  This case is about local content requirements a nd discrimination against imported products in 
blatant violation of the TRIMs Agreement and Artic le III of the GATT 1994.  This is not a technical 
case concerning tariff classification as China would like to have it although even the tariff 
classification arguments of China entirely fail.  This  case is about protectionist measures that violate 
the very core principles of the whole sy stem established by the WTO Agreement. 
2. The automotive industry 
4.548  As the European Communities has demonstrated already on many occasions56, China attempts 
to paint a picture of the automotive industry that has nothing to do with reality. Vehicles and their 
parts are simply not manufactured in one country and by one company and its affiliates, and then 
shipped to China in parts for a mere assembly in  China with the sole purpose of avoiding China's 
higher tariff rates for complete vehicles.  In the global economy, vehicle manufacturers are simply not 
able even to consider such a bus iness model.  They necessarily have to rely on highly specialised parts 
manufacturers that are located in almost all parts of the world. 
4.549  Because of fierce competition, vehicle manuf acturers are obliged to standardise the 
production of their vehicle models in order to r each volumes of production sufficient to generate 
economies of scale which are absolutely vital to remain  competitive.  Many parts fit not only different 
models of the same manufacturer but differ ent models of different manufacturers.  
4.550  The identification of imported parts that belong to a given specific vehicle model is an 
entirely fictitious condition imposed by the measu res. The normal business strategy of a vehicle 
manufacturer is to order parts in bulk, some of which will be used in the manufacture of different 
vehicle models, some as spare parts. Under the m easures these identical parts will be charged entirely 
differently depending on their end use in China and in particular whether they are fitted to a vehicle 
model that contains a certain combination or proportion of Chinese-made parts. 
3. The applicable provisions 
(a) Is there a threshold issue? The TRIMs Agreement as an answer 
4.551  As the European Communities h as repeatedly demonstrated, there is no threshold issue in 
these Panel proceedings for the purposes of examining Article 2 of the TRIMs Agreement .  T h i s  
provision does not require an ex-ante analysis as to whether a Measure  is an internal or a border 
measure.  On the basis of its clear wording, all it requires is an examination of whether the contested 
measures are (a) investments measures, (b) trade-relate d, and (c) fall within the Illustrative List.  If 
they fall – like the Chinese measures –  under both pa ragraphs of the Illustrative List, they must be 
considered to fall under Articles III:4 and XI:1 of  the GATT 1994 and to violate Article 2 of the 
TRIMs Agreement. 
                                                      
56 See inter alia  paragraphs 9 to 17 and 68 to 74 of the first written submission of the European 
Communities, paragraphs 4 to 8 of the European Co mmunities' response to the question of the Panel and 
paragraphs 8 to 19 of the second written submission of the European Communities. WT/DS339/R 
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  (b) Article III vs. Article II of the GATT 1994 
4.552  China stated in its rebuttal submission that  it believes "that the parties have reached 
substantial agreement on the principles that are rele vant to determining whether a particular measure 
or charge is subject to the disciplines of Ar ticle II or to the disciplines of Article III".
57 This is not 
true. Whereas China continues to rely on pure formalism , such as the involvement of "customs" 
authorities, so-called "bonds" and other labels att ached under its domestic law, in order to bring its 
Measures within the scope of Article II of  the GATT 1994, the European Communities has 
demonstrated on the basis of clear substantive criteria  why the Chinese measures are internal 
measures falling under Article III of the GATT 1994, and not ordinary customs duties imposed "on 
importation".58 
4.553  First, the charges on imported auto parts are not determined at the time or point of 
importation, but internally after assembly and manufacture, i.e. at a significantly later stage.  
4.554  Secondly, the Chinese measures do not impose ch arges "on importation" since the charges are 
not due because of importation of the auto parts, but  because of other internal events and criteria.  
Their imposition depends on whether "the Verificati on Center, after verifications, concludes that the 
imported automobile parts should be characterized as complete vehicles" (Article 28 of Decree 125) 
which in turn depends on whether the imported parts were fitted into vehicles with an insufficient 
level of local content.  
4.555  Thirdly, the internal nature of the measures is further illustrated by the fact that they apply 
directly only to vehicle manufacturers, rather  than to the importers of auto parts.  
4.556  However, the fact that the Chinese measures ar e internal measures falling under Article III of 
the GATT 1994 does not mean that Article II of the GATT 1994 does not play any role for the resolution of this dispute. 
4.557  First, the European Communities considers that the standard treatment of certain CKD and 
SKD kits under Article 2 of Decree 125 could be ex amined solely as a violation of Article II of the 
GATT 1994 while the rest of the measures breach, in addition to Article 2 of the TRIMs Agreement, 
Article III, paragraphs 2, 4 and 5 of the GATT 1994.   Secondly, the European Communities is of the 
view that the inconsistency of the Chinese measure s with China's Schedule of Concessions plays an 
important role under Article XX(d) of the GATT 1994, which China invokes, albeit in a very 
superficial manner, as an alternative defence. 
4. Article II of the GATT 1994 
4.558  The interpretation given by the WCO secretariat on the words "as presented" under point 1 of 
the reply is materially identical to the positio n taken by the European Communities in these 
proceedings and by the Appella te Body in its report in EC – Chicken Cuts . Indeed, any other reply 
would have been highly surprising. According to th e WCO secretariat "as presented" refers to "the 
moment at which the goods are presented to customs or other officials with a view to classifying the 
goods concerned in the customs tariff or in the tr ade statistics nomenclatures". The Appellate Body 
has framed this principle in similar terms as follows : "in characterizing a product for purposes of tariff 
                                                     
 
57 China's second written submission, para. 100. 
58 European Communities' second written submission, paras. 35 to 56.  WT/DS339/R 
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  classification, it is necessary to look exclusively at  the 'objective characteristics' of the product in 
question when presented for classification at the border".
59 
4.559  The interpretation of the now so famous d ecision of the HS Committee in 1995 is also 
clarified. The reply demonstrates once and for all that China has entirely invented its theory on 
"multiple shipments". The WCO secretariat has now cl arified that the phrase "elements originating in 
or arriving from different countries" in that decisi on have absolutely nothing to do with the "multiple 
shipments" theory China has invented for the purposes of these Panel proceedings. 
5. Article XX (d) GATT 1994 
4.560  The European Communities is of the view that China's arguments relating to Article II of the 
GATT 1994 are more appropriately addressed under Article XX(d) of the GATT 1994.  This is 
because in our view there can be no doubt about the fact that the measures violate Article 2 of the 
TRIMs Agreement and Article III, para graph 2, 4 and 5 of the GATT 1994. 
4.561  China's explicit arguments relating to Article  XX(d) of the GATT 1994 are very cursory both 
in its first and second written submissions.  The ar guments fall manifestly short of fulfilling China's 
obligations on the burden of proof and therefore the analysis should stop there.  As a matter of principle, it is not for the complaining parties to develop further China's passing references to 
Article XX(d). 
4.562  In any event, China has not shown that there is in reality a problem of tariff evasion that needs 
to be addressed. Second, in order to be jus tified under Article XX(d), the measures should be 
necessary to secure compliance with the 25 per cen t  duty on complete vehicles. However, as 
demonstrated by the European Communities in its first and second written submissions, the measures 
treat imported auto parts less favourably than provi ded for in China's Schedule. The measures cannot 
be suitable to enforce China's tariff schedule sinc e they impose charges which directly conflict with 
China's tariff schedules instead of enforcing them.  
4.563  As regards China's passing arguments in relati on to the chapeau of Article XX of the GATT 
1994, they are made for the first time only in China's second written submission, which is nothing but another demonstration of China's tactics to delay or avoid addressing difficult issues. Therefore and in 
view of the fact that China entirely fails to meet the first condition of provis ional justification under 
Article XX, a couple of remarks will suffice. 
4.564  In US – Gasoline,  the Appellate Body held that the object and purpose of the chapeau of 
Article XX is to prevent the misuse or abuse of the exceptions of Article XX.
60  Even a restriction that 
formally meets the requirements of one of the speci fic exceptions listed in Article XX, which is not 
the case here, will constitute an abuse if it is in f act only a disguise to conceal the pursuit of trade-
restrictive objectives.61  This is precisely what China tries to  do: to conceal the trade-restrictive 
objective of its measures, which is apparent in view  of the various clear statements in the measures 
that directly point to the objective of provid ing protection to domestic production of auto parts.62 
                                                      
59 Appellate Body Report on EC – Chicken Cuts , para. 246. 
60 Appellate Body Report on US – Gasoline , para. 22. 
61 Panel Report on EC – Asbestos , para. 8.236. 
62 See, for instance, Articles 4 and 52 of the Automotive Policy Order 2004. WT/DS339/R 
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  N. O
RAL STATEMENT BY THE UNITED STATES AT THE SECOND SUBSTANTIVE MEETING OF THE 
PANEL  
4.565  China's rebuttal submission, though lengthy, adds  very little to the substantive discussion of 
the issues in this dispute.  Rather , China's submission mostly relies on rhetorical devices.  First, China 
relies on rhetorical catch-phrases – such as "substanc e over form" and "parts versus wholes."  These 
phrases are nowhere contained in the WTO Agreement,  or even in the HS, and are not helpful in 
resolving the issues in dispute.  The second rh etorical device used in China's second written 
submission is to mischaracterize complainants' positi ons.  Most notably, China repeatedly claims that 
the complainants agree with China on various issues  and the issues thus have been "narrowed," and 
then China proceeds to build argumen ts based on these false premises.  
1. Article III of the GATT 1994 and the TRIMs Agreement 
4.566  As the United States has explained, China's measures amount to straightforward 
inconsistencies with China's national treatment ob ligations under Article III of the GATT 1994 and to 
a domestic content requirement that is inconsiste nt with China's obligations under Article 2.1 and 
Paragraph 1(a) of Annex 1 of the TRIMs Agreement.  China's defense to the Ar ticle III issues is based 
solely on its argument that its measures involve cu stoms duties, and that Article III cannot apply to a 
measure that involves customs duties.  China has not otherwise even attempted to assert a defense – 
aside from a vague reliance on Article XX(d) – to these breaches of its WTO obligations. 
4.567  In its rebuttal submission, China phrases its ar gument as follows, with the emphasis in the 
original: "If a particular measure implements and collects a charge that a Member is allowed  to 
impose in accordance with Article II, it cannot be the case that the same charge must be in conformity 
with the requirements of Article III."  This stat ement has no basis in logic or the text of the 
GATT 1994.  In fact, it is routine for a measure to  be examined under the obligations set out under 
various provisions of the WTO Agreement in disputes under the DSU.  The fact that a measure is or is 
not consistent with one obligation does not necessar ily determine whether the measure is or is not 
consistent with a different obligation.   
4.568  Perhaps China implies that there is somethi ng special in Article II of the GATT 1994 that 
somehow "allows" (as China puts it) Members to de part from other GATT obligations.  But that issue 
has been considered, and rejected, by prior Pane ls under the GATT 1947 a nd by the Appellate Body 
under the GATT 1994.  As found in those disputes, Article II of the GATT 1994 and a Member's 
schedule of tariff commitments impose additional ob ligations on a Member, and consistency with 
those obligations cannot serve as a defense to breaches of other WTO obligations.   
4.569  China's charges (whether internal charges or cu stoms duties) are straightforward violations of 
Articles III:4 and III:5 of the GATT 1994, as well as th e TRIMs agreement.  This is because the level 
of China's charges increases if the local content of a vehicle manufactured in China does not exceed 
certain thresholds.  As such, the measures provide less favorable treatment to imported parts with 
respect to laws affecting their internal sale, pur chase, distribution and use under Article III:4, and 
impose a domestic mixing requirement within the meaning of Article III:5.   
4.570  Consider a vehicle manufacturer in China that ha s imported an auto part; call it Part A.  Under 
China's measures, the importer/manufacturer must po st a security for the 10 per cent parts rate.  Once 
Part A enters into inventory, the manufacturer h as a decision with regard to what to do with this 
imported part.  The manufacturer may decide to use the imported part in the production of a particular 
complete vehicle.  However, the manufacturer must always be mindful of China's local content thresholds.  If the use of Part A in manufacturing would result in a vehicle that exceeds the thresholds,  WT/DS339/R 
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  then all other imported parts used in that vehicle w ould be subject to the 25 per cent charge.  By tying 
the use of Part A to increased charges on other pa rts, China's measures serve as a disincentive on the 
use of Part A in manufacturing.  And, this disincentive is in 
addition to, and separate from, the level of 
the charge imposed on Part A itself.  No comparab le regulations affect the use of a comparable 
domestic Part A.  Accordingly, China's measures are a violation of Article III, as a law affecting the 
use within China of an imported product.  
4.571  China is wrong in asserting that customs duties w ould always constitute "a violation of the 
non-discrimination principles under Article III."  The same type of discrimination does not apply to 
customs duties regularly imposed by WTO Members.  That is, the level of charges on other imported 
products does not depend on how an imported part is used within the Member's territory.   
4.572  This discrimination not only applies to the "use"  of the imported product, but also applies to 
the "internal sale, offering for sale, purchase, or distribution" under Article III:4.  If the importer in the above example were instead a parts distributor or a parts producer, then the importer would want to 
sell or distribute imported Part A to manufacturers w ithin China.  Under China's measures, however, a 
manufacturer in China will have a disincentive to  purchase imported Part A from the distributor.  
Thus China's measures adversely affect the "interna l sale, offering for sale, purchase, or distribution" 
of imported parts, with no comparable effect on domestic parts.   
2. Internal charges vs. customs duties 
4.573  The additional charges at issue in this dispute are internal charges,  not  "ordinary customs 
duties."  Under EEC – Parts and Components , charges are internal charges subject to Article III:2 of 
the GATT 1994 when based on the product as manufacture d internally, regardless  of the label adopted 
by the implementing Member.  In this case, China' s charges are based not on the goods as entered but 
instead on the use of the goods in manufacturing a vehi cle within the territory of China.  When a part 
is presented at the border, China imposes a revenue  bond based on the 10 per cent duty rate for parts, 
and applies the extra 15 per cent charge only (1) if the imported part is actually used in the 
manufacture of a vehicle, and (2) if the amount of  imported content in that vehicle exceeds the 
thresholds set out in China's measures.  China's measures are focused on the amount of local content 
in the final assembled vehicle - the who, what, where, and hows of importation are irrelevant.  
4.574  In its second submission, China argues that its charges are just like regular customs duties 
because: "The classification of the import entry, a nd the assessment of the applicable duty rate, is 
based on the status of the auto parts and component s when they were entere d and declared to the 
Customs General Administration."  This statement, how ever, is inconsistent with the actual content of 
China's measures.  The charge is based on how the part is actually used internally, and not on the 
condition of the part as imported.   
4.575  As the United States understands it, China's argu es in its rebuttal submission that no parts are 
actually "imported" until the final duties are assessed  after manufacturing, because as a formal matter 
China (in most but not all cases) will not have settle d – until after the final manufacture of a complete 
vehicle – the financial guarantee required upon entry.   This argument is not and cannot be correct.  
Otherwise, a Member could avoid its Article III disciplines by the simple ruse of structuring its customs laws so that no product is actually "impor ted" – as China proposes the term be interpreted – 
until after discriminatory internal charges and ot her discriminatory measures had been applied.  
Rather, the only sensible way to view "imported" in this context is with its normal meaning, that is, 
the time when the product enters the Member's customs territory.   WT/DS339/R 
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  4.576  The United States also would note that if the Panel in fact were to agree with China's apparent 
argument that no parts are to be considered "im ported" until after manufacturing, then the measures 
would amount to import restrictions under Article XI  of the GATT 1994, as alleged in the US request 
for the establishment of a panel.  This result w ould follow from the fact that China's measures are 
mandatory for vehicle manufacturers who wish to im port parts.  And, if those measures prohibit the 
importation of parts until after the completion of a manufacturing operation, the measures would amount to restrictions on the ability of manufacturers to import parts.   
3. GIR 2(a) would not provide China with a defense under Article II of the GATT 1994 
4.577  China's additional charges on imported auto parts are internal charges, subject to obligations 
under Article III:2 of the GATT 1994, and not "ordinar y customs duties" under Article II:1(a) of the 
GATT 1994.  Even aside from this fact, GIR 2(a) of the HS would not provide a defense to a breach by China of its tariff commitments. 
4.578  As the United States has explained, China's tariff classification argument based on GIR 2(a) is 
entirely without merit.  The US explanation incl udes that China's interpretation of GIR 2(a) is 
inconsistent with the object and purpose of the HS Convention to establish uniform tariff 
nomenclature rules for the purpose of comparing tr ade statistics (between exports and imports, and 
between different parties to the Convention).  In fact, under China's interpre tation, the comparability 
of trade statistics collected by different Members, and between import and export statistics, would be 
destroyed.  China has never responded to this explan ation of how China's interp retation is inconsistent 
with the object and purpose of the HS Convention. 
4.579  China's argument that only Chin a's interpretation would allow "substance" to triumph over 
"form" is meaningless, and completely ignores th e reality of modern automobile manufacturing.  
Manufacturers import bulk shipments of parts because th is is the usual and most efficient means of 
conducting large-scale automobile manufacturing, a nd not because manufacturers are trying to avoid 
duties owed on the import of knock-down kits.   
4.580  The United States also has three additional point s on China's tariff binding argument based on 
GIR 2(a).  First, China's submission repeatedly claims  that GIR 2(a) is addressed to the issue of "parts 
vs. wholes."  This characterization of GIR 2(a) is incorrect.  Rather, the HS addresses "parts vs. wholes" under the HS tariff nomenclature:  that is, whole articles and parts (and assemblies) of articles are classified in separate headings.  Accord ingly, the general issue of "parts vs. wholes" is 
governed by GIR 1, which provides that articles mu st be classified in accordance with the relative 
headings.  In contrast, GIR 2(a) is only addressed to the limited issue of the classification of articles presented unassembled or disassembled, and does not address the classification of bulk parts shipments.   
4.581  Second, the United States recognizes that the WCO Secretariat has no formal role under the 
Convention to provide definitive in terpretations of the HS, nor to provide definitive advice to other 
bodies.  The United States does note, however, that the response of the WCO Secretariat to the Panel's 
questions acknowledges the point made by th e United States regarding the phrase "elements 
originating in or arriving from different countries," as used in th e HS Committee decision cited by 
China.  In particular, the Committee's discussion of "elements" from different countries was in the context of discussing the application of rules of origin, and does not in any way indicate that the 
Committee was considering a measure (such as Ch ina's) that would artificially combine bulk 
shipments of parts from different countries in order to  create a fictional collection of parts to be used 
in the assembly of a complete vehicle.     WT/DS339/R 
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  4.582  Third, the only pertinence of the HS Convention in  this dispute is to assist in determining the 
common intent of WTO Members with respect to Ch ina's tariff commitment on specific auto parts, 
such as radiators and brakes.  Regardless of any issues raised by China regarding the precise meaning 
of HS interpretive notes and WCO discussions of in terpretive notes, nothing in the HS Convention 
could support an interpretation of China's WTO tariff commitments such that bulk shipments of 
brakes and radiators should receive the same  tariff treatment as whole automobiles.  
4. China's Article XX(d) defense 
4.583  China, as the disputing party asserting an affirmative defense under Article XX(d) of the 
GATT1994, has the burden of proving each element of th e defense.  China has not met that burden.   
4.584  China's basic argument under Article XX(d) is  that its measures are "necessary to secure 
compliance with laws or regulations" needed to collect the 25 per cent duty that China is permitted 
under its tariff bindings to collect on the importation of whole vehicles.  China uses this language to mean two very different things – neither one of them supports an Article XX(d) defense.   
4.585  First, China uses this language to mean that  under its domestic tariff schedule, China is to 
charge a whole-vehicle rate of dut y on any imported part, so long as that part is used to manufacture 
within China a vehicle with a foreign content that  exceeds the thresholds under China's measures.  As 
the United States has explained, there is no possi ble interpretation of China's national treatment 
obligations under Article III, nor of China's WTO Schedule, that would allow for China to impose a 
25 per cent duty on bulk shipments of parts impor ted for manufacturing purposes.  Accordingly, 
China's purported Article XX(d) defense fails to present any "laws or regulations which are not 
inconsistent with the provisions of this  Agreement," as required by Article XX(d).   
4.586  Second, China uses the same language – about en suring its ability to collect the 25 per cent 
whole-vehicle duty – to mean something entirely di fferent:  namely, that China must be able to 
address certain limited, though still hypothetical, exam ples of "evasion" (as China puts it), such as the 
case of a CKD split into two shipments, or a whole vehicle entered with the tires removed.  To be 
absolutely clear, the United States does not agr ee, as China claims, that a hypothetical measure 
intended to address split shipments of kits would be consistent with China's WTO obligations.  
Rather, China in fact has not adopted any such meas ures in this dispute, and it is not meaningful for 
the United States (nor the Panel) to engage in an analysis of hypothetical, vaguely defined measures 
not actually adopted by China.   
4.587  For two reasons, China's asserted rationale fails to meet the requirement of necessity under 
Article XX(d).  First, China has still failed to show a single  instance where any importer ever engaged 
in the specific practices id entified by China. In fact, China's c ourse of conduct has shown that it has 
not been concerned about tariff evasion at all.  Rather, Chinese authorities have controlled the tariff 
process by requiring auto manufacturers to negotiate the rates that would be applicable for all types of 
kits and parts, with the key factors in the outcome of that negotiation being a manufacturer's 
commitment to investing in China and using local content in assembling vehicles. 
4.588  Second, China's asserted "circumvention" rationale does not match the scope of China's 
measures. China's measures sweep broadly to cove r all imports of bulk parts for manufacturing 
purposes, not just instances of what China calls "tar iff evasion."  Given the far broader scope of the 
measures China has actually adopted, they cannot be  considered "necessary" under Article XX(d) to 
meet China's asserted policy concern with "evasion."   WT/DS339/R 
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  O. O
RAL STATEMENT BY CANADA AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL  
4.589  Canada has explained how the measures are in consistent with Article III of the GATT 1994:  
with Article III:2, for applying internal charges on imported auto parts in excess of those applied to 
domestic auto parts; with Article III:4, for accordin g less favourable treatment to imported parts with 
respect to requirements affecting internal sale, pur chase, distribution and use; and with Article III:5, 
for requiring specified amounts or proportions of pa rts for vehicle manufacturing in China to come 
from domestic sources.  This domestic-content requirement  leads in turn to a violation of Article 2 of 
the TRIMs Agreement.  China has not addressed these arguments.  Its central position remains its 
Article XX of the GATT 1994 defence presen ted as an argument under Article II.  
4.590  China's mischaracterization of the complainants' arguments does not address the claims 
before the Panel. The complainants' arguments rai se the fundamental issue of how one auto part can 
become a motor vehicle by virtue of its use in the internal market, when another, identical part does 
not. China does not deal with this.  It alleges that th e complainants would deny it the right to apply its 
motor vehicle tariff because they have asked China to honour its tariff commitments for auto parts. 
China tells the Panel that everyone does as it does.  There is no evidence to support this proposition, 
which is legally irrelevant even if there were.  
4.591  China also alleges that the comp lainants have selectively ignored  the GIRs and its efforts to 
reframe the complainants' clai ms under Article II of the GATT 1994.  The GIRs, which the 
complainants have addressed in full and in context, are not relevant to this dispute, because this 
dispute is not about applicable tariffs or Article II,  but discrimination against imported auto parts.   
4.592  Canada has already demonstrated the nature of China's violation of Article III of the 
GATT 1994 and the TRIMs Agreement, and will examin e in more detail four  persistent problems 
with China's defence:  (1) the serious systemic im plications of China's Article II claim;  (2) basic 
inconsistencies in China's argument;  (3) the inc onsistency of China's defence with accepted customs 
practices;  and (4) the absence of any Article XX defence for the measures. 
4.593  China's argument concerning the flexibility that  GIR 2(a) should afford to a Member to 
interpret its Schedule would, if accepted, allow Me mbers to justify with impunity the circumvention 
of the national treatment obligation in Article III.  According to China, whenever a Member's tariff 
commitments for parts are lower th an those for complete products, that Member may presume that the 
difference will lead to tariff circumvention and c onsequent economic loss.  This would legitimize the 
application of domestic-content th resholds linked to the imposition of the tariff rate for a completed 
product to parts used to produce that product.  
4.594  Following China's logic, imported auto parts can on ly receive the benefit of a parts tariff in 
two circumstances.  One is where those parts are never used to manufacture a complete product (as in the case of spare parts).  The other is where enough domestic content is incorporated in the complete 
product so that imported parts after further processing no longer have the "essential character" of the 
completed product. 
4.595  China has not presented any evidence of a problem with competition, and, even if there was a 
problem, such a problem is appropriately resolved  by specific means for which specific disciplines 
exist, such as safeguards and anti-dumping duti es, and not through additional illegal tariffs. 
4.596  In its rebuttal submission, China erroneously cl aims that the complainants would deny it the 
opportunity to enforce its tariff rate for motor vehicles .  Canada is happy for China to apply its tariff 
rate for motor vehicles to actual
 motor vehicles as understood in the HS, instead of to alternators or  WT/DS339/R 
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  steering wheels.  China's argument relies on GIR 2(a), while ignoring the express language of 
Article II of the GATT 1994 and the context for the operation of the GIRs as demonstrated by the 
complainants.  
4.597  The Appellate Body has said clearly that the broad purpose of Article III is to avoid 
protectionism in the application of internal tax a nd regulatory measures.  To realize that purpose, we 
apply the tests set down in, for example, Japan – Alcoholic Beverages II  so as to determine whether 
an imported good is like a competing domestic one that may be receiving better treatment in the 
domestic market.  However, if a Member can extend its consideration of the character of an imported 
good to some indefinite point after physical importa tion, in order to evaluate how or by whom the 
good is used, any Article III test becomes an exercise in relativity.  
4.598  Under China's approach, one imported good may be identical to both another imported good 
and a domestic equivalent.  Yet, a Member may gr ant different treatment to the first imported good 
because it was bought by company X and not company Y,  or was used in a process that included over 
60 per cent  imported parts, whereas the other impor ted good was used mostly with domestic parts. If 
we are examining the imported a nd domestic goods under, say, Article  III:4, tariff classification and 
the physical characteristics of the good are now unrelated.  Under the measures, two otherwise-
identical imported goods are given two different ta riffs solely on the basis of their end-use.  
4.599  China tries to confuse this fact by arguing that, if the classification of a particular motor 
vehicle at the border is not obvious, the complainants would limit China to considering that motor 
vehicle as a collection of parts.  In fact, China goes further than that, to sugg est that the complainants 
contend that removing something as simple as a wiper blade requires the classification of the vehicle as a collection of parts.  China is entitled to classi fy parts that have the essential character of a 
finished vehicle, as they are presented in a single shipment at the border, as a finished vehicle; 
however, it is not China's right to withhold a decision  on essential character until it sees fit.   
4.600  China's argument is that the scope of Artic le II should be expanded, and the scope of 
Article III narrowed.  China attempts to justify this by wrapping its Article II defence in an erroneous 
interpretation of WCO, not WTO, obligations.  A nd that defence can be reduced to two flawed 
notions: first, that a Member may unilaterally char acterize and artificially extend the "importation" 
stage to have a Measure covered under Article II;  and, second, that a duty liability can relate to any 
point in time during this artificial "importation" stage.  
4.601  Canada has shown in its written submissions th at both notions are wrong in law. To accept 
otherwise would allow a Member to undermine its tariff commitments by affording protection to 
domestic production through an extension of the cove rage of Article II to whatever point after 
physical importation suits the interests of the importing Member. China's defence does not address the central arguments presented by the complainants, and fa ils to explain why this logic applied to China's 
automobile industry should not also be true for other types of commercial operations that use parts 
charged at a lower rate than finished goods. 
4.602  China maintains that its Schedule serves to protect it from a clear violation of Article III of 
the GATT 1994, and by extension Article 2 of the TRIMs  Agreement, through the presentation of an 
anti-circumvention argument that is found nowhere in the WTO  Agreement.  The Appellate Body in 
EC – Export Subsidies on Sugar  reaffirmed that a Member cannot rely on its Schedule to cure a 
violation of another provisi on of a covered agreement.  
4.603  
The measures effectively nullify WTO disciplines on domestic-content requirements. 
Consider the discipline set out in Article III:5 of the GATT 1994 concerning the application of WT/DS339/R 
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  internal quantitative regulations, something that China simply ignores.  If a Member applies a 
threshold for domestic content, it would still be subj ect to the discipline imposed by Article III:5.  
Since China cannot marry the restriction on imposing such measures in the inte rnal market with an 
argument that the threshold is necessary to permit th e application of tariff lines, it avoids the issue 
entirely. 
4.604  Further, the broad scope for Article II:1(b) of the GATT 1994 that China has invented cannot 
exist in the same legal universe as, for example,  the clear restriction in Article III:4 against 
discrimination in the internal sale, offering for sal e, purchase or distribution of an imported good.  
Canada has established, and China has not denied, that the measures discriminate in each of these 
ways against the sale, purchase and distribution of fo reign auto parts.  China has maintained that 
Articles II and III are binary.  This ignores the fact that Article III can, in certain instances, apply at 
the border, such as with Article III:4.  Nothing in the text of Article II authorizes the operation of the 
measures in the face of the prohibition in Ar ticle III:4, and China does not address this. 
4.605  China argues that the measures are justified as th ey are consistent with widespread Member 
practice, that it can classify goods on the basis of their end-use, and that it can establish different 
points in time at which importation may occur.  It  suggests that documentation it requires can justify 
this. And it argues, in the context of the term "as pr esented", that it can link th e distinct legal concepts 
in Article II into one indistinguishable whole.  Ther e is no practice, and no lega l justification in either 
the text of Article II or the statements of  the complainants to support these claims. 
4.606  All parties, as well as the WCO, agree that pr oper classification is made on the basis of the 
state of a good when it is presented at the border.  Yet China "classifies" parts based on their status 
once they are assembled in a final vehicle by a vehicl e manufacturer.  There is nothing in the text of 
Article II to justify this reading of the WTO  Agreement.  
4.607  Canada has argued that the general process of im portation under Article II is distinct from the 
single point of assessment for ordinary customs duti es.  This is evident from the distinction between 
the term "impose as a condition of" that China sugg ests can be read into Article II:1(b) of the 
GATT 1994, first sentence, and the term "on their impor tation" that is actually there.  China argues, 
incorrectly, that the fact that a good may be rel eased into an importer's custody prior to payment of 
duties justifies the conclusion that any duty sub sequently assessed can relate to the use of the good 
after release.  In China's words, "the character ization of a particular charge … will depend upon the 
reason or event  that triggered the imposition of the charge".  
4.608  The reason for imposing a charge is legally irrelevant, as EEC – Parts and Components  
makes clear. And there can only be one "event" under Article II:1(b), first sentence, namely the 
assessment of the product in a given shipment b ased on its objective characteristics at the border.  
That reason or event does not change for ordinary cu stoms duties, despite China's attempt to conflate 
the first and second sentences of Article II:1(b).  
4.609  China argues that the flexibility to impose othe r charges under Article II applies to ordinary 
customs duties, and tries to link its measures to other charges levied at importation, including anti-
dumping duties, countervailing duties and other duties or charges. But this case is about the 10 per 
cent  rate of ordinary customs duty that China is permitted to levy against imported auto parts, and no 
more. 
4.610  Canada has demonstrated that documentary ev idence in context is only one aspect of this 
assessment.  Yet China continues to argue that the documentation required under the measures is a 
justification for its classification practices, claiming that "a customs declaration or other documentary  WT/DS339/R 
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  evidence" is sufficient, in order to classify importe d auto parts as automobile parts characterized as 
complete vehicles.  This ignores the fact that im porters are required to s ubmit this documentation as a 
means to obtain an import licence.  And he measure s deem parts to be whole vehicles even in the 
great majority of instances under the HS Classifica tion where they should be considered as parts. 
4.611  Given that the proper classification is based on the state of the goods in a single shipment at 
the border, China's recourse is to stretch a singl e WCO decision to stand for a general proposition that 
Members may classify split shipments as if they arrived together.  
4.612  Considering both the reality of the automobile market and the nature of China's defence under 
GATT Article XX as applied to the whole of the me asures, the only reasonable conclusion is that 
Article XX does not offer a defence to China.  The measures are designed to support and develop 
China's domestic industry in a manner inconsistent w ith the requirements of Article XX(d).  They are 
arbitrary in application and expressly designed to restrict trade. 
4.613  Canada has shown that China's Article II ar gument is an Article XX(d) of the GATT 1994 
defence by another name.  Even if one accepts th at the measures may be considered in respect of 
Article II, the measures are applied such that some identical products receive different tariff treatment 
in a manner that is inconsistent with China's Sche dule.  In respect of goods presented at the border, 
this would result in a breach of Article II;  since the Schedule itself (or its incorporation into Chinese 
law) seems to be the grounds for China's invocatio n of Article XX(d), its misapplication can hardly 
then be the reason for turning to Article XX(d) in the first place.  
4.614  By arguing that there is an effort by vehicle manufacturers to get around the tariff rates that it 
negotiated, China creates  a legal problem that does not exist, namely tariff "circumvention".  It 
establishes arbitrary thresholds to define a motor ve hicle, which allows it to presume "circumvention" 
if the artificial thresholds are reached. 
4.615  According to China, there should be special rul es applied to auto manufacturers in respect of 
otherwise-clear tariff headings, simply because a company may have sourced a large quantity of parts 
outside China.  The reason for this, says China, is that manufacturers could evade duty liability for 
complete motor vehicles by arranging to impor t parts and components through suppliers. 
4.616  This position is untenable.  Canada demonstrat es this with a series of slides focussing on 
sourcing of the key parts for a brake system whic h, under the measures, constitute a Deemed Imported 
Brake Assembly.  The normal chain of supply is  a complex web of parts manufacturers, joint 
ventures, commercial linkages and temporary or pe rmanent integration of operations within and 
across borders, often with a single company playing multiple roles.  
4.617  Slide 1 describes what China says is happening:  all the parts necessary to assemble a vehicle 
are together at one location abroad.  Instead of bei ng shipped together, the shipment is separated into 
two shipments.  Those parts are then received by  one joint-venture vehicle manufacturer, which uses 
the parts to assemble a complete vehicle.  Chin a has presented no evidence that this ever happens. WT/DS339/R 
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Page 108 
  
  Slide 1: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Chinese Scenario of « Circumvention »)
Outside Chinese
Customs Territory
Inside Chinese 
Customs Territory
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
Brake Assembly and
all other parts necessary to 
assemble a Whole
Vehicle Ford/
Mazda/
Changan
Legend:
= Previously shown business transaction 
= Newly shown business transaction
= Foreign Owned
= Sino-Foreign Joint Venture
= Chinese OwnedShipment 1
Shipment 2Parts Manufacturer
Controlled by Ford or 
MazdaInternal Market
 
4.618  Now let us look at the real commerc ial world, at how parts sourcing actually  operates in the 
auto industry.  In every scenario , the measures deem the resulting br ake assembly manufactured by a 
vehicle manufacturer to be imported, with the con sequence of the application of the motor vehicle 
tariff. 
4.619  Slide 2 shows  a specialized parts manufacturer abroad  that ships a full brake assembly 
directly to a vehicle manufacturer in China.  Th e vehicle manufacturer needs to source separately all 
other parts for the vehicle. 
Slide 2: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 1)
Tier 3
Outside Chinese
Customs Territory
Inside Chinese 
Customs Territory
Tier 2Tier 3
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
Full Brake Assemblies
Manufactured in US, EC, Japan 
e.g. by Japan Brake (Japan), 
Brembo (EC)Ford/
Mazda/
Changan
  WT/DS339/R 
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 WT/DS342/R 
 Page 109 
  
  4.620  Slide 3 depicts separate shipments from differe nt specialized parts manufacturers often in 
different countries, all of which are shipped directly from abroad to joint venture vehicle manufacturers in China.  
Brake Master Cylinders 
Manufactured in US, Canada, Japan, 
Korea, EC
e.g. by Delphi (US), FTE (EC)Slide 3: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 2)
Tier 2Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese 
Customs Territory
Ford/
Mazda/
Changan
Toyota/
FAWTier 2Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks 
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC) 
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, 
Japan, Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada 
(Canada), Swi Tong (Chinese Taipei), 
Hyundai Mobis (Korea)Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)Hyundai/
Beijing Auto
VW/FAWGM/
SAICSuzuki/
Changan
 
4.621  Slide 4 depicts a scenario in which three ke y parts are shipped to foreign-owned parts 
manufacturers in China, to be incorporated with pa rts produced in China by those companies and then 
shipped to vehicle manufacturers, which combines tho se parts with other brake parts shipped directly 
to them from abroad.  
Brake Master Cylinders 
Manufactured in US, Canada, Japan, 
Korea, EC
e.g. by Delphi (US), FTE (EC)Slide 4: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 3)
Tier 2Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese 
Customs Territory
Wholly Owned Subsidiaries of 
Foreign Parts  Manufacturers 
e.g. Delphi, Bosch Ford/
Mazda/
Changan
Toyota/
FAWTier 2Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks 
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC) 
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan, 
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada), 
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)Hyundai/
Beijing Auto
VW/FAWGM/
SAICSuzuki/
Changan
 WT/DS339/R 
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Page 110 
  
  4.622  Slide 5  adds the involvement of fore ign-owned suppliers in China that also produce parts for 
the brake system, with material and parts sourced both in China and abroad.  The part for the brake 
system is then shipped either to a foreign-owne d parts manufacturer or directly to a vehicle 
manufacturer, and is incorporated into the brake assembly of a vehicle. 
Brake Master Cylinders 
Manufactured in US, Canada, Japan, 
Korea, EC
e.g. by Delphi (US), FTE (EC)Slide 5: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 4)
Tier 2Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese 
Customs Territory
Wholly Owned Subsidiaries of 
Foreign Parts  Manufacturers 
e.g. Delphi, Bosch Ford/
Mazda/
Changan
VW/FAWGM/
SAIC
Toyota/
FAWTier 2Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks 
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC) 
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan, 
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada), 
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)Suzuki/
Changan
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)Hyundai/
Beijing AutoChinese Owned
Tier 3Chinese Owned
Tier 3
Foreign Owned
Tier 2
 
4.623  Slide 6 adds the involvement of joint ventures in the parts industry, which import some key 
parts, source others parts within China, and ship e ither to foreign parts manufacturers or directly to 
vehicle manufacturers. 
Brake Master Cylinders 
Manufactured in US, Canada, Japan, 
Korea, EC
e.g. by Delphi (US), FTE (EC)Slide 6: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 5)
Tier 2Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese 
Customs Territory
Wholly Owned Subsidiaries of 
Foreign Parts  Manufacturers 
e.g. Delphi, Bosch Ford/
Mazda/
Changan
VW/FAWGM/
SAIC
Toyota/
FAWTier 2Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks 
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC). 
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan, 
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada), 
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)Suzuki/
Changan
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)Hyundai/
Beijing AutoTier 3Tier 3
Tier 2
Joint Ventures between Foreign 
Parts Manufacturers and Domestic 
Chinese Companies
e.g. CSG/TRW, TBK/FAW, 
CAS/SAIC. AGP/FTEJoint Venture
Tier 2
  WT/DS339/R 
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 WT/DS342/R 
 Page 111 
  
  4.624  Slide 7 adds the involvement of wholly ow ned Chinese parts manufacturers. The assembly 
still has enough imported key part s to be Deemed Imported.  
Brake Master Cylinders 
Manufactured in US, Canada, Japan, 
Korea, EC
e.g. by Delphi (US), FTE (EC)Slide 7: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Most Likely Real-market Scenario)
Tier 2Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese 
Customs Territory
Wholly Owned Subsidiaries of 
Foreign Parts  Manufacturers 
e.g. Delphi, Bosch Ford/
Mazda/
Changan
VW/FAWGM/
SAIC
Toyota/
FAWTier 2Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks 
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC). 
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan, 
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada), 
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)Suzuki/
Changan
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)Hyundai/
Beijing AutoTier 3Tier 3
Tier 2
Joint Ventures between Foreign Parts 
Manufacturers and Domestic Chinese 
Companies
e.g. CSG/TRW, TBK/FAW, CAS/SAIC. 
AGP/FTE
Chinese Owned Companies, both
Wholly Independent (e.g. Wanxiang, 
Shandong Gold Phoenix) or owned 
by Chinese Vehicle Manufacturers 
e.g. CAFF, DETCTier 2Chinese Owned
Tier 2
 
4.625  The last diagram emphasizes just how artificia l the entire Chinese circumvention argument 
really is.  China argues that it can aggregate the im ported content of all brake parts in China, even 
though  those parts pass through multip le independent parties in the internal market and are combined 
with domestic parts.  China insists that every imported part must be linked by a vehicle manufacturer to a specific production model, at the same time as it  is aggregated in what China characterizes as a 
broad effort to circumvent the motor vehicle rate. It is impossible to reconcile this with China's 
Article XX(d) argument.  Commercial reality is far removed from the environment in which China 
suggests circumvention is a serious, if unfounded po ssibility.  Simply, there is no necessity to justify 
the measures, and China's defence fails entirely. 
P. O
RAL STATEMENT BY CHINA AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL  
4.626  The central issue in this dispute is whether China's tariff provisions for motor vehicles have 
any meaningful effect.  The complainants' argument  leads to the conclusion that China cannot, in 
practice, apply its tariff for motor vehicles becau se importers can manipulate at will the boundary 
between a motor vehicle and parts of a motor vehicl e to obtain the lowest rate of duty.  The Panel 
must reject this argument and its conclusion. 
4.627  China's tariff provisions for motor vehicles must  be interpreted to have meaningful effect 
under the terms of Article II of the GATT 1994.  This necessarily entails drawing a line between motor vehicles and the parts of motor vehicles, and between the form and the substance of what is 
imported in order to reflect commercial reality of the transaction.   
4.628  The question before the Panel is whether the co mplainants have demonstrated that the manner 
in which China has drawn these two lines is inc onsistent with China's WTO obligations.  The WT/DS339/R 
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  complainants have failed to meet this burden, especia lly in light of their own practices and in light of 
the WCO's responses to the Panel's questions. 
1. The line between complete motor ve hicles and parts of motor vehicles 
4.629  Within the HS, the line between parts and w holes is expressed in terms of the "essential 
character" test under GIR 2(a).  The complainants have failed to demonstrate that the measures at 
issue are inconsistent with applicati on of the "essential character" test.   
4.630  The WCO's responses to the Panel's questions strongly confirm this conclusion.  The WCO 
has explained that Chapter 87 of the HS "presents unique classification challenges" in light of its 
simultaneous provision for motor vehicles and for va rious parts and assemblies of motor vehicles.  
The WCO has explained that "the borderlines among these headings" have not been examined by the 
HS Committee. 
4.631  The WCO response has made clear that there is a difficult issue of classification involved in 
distinguishing between motor vehicles and parts of mo tor vehicles, and that the application of GIR 1 
does not, by itself, resolve this classification issue.  The WCO has also confirmed that the application 
of the essential character test reflected in GIR 2(a) to a specific set of facts is "within the purview of 
national customs administrations." 
4.632  The complainants opted not to raise a dispute concerning the application of Decree 125 to 
specific combinations of motor vehicle parts and com ponents.  They have also failed to offer a clear 
position on the factors that are relevant in applyi ng the essential character t est.  The complainants 
have, therefore, failed to demonstrate that the ch allenged measures necessarily result in an improper 
application of the essential character test to motor vehicle parts and components. 
2. The line between form and substance 
4.633  Under GIR 2(a), the condition of goods "as presente d" at the border defines the parameters in 
which customs authorities may evaluate the goods con cerned.  The interpretation of  "as presented" 
defines the extent to which China can classify a shipment of auto parts and components on the basis 
of evidence that it is one of a series of shipments th at, taken together, have the essential character of a 
motor vehicle and can be assembled into a motor vehicle within the parameters of the assembly 
operations described by GIR 2(a). 
4.634  According to the WCO, the HS "is silent" on the meaning of  the term "as presented".  China 
considers that the central issue befo re the Panel, at this juncture, is  how it should proceed to resolve 
the present dispute in light of the absence of an agreed  interpretation of this term by the WCO, and in 
the absence of the complainants' failu re to establish an interpretation of this term that plainly results 
from the application of customary principles of international law. 
4.635  The question of whether the challenged measur es result in proper classification of motor 
vehicles under GIR 2(a) is central to the resolution of the present dispute.   Both sides of this dispute 
have placed significant weight on their respectiv e understandings of the term "as presented."  The 
complainants' basic thesis is that the challenged measures do not result in the collection of a valid 
customs duty because the charges are not based on the condition of auto parts and components "as 
presented" at the border.  Therefore, in their vi ew, the challenged measures impose "internal" charges 
subject to the disciplines of Article III and th e TRIMs Agreement.  China, on the other hand, 
considers that the measures are based on a proper understanding of the term "as presented," because 
the classification is based on the declaration of the importer that an entry of parts and components is  WT/DS339/R 
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  related to other entries of parts and component s through their common assembly into a complete 
article.  China therefore considers that the challe nged measures collect ordinary customs duties on 
motor vehicle parts and components on their importation into its customs territory, and that the 
collection of these duties is consistent with its rights and obligations under Article II.   
(a) The complainants have not articulated an interpretation of the term "as presented" 
4.636  The complainants have offered only circular de finitions of the term "as presented".  Their 
definitions refer to goods "as presented" to custom s or to the "state of a product upon arrival at the 
border".  These definitions beg the question of what  the term "as presented" means.  They do not 
clarify whether the term refers solely to the physic al characteristics of a single container, to the 
contents of multiple containers, or whether it can encompass a consideration of the documentary 
evidence accompanying the shipment. 
4.637  As the complaining parties in this dispute, the burden is on the complainants to establish that 
the challenged measures are inconsistent with China' s obligations under the relevant provisions of the 
covered agreements.  In the absence of any articula tion of the term "as presented," and in the absence 
of any substantiation of this term in accordance wi th customary principles of international law, the 
complainants have no basis to assert that Decree 125 is  inconsistent with the HS or with international 
customs practice. 
(b) The complainants' implicit interpretation of GIR 2(a) lacks foundation 
4.638  The complainants implicitly propose an interpretation of GIR 2(a) requiring customs 
classification according to the form in which the importer "presents" a collection of parts and 
components.  On this interpretation, importers can "present" parts and components of an article in 
whatever form they wish, and customs authoriti es must accept the proposed classification without 
regard to other evidence which shows that the im porter is importing parts and components that have 
the essential character of the complete article. 
4.639  The complainants have failed to provide any support for the proposition that GIR2(a) 
precludes the consideration by customs authoritie s of whether multiple shipments of parts and 
components are related to each other through their common assembly into a complete article.  The complainants have merely asserted this interpretation of  GIR 2(a).  It is an interpretation that fails to 
give effect to the role that GIR 2(a) plays within the HS, as it leaves the relationship between 
complete articles and parts of those articles entirely at the discretion of the importer.  It is, moreover, 
an interpretation that is contradicted by the co mplainants' own arguments and customs practices.   
3. Three paths toward the resolution of this dispute 
4.640  The complainants have advanced claims that  the challenged measures violate Article III and 
the TRIMs Agreement, as well as Article II.  In  order to establish any of these claims, the 
complainants must demonstrate that the challenge d measures do not collect ordinary customs duties 
that China is allowed to collect under its Schedule of Concessions.  The complainants have failed to 
meet this burden.  China, by contrast, has demonstrat ed that it is consistent with the context of GIR 
2(a) to interpret the term "as presented" in a ma nner that allows customs authorities to draw a line 
between the substance of what an importer brings in to the customs territory and the form in which it 
does so.   
4.641  The WCO has advised the Panel that there is  no agreed interpretation of the term "as 
presented" in GIR 2(a).  This suggests that th ere is a known and unresolved ambiguity within WT/DS339/R 
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  GIR 2(a) concerning the line between form and substance in the classification of parts and 
components.  The ambiguity in GIR 2(a) is suggested not only by the absence of an authoritative interpretation of the term "as presented" within th e WCO, but also by the complainants' inability to 
articulate and substantiate what th is term means under esta blished international nor ms, or by reference 
to other interpretive principles under the Vienna Convention .  China does not consider that it is 
consistent with Article 3.2 of the DSU to resolve th ese types of policy questions within the context of 
dispute settlement. 
4.642  There are three possible ways forward for the Pane l to resolve this case.  First, the Panel could 
find that the complainants have failed to meet thei r burden of demonstrating the inconsistency of the 
measures at issue with China's WTO obligations.   
4.643  Second, the Panel could recognize that China, unlike the complainants, has articulated an 
understanding of the term "as presented" in GIR 2(a), and has demonstrated that this interpretation is 
supported by the interpretive principles of the Vienna Convention.   This interpretation supports 
China's position that the challenged measures are consistent with its rights and obligations under 
Article II. 
4.644  Third, the Panel could that find that the resolution of this dispute is contingent upon the 
interpretation of a term that, at present, remains ambiguous.  This is precisely the circumstance in 
which the doctrine of in dubio mitius  is applicable.  In the present context, the application of this 
doctrine supports an interpretati on of the term "motor vehicles" in China's Schedule of Concessions, 
and an interpretation of the term "as presented" in GIR 2(a), that preserves China's sovereign authority 
to define and enforce the boundaries between motor vehicles and parts of motor vehicles, and to ensure that all of its tariff provisions have effect.  By the same principle, th e complainants' implicit 
interpretation of these terms, which would deprive China's tariff provisions for motor vehicles of any 
meaningful effect, must be rejected as inconsistent with the doctrine of in dubio mitius .  This 
ambiguity can be resolved, either by the WCO (as the WCO has suggested) or by the General Council 
in accordance with Article IX:2 of the WTO Agreement.  Once there is a clear resolution of this issue, 
it would be possible for a WTO dispute settlement pa nel to evaluate Decree  125 in relation to the 
standards that are adopted. 
V. ARGUMENTS OF THE THIRD PARTIES 
5.1 The arguments presented by Argentina, Australia , Brazil, Japan and Mexico in their written 
submissions and oral statements are reflected in the summaries below.
63 
A. THIRD PARTY SUBMISSION BY ARGENTINA  
1. The challenged measures are not border measures under Article II of the GATT 1994  
5.2 One of the main points in dispute is whether the measures64 at issue constitute either border 
measures governed by Article II of the GATT 1994 or rather internal taxes ruled by Article III:2 of 
the GATT 1994 or internal regulations referre d to in Article III:4 of the GATT 1994.  
                                                      
63 The summaries of the third par ties' arguments are based on the executive summaries submitted by 
the third parties to the Panel, in the case of Argentina and Japan;  and on the oral statements submitted by 
Australia, Brazil and Mexico.  Footnotes in th is section are those of  the third parties. 
64 The Measures challenged are: "Automotive Policy Order 2004"(Exhibit JE-18); "Decree 
125"(Exhibit JE-27); "Announcement 4" (Exhibit JE-28).  WT/DS339/R 
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  5.3 In order to be considered a border measure under Article II:l(b) such measure should be a 
duty or duties charged upon "importation into the te rritory" or in "connection with the importation".
65 
Under the measures in dispute, a duty for whole vehicles is charged upon assembly of the imported 
parts. The fact that the duty is charged after th e verification by the authorities and once the vehicle 
was manufactured is a feature that tells that the condition for the application of the duty is the 
assembly and manufacture of the vehicle and not the importation of the parts.  
5.4 China suggests that its measures are conditione d upon importation because the auto parts are 
not in free circulation up until the point where the pa rts and components are as sessed at the tariff rate 
for motor vehicles if the manufacturer uses the imported parts and components as part of a larger 
collection of imported parts having the essential character of a motor vehicle.66 The panel in EEC -
Parts and Components  understood that the treatment of imported goods as not being "in free 
circulation" cannot support the conclusion that the duties are being levied "in connection with 
importation" within the meaning of Article II:l(b).67 
5.5 Furthermore, China seeks to demonstrate that the charges collected after the importation are 
border measures because the collection is administra ted by Customs. Argentina considers this should 
be carefully assessed since a Member could circ umvent its Article III of the GATT 1994 obligations 
simply by appointing the Customs Office as the collector agency of an internal charge.  
5.6 The manner in which the measures at issue in this  dispute work suggests that they are internal 
taxes and internal regulations applicable only to imported parts.  Therefore such measures fall under 
the provisions of Article III:2 and Article III:4 of the GATT 1994.  If the Panel were to find any 
inconsistency of the measures with the above men tioned provisions regardin g national treatment, a 
finding on the consistency of Chin a's measures with Part 1, paragr aph 7.2 of the Accession Protocol 
of China would also be relevant.  
2. China's measures are not similar to anti- dumping or countervailing anti-circumvention 
measures  
5.7 Argentina considers it is not appropriate to make a parallelism between ordinary customs 
duties and antidumping or countervailing anti-circum vention measures. China makes such parallelism 
in order to justify its measures as being anti-circumvention measures.  
5.8 Under an antidumping or countervailing anti-ci rcumvention measures the duties are charged 
at the border at the time of importation and not sub sequently or dependent upon their incorporation to 
whole parts. The difference between China's measures and AD/CVD anti-circumvention measures 
suggests that China's measures are not anti-circumve ntion ones, and that therefore there is not a 
common, consistent or discernible practice.68  
5.9 Admitting that China's measures are imposed to prevent circumvention of ordinary customs 
duties69 would lead to include within Article II of  the GATT 1994, measures that involve burdensome 
administrative procedures prior and after importa tion only applicable to manufacturers of imported 
parts, as well as duties charged conditioned upo n how and which imported parts the manufacturer 
decides to fit in the final product. This would allo w restrictions to imports of other Members' goods 
                                                      
65 See GATT Panel Report on EEC - Parts and Components , para 5.8. 
66 China's first written submission, para 46. 
67 GATT Panel Report on  EEC - Parts and Components , para 5.7. 
68 Appellate Body Report on US - Gambling, para 192. 
69 China's first written submission, para. 112. WT/DS339/R 
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  not committed in their Schedules of Concessions under-covered by the protection of an alleged 
anti-circumvention measure.
70  
3. The measures are not justified under Article XX(d).  
5.10 China states that the challenged measures are justified under Article XX(d) of the 
GATT 1994 as measures that are necessary to secu re compliance with China's customs law.71  I n  
order for a measure to be considered "necessary" un der Article XX(d) one of the features involved in 
the "weighing and balancing" is the respective impact of the measure on international commerce.72 
5.11 The differential treatment granted to imported pa rts results in a restriction on the entry of 
imported parts in the Chinese automobile market. The Appellate Body in Korea -Various Measures 
on Beef found that:  "A measure with a relatively slight impact upon imported pr oducts might more 
easily be considered as 'necessary' than a meas ure with intense or broader restrictive effects. ''73  The 
effects the challenged measures have on imported parts result in a restriction to commerce.  Therefore 
the "necessity" test is not satisfied, preventing Chin a to justify the measures under Article XX (d).  
5.12 Finally, if the Panel where to analyse the ju stification of the measures under the chapeau of 
Article XX, Argentina considers pertinen t the rulings of the Appellate Body in US - Shrimp  and US -
Gasoline regarding the prevention of "abuse of the exceptions of Article XX."74  
B. THIRD PARTY SUBMISSION BY JAPAN  
1. Article III of the GATT 1994 applies to the measures 
5.13 The duties imposed under China's measures are appropriately classi fied as internal charges 
under Article III:2 of the GATT 1994 and the measures as internal regulations under Article III:4.  
Under GATT and WTO jurisprudence, it is not the labe l that Members attach to trade measures that is 
determinative of whether they constitute internal  measures or border measures, but their actual 
operation. 
(a) Relevant WTO and GATT case law 
5.14 In EC – Bananas III , the EC argued that its import licensing system was a border measure not 
subject to Article III.  The Appellate Body, how ever, confirmed the Panel's conclusion that the 
procedures went "far beyond" the "mere requirements"  needed to administer a tariff-rate quota system 
and thus fell within the scope of Article III of the GATT 1994.75 
5.15 Several GATT Panels also confirm this approach.  At issue in EEC – Parts and Components, 
was an EC regulation intended to prevent circumven tion of anti-dumping duties.  Pursuant to the EC 
regulation, duties were payable on assemblies produ ced in the EC that contained a significant 
proportion of imported parts, when the finished product imported from the country would have been 
                                                      
70 See also Japan's third party submission, para.35. 
71 China's first written submission, para. 201. 
72 China's first written submission, para. 208. 
73 Appellate Body Report on Korea -Various Measures on Beef , para. 163. 
74Appellate Body Report on US - Shrimp , para. 116, quoting Appellate Body Report on US - Gasoline , 
page 22. 
75 Appellate Body Report on EC - Bananas III , para. 211.  WT/DS339/R 
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  subject to anti-dumping duties.  According to the GATT Panel these "anti-circumvention duties" were 
not imposed conditional on importation or at  the time of importation of the product.
76 
5.16 Similarly, in EEC – Animal Feed Proteins , the Panel decided that a security deposit for the 
importation of vegetable protei ns should be examined under Article III, not Article II.77  The Panel's 
conclusion was in significant part based on its evaluation of whether the charges at issue were "collected at the time of, and as a condition to, th e entry of the goods into the importing country."
78  
5.17 Finally, in Belgian Family Allowances , the Panel found that the disputed levy was an internal 
charge subject to Article III, not a tariff subject to  Article II.  The Panel noted that the levy was 
"charged, not at the time of importation, but when the purchase price was paid", and that the levy was 
assessed "only on products purchased by public bodies for their own use and not on imports as such."
79 
(b) The Chinese measures result in violatio ns of Article III of the GATT 1994 
5.18 The duties imposed under the measu res are internal charges and not customs duties as they 
are not imposed conditional merely on importation of the parts, but rather on the way the finished car 
is assembled or produced in China and thus the way in which the imported parts are used.  Several 
features of the measures demonstrate this. 
5.19 First, the measures require the collection of ch arges only after auto parts have been imported 
and assembled into a complete vehicle, not upon th eir presentation at the border.  Under Decree 125, 
the duty on a part is assessed following assembly and production, rather than directly upon 
importation (cf. Arts. 7, 11, 27-35).  The level of  the duty on imported parts thus depends on their 
final assembly into a completed vehicle in China.  If the imported parts will be incorporated in a car, 
which, pursuant to Decree 125, does not have suffi cient local content, the imported parts will be 
subject to customs duties that are normally pa yable on a completely built up imported car (cf. 
Decree 125, Arts. 21 and 22);  the final duty on the pa rts is only assessed after their assembly into 
entire automobiles (cf. Art 28);  whether a part bears the features of a complete vehicle is determined 
after the parts have been assembled (cf. Art 5). 
5.20 Second, the charges are applicable primarily to  automobile manufacturers, rather than the 
importers of specific auto parts.  Manufacturers are responsible for the payment of duties even if the 
parts were purchased in the domestic market from th e suppliers that previously imported them (cf. 
Decree 125, Arts. 27-35). 
5.21 Third, verification by customs authorities at the site of the manufacturer (cf. Decree 125, 
Arts. 17-20) occurs following assembly and production.  When viewed in combination with the other 
elements listed here it certainly confirms the internal character of the measures. 
5.22 Finally, duties are levied according to how impor ted auto parts are incorporated in domestic 
production (cf. Decree 125, Arts. 21-24).  Indeed, the "tariff" rate of the part can change during the 
production of the vehicle, if the mix of imported parts used in assembly changes (cf.  Decree 125, 
Art. 20).  Accordingly, duties payable under Decree 125,  while in name "customs duties", are in fact 
                                                      
76 GATT Panel Report on EEC – Parts and Components , para. 5.5. 
77 GATT Panel Report on EEC – Animal Feed Proteins . 
78 Id., para. 4.16 (b) (citing Reports of the Sub-Committee at the Havana Conference at pages 62-63). 
79 GATT Panel Report on Belgium Family Allowances , para. 2. WT/DS339/R 
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  internal charges subject to Article III:2 of the GATT 1994, rather than customs duties subject to 
Article II. 
(c) China's first written submission does not refute the evidence that the challenged measures are 
internal charges subject to Article III of the GATT 1994 
5.23 In China's First Written Submission (hereinafter referred to as FWS Chin a), China argues that 
three factors suggest that the measu res in dispute impose customs duti es, not internal charges. (cf. 
FWS China, para. 44)  Japan submits some obs ervations as to why China's assertions are not 
convincing. 
5.24 First, China asserts that the importer "will ordinarily declare at the time of importation 
whether an entry of auto parts and components will be used to assemble a complete imported 
vehicle."
80  The fact that a measure requires some action at the time of importation does not mean that 
the measure is therefore a border measure.  Indeed, in EEC – Animal Feed Proteins , a GATT Panel 
found that a security deposit for the importation of a good should be examined under Article III.  
Furthermore, it is important to note that the cha llenged measures require a declaration on the content 
of the completed auto vehicle after it is manufactured  in China, not on the contents of a particular 
consignment upon importation.  Thus, even if a cons ignment contains only engines, the importer must 
declare it to be a "deemed complete vehicle" depe nding on what other parts the engine will be paired 
with as part of the manufacturing process. 
5.25 Second, China argues that under the measures, auto parts entering China remain in bonded 
status and are not in free circulation in its customs territory. (cf. FWS China, para. 46)  However, this 
assertion is irrelevant to the Panel's consideration.  The GATT Panel in EEC – Parts and Components  
concluded that "[t]he fact that the EEC tr eats imported parts and materials subject to 
anti-circumvention duties as not being 'in free circ ulation' … cannot … support the conclusion that the 
anti-circumvention duties are being levied 'in conne ction with importation' within the meaning of 
[GATT] Article II:1(b)".81  To find otherwise, said the panel, would mean that the basic objectives 
underlying Article II and III could no longer be achieved.  
5.26 Finally, China asserts that the "challenged measu res are administered by the Customs General 
Administration of China" and that "duties collected  pursuant to Decree 125 are classified as ordinary 
customs duties. (cf. FWS China, para. 47)  This ass ertion is not relevant either.  The GATT Panel in 
EEC – Parts and Components  specifically expressed concern that if the description or categorization 
of a charge under domestic law were relevant to wh ether the charge is covered by Article III of the 
GATT 1994, a Member "could in particular impose ch arges on products after importation simply by 
assigning the collection of these charges to the cu stoms administration and allocating the revenue 
generated to their customs revenue."82  The Panel thus rejected that the disputed charge was covered 
by Article II. 
2. Alternatively, Article II of the GATT 1994 applies to the measures 
5.27 If the Panel were to characterize the charges at  issue as customs duties, Japan supports the 
view of the complainants that the Chinese measures are inconsistent with Article II of the GATT 
1994.  
                                                      
80 See id. para. 45. 
81 GATT Panel Report on EEC – Parts and Components , para. 5.7 (original emphasis). 
82 GATT Panel Report on EEC – Parts and Components , para. 5.7.  WT/DS339/R 
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  (a) China's measures result in a prima faci e violation of its tariff commitments 
5.28 China's Schedule of Concession on autos and auto parts is based on the nomenclature 
prescribed in Chapter 87 of the HS Code titled "vehic les other than railway or tramway rolling-stock, 
and parts and accessories thereof".  The ordinary me aning of these headings within their context is 
clear: when a good constitutes one of the parts descri bed in headings 8706 – 8708 it is to be classified 
under those headings.  As a car body without en gine and certain other components cannot be 
considered a "motor car or other motor vehicle" w ithin the ordinary meaning of these terms, but only 
as a part or parts of it, it cannot be classified as a whole vehicle but only as its individual component 
part.   
5.29 As China acknowledges, the " essential character" rule as form ulated in the HS and its 
Explanatory Notes constitute relevant context in interpreting its tariff schedule. (cf. FWS China, 
para. 84).  Under this rule, only if imported parts possess the "essential character" of the complete or 
finished article, will they be considered the comple te or finished article.  Any application of the 
measures imposing whole vehicle duties on parts that do not have the essential character of the whole 
vehicle violates Article II. 
(b) China inappropriately combines goods imported separately 
5.30 In keeping with its 'anti-circumvention' theo ry, China asserts that th e key interpretive issue 
before the Panel is whether its challenged measur es are based on a valid interpretation of the term 
"motor vehicles".  China's defense is based on the no tion that all it is doing is to assess the nature of 
imported products based not on the form in which th ey are imported but on the extent to which they 
are combined with other imports in the end product.  China suggests that this would be consistent with 
Article II of the GATT 1994 and with the customs practices of other Members. 
5.31 In reality, there is nothing in the ordinary meaning of China's classification headings for 
vehicles or auto parts to support any distinction in tariff rates depending on the ultimate use of 
imported car parts.  Indeed, in interpreting China's tariff schedule, the Panel has to give meaning not 
only to China's commitment on "motor vehicles" but equally to its commitments on motor vehicle 
"parts". 
5.32 As to context, the "essential ch aracter" rule under the HS whic h is incorporated in China's 
Schedule, stipulates that, if imported parts "as presented" possess the "essential character" of the complete or finished article, they will be considered  the complete or finished article.  Thus, where a 
consignment of imported car parts possesses the essential character of a motor car or other motor 
vehicle as they are presented to customs, they can  be considered covered by heading 8702-8704.  
However, if they constitute "as presented" a "veh icle chassis fitted with engines and bodies" covered 
by headings 8706–8708 or "auto part[s]" covered by headings 8407-8408, then such imported parts 
cannot be considered as covered by headings 8702-8704. 
5.33 Subsequent practice of Members also shows that goods presented in multiple consignments 
cannot be considered together as one article.  As a rule, Japan's customs author ities, for example, base 
their classification decisions on the imported produc ts at the time of customs clearing; and goods 
imported in different consignments are classified jointly only in exceptional cases.  Japan understands 
that the same is true in the EC
83.   
                                                      
83 European Court of Justice, Case C-35/93, Develop Dr. Eisbein GmbH & Co , 16 June 1994, 
ECR [1994] I-2655, para. 19, held that "(a)n article is to be considered to be imported unassembled or WT/DS339/R 
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  5.34 Where China refers to the US and EC rules on sp lit consignments, it fails to clarify that these 
are exceptional provisions.  These are applied at the request and to the benefit of an importer, who 
wants to avoid for instance the administrative burden of having to file separate customs declarations 
for one consignment that has been divided up in diff erent shipments. (cf. FWS China, para.157-159)  
Such rules apply in limited cases, and are designed no t to counter circumvention but are applied at the 
importer's choice to ensure that the importer of record  is not penalized for a carrier's decision to split 
shipments. 
5.35 Accordingly, even if the duties imposed under the measures are considered customs duties, 
any application of the measures where part(s) im ported into China (in one consignment) do not 
possess the essential character of the whole vehicle r esults in a violation of China's Schedule and 
Article II of the GATT 1994. 
3. Tariff classification of CKD and SKD Kits 
5.36 In addition to the general violations menti oned above, the measures' blanket treatment of 
CKD/SKD kits as "whole vehicles" irrespective of the precise content and condition of such kits also 
leads to a specific violation of Article II and Paragraph 93 of the Working Party Report ("WPR"). 
(a) China's tariff treatment of CKD and SKD k its under the challenged measures violates 
Article II of the GATT 1994  
5.37 CKD and SKD kits range from kits that include certain but not nearly all parts of a motor 
vehicle and that still need substantial assembly a nd production work, to kits that are essentially entire 
motor vehicles that have simply been disassembled to facilitate transport.  Thus, CKDs/SKDs may in 
certain circumstances constitute the "whole vehicle" but in many others will not. 
5.38 The measures, however, impose a blanket ru le that CKD and SKD kits are among the 
combinations of parts and components that are deemed  to constitute a whole vehicle.  China's blanket 
treatment of CKD and SKD kits as "whole vehicles" therefore will necessarily lead to violations of 
Article II of the GATT 1994.  China's defense is contradictory.  On the one hand, it argues that the 
measures do not apply to CKD and SKD kits. (cf. FWS China, para.37)  On the other hand, the plain 
text of Article 21 of Decree 125 very clearly includes such kits as combinations of parts that are automobile parts characterized as complete vehicles. 
(b) China's treatment of CKD and SKD kits viol ates paragraph 93 of the Working Party Report  
5.39 In addition, China's treatment  of CKD and SKD kits also leads to a violation of its 
commitment under the Working Party Report.  Japan  supports the view expressed by certain of the 
complainants in this regard.  The measures have  effectively created a new tariff line for CKD and 
SKD kits with a 25 per cent tariff, as all kits are now  subject to this tariff. (cf. FWS US, para.122)  
This constitutes a violation of China's commitments  flowing from paragraph 93 of the Working Party 
Report.  China was not obliged to establish a new ta riff line for kits; but if it did formulate a generally 
applicable tariff, it was bound to impose a 10 per cent tariff. 
5.40 It would be no defense for China to say that it did not formally open a new tariff line for CKD 
and SKD kits, as it did not amend its tariff schedule.   Effectively, the measures have created a new 
                                                                                                                                                                    
 
disassembled where the component parts, that is the parts which may be identified as components intended to 
make up the finished product, are all presente d for customs clearance at the same time (…)."  WT/DS339/R 
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  tariff for such kits.  China is obliged to implem ent its WTO obligations, including the commitments 
flowing from the Working Party Report, in good faith. 
4. Article XX of the GATT 1994 does not justify the measures 
5.41 China argues that the measures were designed to  secure compliance with its customs laws and 
regulations. (cf. FWS China, para. 203-204)  Th e measures, however, nowhere refer to any such 
objective to counter circumvention of China's custom s rules.  Indeed, China merely refers to the 
generic language in its Policy Order 8that China will "strictly levy import duties at tariff rates 
applicable to complete vehicles and parts, so as to  prevent tariff evasion." (cf. FWS China, para. 24)  
It is unclear how this would be re levant, let alone provide any kind of  justification for the measures.  
Moreover, it specifically refers to both "whole vehi cles and parts" and makes no reference whatsoever 
to CKD or SKD kits or any particular risk  of circumvention relating to such kits. 
5.42 China has provided no evidence that China-b ased car manufacturers, having legitimately 
benefited for many years from China's lower duties on auto parts through local assembly operations, 
recently shifted to customs fraud by importing complete  vehicles as auto parts.  If anything, China has 
shown that major car manufacturers have abided  by China's customs ru les, whether these are 
WTO-compatible or not.  Thus, China has noted that major car manufacturers have imported CKD 
and SKD kits into China under tariff classifications consistent with China's customs rules. (cf. FWS 
China, para. 39)  
5.43 In addition, the effect on trade from the measures is severe.  They are framed very broadly, 
covering multiple shipments from various sources a nd to various parties within China.  China's 
measures impose a blanket rule that if imports are us ed in certain proportions with other imports they 
will always be treated as "whole vehicles", and theref ore subject to higher customs duties.  Indeed, 
China will treat combinations of parts imported fro m different suppliers or even different national 
origin as one single "whole vehicle" for these pur poses.  The measures also do not distinguish 
between parts imported into China by the manufactur er of the vehicle and parts imported into China 
by third parties, such as parts suppliers.  Th is particular element merits a closer look. 
C. T
HIRD PARTY SUBMISSION BY MEXICO  
1. Introduction 
5.44 The Government of the United Mexican States (Mexico) is grateful for the opportunity to 
present its views in this dispute.  Mexico is particip ating as a third party owing to its trade interest in 
this case.  Mexico notes with concern the failure of  China to comply with its obligations under the 
WTO, particularly in view of the fact that the Mexican auto parts industry accounts for an important 
part of its manufacturing sector's gross domestic product. 
5.45 Mexico agrees with the arguments presented by the United States, the European Communities 
and Canada according to which the imposition of measures that favour domestic auto parts over 
imported parts amounts to a violation of the fund amental WTO principles of non-discrimination.  
Through three specific instruments that are challeng ed in this dispute today (the measures), China 
imposes additional charges and administrative burdens on imported auto parts that are not imposed on auto parts produced in Chinese terr itory.  This inevitably alters th e conditions of competition between 
domestic and imported products , which in its turn provides automob ile producers with an incentive to 
use domestic auto parts rather than imported auto parts. WT/DS339/R 
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  5.46 In particular, the measures imposed by Chin a violate the GATT 1994, the TRIMs Agreement, 
SCM Agreement, and certain provisi ons of its Accession Protocol. 
2. The GATT 1994 
5.47 In Mexico's view, the measures adopted by China are "internal measures" that are inconsistent 
with Article III of the GATT 1994 in that they prov ide for less favourable treatment for imported auto 
parts than for domestic auto parts.  Contrary to what China contends in its first submission
84, the 
measures at issue are not "border measures", but "internal measures".  Considering that these 
measures are applied once the product has been im ported and not upon its im portation, this Panel 
should conclude that by their nature, the measures are internally applied measures. 
5.48 More specifically, China's measures with respect  to auto parts are inconsistent with the 
following paragraphs of Article III: 
(a) Paragraph 2, in that they result in inte rnal charges in excess of those applied to 
domestic products; 
(b) paragraph 4, in that they are measures which affect the sale, purchase, transportation, 
distribution and use in the domestic market85; 
(c) paragraph 5, in that they are quantitative regulations that require that a specified 
amount or proportion of a product be  supplied from domestic sources. 
5.49 Paragraphs 2, 4 and 5 of Article III of the GA TT 1994 set out the different ways in which to 
comply with the national treatment obligation.  Accordingly, the measures imposed by China are 
inconsistent with these three scenarios of the principle of national treatment. 
3. TRIMs Agreement 
5.50 The measures adopted by China also violate WT O disciplines from the point of view of trade-
related investment measures (TRIMs). 
5.51 In Mexico's view, the challenged measures are in consistent with the TRIMs agreement, in the 
order of analysis applied by the Panel in Indonesia – Autos.86  The Panel in that dispute considered 
that the inconsistency of the measures should be analy sed in two stages:  first, by determining if the 
measures at issue were TRIMs, which involved de termining whether they were (i)"investment 
measures" and (ii) "trade-related" measures;  and secondly, to examine whether the TRIMs violated 
Article III of the GATT 1994. 
5.52 Regarding the first stage, Mexico considers th at the measures adopted by China are indeed 
trade-related investment measures.  As indicated in Indonesia – Autos , a measure that is "aimed at 
encouraging the development of a local manufacturing capability for finished motor vehicles and parts and components" is an "investment measure".
87  This same Panel affirmed that measures that are local 
                                                      
84 See China's first written submission, paras. 41-70. 
85 Regarding the term "affecting" in Article III:4 of the GATT 1994, Mexico cons iders that the view of 
the Panel in India –Autos (DS175) (paragraph 7.197) applies to this case.   In that dispute, the Panel interpreted 
"affecting" as being able to occur when an incentive is provided to purchase local products or when the 
conditions of competition between the domestic and imported products are modified. 
86 Panel Report on Indonesia – Autos  para. 14.72. 
87 Ibid., paragraph 14.80.  WT/DS339/R 
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  content requirements "would necessarily be 'trade-related'".
88  Consequently, in the case at issue, both 
of the requirements for a TRIM are met. 
5.53 Regarding the second stage, in the light of the cons iderations set forth above, Mexico is of the 
opinion that the measures imposed by China violate Article III of the GATT, namely the requirements 
set forth in paragraphs 2, 4 and 5 thereof.  Con sequently, the measures at issue are inconsistent in 
terms of the analysis of the Panel in Indonesia – Autos . 
5.54 Moreover, Article 2 of the TRIMs Agreement states that no Member shall apply any TRIM 
that is inconsistent with the provisions of Article III of the GATT 1994 (National Treatment).  
Article 2.2 clarifies the point by referring to the "Illustrative List" of TRIMs that are considered 
inconsistent with the natio nal treatment obligation. 
5.55 The measures at issue fall squarely into paragra ph 1(a) of the Illustrative List, which concerns 
TRIMs that have local content requirements.  Speci fically, paragraph 1(a) refers, as an example of 
TRIMs that are inconsistent with Article III of the GATT 1994, to those compliance with which is 
necessary to obtain an advantage, and which require: 
the purchase or use by an enterprise of products of domestic origin or from any 
domestic source , whether specified in terms of particular products, in terms of 
volume or value of products, or in terms of a proportion of volume or value of its 
local production.  (Emphasis added). 
5.56 In this context, it is clear that the challenge d measures meet the description in paragraph 1(a) 
of the Illustrative List since (i) they are necessary to  obtain an advantage, and (ii) they require as a 
condition the use of products of domestic origin. 
4. China's Accession Protocol 
5.57 China's commitment to comply with Article III of the GATT 1994 and the TRIMs Agreement 
is clearly established in its Accession Protocol.  Rega rding the obligation to comply with Article III of 
the GATT 1994, paragraph 7.2 of the Accession Protocol states as follows: 
In implementing the provisions of Artic les III and XI of the GATT 1994 and the 
Agreement on Agriculture, China shall eliminate and shall not introduce, re-introduce or apply non-tariff measures that cannot be justified under the provisions of the WTO 
Agreement. (...)  (Emphasis added). 
5.58 Regarding the TRIMs Agreement, paragraph 7. 3 of the Accession Protocol states as follows: 
China shall, upon accession, comply with the TRIMs Agreement, without recourse to 
the provisions of Article 5 of the TRIMs Ag reement.  China shall eliminate and cease 
to enforce trade and foreign exchange balancing requirements, local content and export or performance requirements made effe ctive through laws, regulations or other 
measures.  (Emphasis added) 
5.59 According to the cited provisions, upon acce ssion to the WTO China assumed the obligation 
to bring its measures into conformity with WTO disciplines, including Article III of the GATT 1994 
and the TRIMs Agreement. 
                                                     
 
88 Ibid., paragraph 14.82. WT/DS339/R 
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  5. Conclusion 
5.60 For the above reasons, Mexico considers that Chin a is acting in a manner inconsistent with its 
WTO obligations by maintaining measures that favour the use of domestic auto parts in preference to 
imported auto parts.  These measures violate th e commitments that China assumed upon acceding to 
the WTO, and hence undermine the legitimat e expectations of the other Members. 
D. O
RAL STATEMENT BY ARGENTINA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL  
1. The challenged measures are not border measures under Article II of the GATT 1994  
5.61 One of the main points in dispute is whether the measures89 at issue constitute either border 
measures governed by Article II of the GATT 1994, or rather internal taxes ruled by Article III:2 of 
the GATT 1994 or internal regulations referre d to in Article III:4 of the GATT 1994.   
5.62 In order to be considered a border measure under Article II:1(b) such measure should be a 
duty or duties charged upon "importation into the territory" or in "connection with the importation"90.  
Under the measures in dispute, a duty for whole vehicles is charged upon assembly of the imported 
parts.  That is clear from the text of Decree 125 wh ich provides in its Article 28:  "After the imported 
automotive parts are assembled and manufactured into whole vehicles, automobile manufacturers 
shall declare such items to Customs, and Custom s shall […] proceed with categorization and duty 
collection".  The fact that the duty is charged af ter the verification by the authorities and once the 
vehicle was manufactured is a feature that tells that the condition for the application of the duty is the 
manufacture of the vehicle and not the importation of  the parts.  Moreover, the fact that the duty 
charged could be higher if the manufacturers decide to fit other imported parts into the model vehicle 
registered91, or that a difference in duties is recogni zed if the parts were purchased from a local 
supplier and not imported by the manufacturer92 confirm that the goods' ta xable event takes place 
upon assembly and not upon the entry of  the product into the territory.  
5.63 China argues that as the EC revised anti-circ umvention measure, the challenged measures 
impose duties that are conditional upon the entry of  goods into China, and are therefore border 
measures subject to Article II of the GATT 1994.93  As stated by China, the revised EC 
anti-circumvention measure "applies the anti-dumping duty to the imported parts and components as a 
condition of their importation".  China suggest s that its measures are also conditioned upon 
importation as the EC's one because the auto parts ar e not in free circulation until the tariff rate for 
motor vehicles is assessed upon them , if the manufacturer uses the im ported parts and components as 
                                                      
89 By "Measures" Argentina refers to: The Policy on Development of the Automotive Industry, issued 
on May 21, 2004, by China's National Development and Reform Commission (NDRC) as Order No.8. 
("Automotive Policy Order 2004") (Exhibit JE-18); "Administrative Measures on Importation of the 
Automotive Parts Deemed Whole Vehicles", issued as D ecree 125 on February 28, 2005 by China's General 
Administration of Customs ("Customs"), NDRC, Ministry of Finance, and Ministry of Commerce in accordance 
with the Automotive Policy Order ("Decree 125") (Exhibit JE-27); "Rules for Verifying whether imported 
Automotive Parts are deemed Whole Vehicles", issued as Public Announcement No.4 by Customs on March 28, 2005, in accordance with Decree 125 ("Announcement 4") (Exhibit JE-28). 
90 See  GATT Panel Report on EEC –  Parts and Components , where the Panel in paragraph 5.8 
 found:  "In the light of the above, the Panel found that the anti-circumvention duties are not levied " on or in 
connection with importation " within the meaning of Article II:1(b ), and consequently do not constitute 
customs duties within the meaning of that provision. 
91 Article 20 of Decree 125. 
92 Article 29 of Decree 125. 
93 China's first written submission, para.61.  WT/DS339/R 
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  part of a larger assembly of imported parts having the essential character of a motor vehicle.
94 The 
panel in EEC – Parts and Components  understood that the treatment of imported goods as not being 
"in free circulation" cannot support the conclusion that  the duties are being levied "in connection with 
importation" within the meaning of Article II:1(b).95  
5.64 The wording of the norm such as "bonded goods"96 or "at the import stage"97 not necessarily 
imply that the measures at issue are in fact border measures.  Again, as the Panel held in EEC – Parts 
and Components , "if the description or categorization of a charge under the domestic law of a 
contracting party were to provide the required 'conn ection with importation', contracting parties could 
determine themselves which of these provis ions would apply to their charges."98  
5.65 Furthermore, China seeks to demonstrate that  the charges collected after importation are 
border measures because the collection is administrate d by Customs.  Argentina considers this should 
be carefully assessed, given the possibility that this could provide for any Member to circumvent its 
obligations under Article III of the GATT 1994, only by  appointing the Customs Office as the one in 
charge of collecting a tax that is in fact an inte rnal charge and not a border measure.  This kind of 
reasoning was also supported by the Panel in EEC – Parts and Components  when it held that 
Members "could in particular impose charges on pr oducts after their importation simply by assigning 
the collection of these charges to their customs administration and a llocating the revenue generated to 
their customs revenue.  With such an interpreta tion the basic objective underlying Articles II and III, 
namely that discrimination against products from othe r contracting parties should only take the form 
of ordinary customs duties imposed on or in connect ion with importation and not the form of internal 
taxes, could not be achieved."99 
5.66 The manner in which the measures at issue in th is dispute work suggests that the measures are 
internal taxes and internal regulations applicable  only to imported parts ra ther than border measures 
ruled by Article II of the GATT 1994.  Therefore such measures fall under the provisions of Article 
III:2 and Article III:4 of the GATT 1994.  In Argentin a's written submission we have already made an 
analysis of the measures under Articles III:2 and III:4 of the GATT 1994, therefore we do not wish to repeat it here. Nevertheless, if the Panel where to  find any inconsistency of the measures with the 
above mentioned provisions rega rding national treatment, a finding  on the consistency of China's 
measures with Part 1, paragraph 7.2 of the Accession Protocol  of China would also be relevant . 
2. China's measures are not similar to anti- dumping or countervailing anti-circumvention 
measures 
5.67 Argentina considers that it is not appropriate to make a parallelism between ordinary customs 
duties and antidumping or countervailing anti-ci rcumvention measures.  China makes such 
parallelism in order to justify its measures as being anti-circumvention measures.  
5.68 Antidumping and countervailing anti-circumventi on measures are applied to goods that are 
imported with the sole purpose of being assembled in to final products which imports are subject to 
antidumping or countervailing duties, in order to prev ent the material injury or threat of material 
injury or the retardation in the establishment of a domestic industry.  Under an antidumping or 
                                                     
 
94 China's first written submission, para. 46. 
95 GATT Panel Report on EEC – Parts and Components , para. 5.7. 
96 Article 16 of Decree 125. 
97 Article 28 of Decree 125. 
98 GATT Panel Report on EEC – Parts and Components , para. 5.7. 
99 Ibid, 5.7. WT/DS339/R 
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  countervailing anti-circumvention measures the duti es are charged at the border at the time of 
importation and not subsequently or dependent  upon their incorporation to whole parts. 
5.69 Contrary to what China asserts, antidumping and countervailing duties and AD or CVD 
anti-circumvention duties are different to ordinary custom duties.  AD/CVD duty and AD/CVD 
anti circumvention duties are aimed to resolve a situa tion of injury within the domestic market caused 
by products imported at discriminatory prices due to  subsidization or due to a dumping practice.  
5.70 Therefore, the difference between China' s measures and AD/CVD anti-circumvention 
measures added to the fact that the later are duti es charged at the border and not upon assembly of the 
goods, suggests that China's measures are not anti-circ umvention ones, and that therefore there is not 
a common, consistent or discernible practice.
100 
5.71  Admitting that China's measures are imposed to  prevent circumvention of ordinary customs 
duties101 would lead to include within Article II of  the GATT 1994, measures such as these ones, that 
involve burdensome administrative procedures - pr ior and after importation - only applicable to 
manufacturers of imported parts, as well as duties charged conditioned upon how and which imported 
parts the manufacturer decides to fit in the fina l product.  This understanding would allow Members to 
apply restrictions to imports of other Memb ers' goods not committed in their Schedules of 
Concessions under-covered by the protection of  an alleged anti-circumvention measure.102 
3. The measures are not justified under Article XX(d). 
5.72 China states that the challenged measures are justified under Article XX(d) of the 
GATT 1994 as measures that are necessary to secu re compliance with China's customs law.103  
However, Article 1 of Decree 125 clearly states that the measures "are formulated […] with a view to 
formalizing and strengthening the administration of the importation of automobile parts, and 
promoting the healthy development of the automobile industry".104  The text of the norm suggests that 
there is not a clear "compliance" univocal objective in the norms as suggested by China throughout its 
written presentation105.  In order to a measure to be considered "necessary" under Article XX (d) one 
of the features involved in the "weighing and balanc ing" is the respective impact of the measure on 
international commerce.106  
5.73 Argentina considers that the im pact these measures could have are far beyond to what could 
be considered "slight". The fact that the measures r esult in higher tariff rates to those parts that are 
finally assembled into whole vehicles, no matter whether the importation was done by the 
manufacturer or by a local supplier whose only objectiv e is to import parts, results in a disincentive 
for local purchasers and manufacturers to buy the im ported parts.  Furthermore, the administrative 
burden imposed to importers and manufactures of vehi cles that use imported parts helps to skew the 
choice of manufacturers who are to decide betw een buying imported or domestic parts.  The 
differential treatment between local parts a nd imported ones obviously affects the competitive 
conditions of the imported product on the Chinese mark et and more specifically, affects the conditions 
of internal offering for sale or purchase of these produc ts.  Altogether, this results in a restriction on 
                                                      
100 Appellate Body Report on US – Gambling, para. 192. 
101 China's first written submission, para. 112. 
102 See also Japan's third party submission, para.35. 
103 China's first written submission, para. 201. 
104 Article 1 of Decree 125, Exhibit CHI-2. 
105 China's first written submission, paras. 202, 204, 205, 207, 208 and ff. 
106 China's first written submission, para. 208.  WT/DS339/R 
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  the entry of imported parts in the Chinese automobile market. The Appellate Body in Korea – Various 
Measures on Beef found that :  "A measures with a relatively s light impact upon imported products 
might more easily be considered as "necessary" t han a measure with intense or broader restrictive 
effects."
107 The effects the challenged measures have on imported parts result in a restriction to 
commerce. Therefore the "necessity" test is not satis fied, preventing China to justify the measures 
under Article XX(d). 
5.74 Finally, were the Panel to analyse the justification of the measures under the chapeau of 
Article XX, Argentina considers the rulings of the Appellate Body in US – Shrimp and US – Gasoline 
regarding the prevention of  "abuse of the exceptions of Article XX", a guidance of relevance for that 
task.108 
4. Conclusion 
5.75 To conclude, Argentina wishes to make the following remarks:  
• First of all, Argentina is not convinced by China's argument on the fact that the 
measures are border measures rather than in ternal taxes.  Therefore, Argentina 
believes the measures fall under the provisions  of Article III:2 and Article III:4 of the 
GATT 1994. 
• Secondly, Argentina considers ther e is no similarity between AD/CVD 
anti-circumvention measures and China's measu res because they deal with different 
subject matters, they have different purposes and most importantly, the former 
consists of duties charged upon importati on while the later is a duty charged upon 
verification of the content of imported parts that had been put together into the locally manufactured vehicle.  Considering China's measures as tariff anti-circumvention measures will allow members to call ordinary  customs duties to taxes and charges that 
depend upon manufacture and verification of goods containing imported parts and 
calling ordinary custom duties to measures that entail burdensome administrative procedures only applicable to users of imported goods.  Such measures might entail some sort of restriction to imports and would suppose broadening the scope of interpretation of Article II, while leaving Article III with little or no application.  
• Finally, Argentina is not convinced by China's argument that the measures fall under 
the exception of Article XX(d), because the restrictive effects of the measures on 
international commerce make China unable to  fulfil the "necessity" test to justify the 
application of the measures under Article XX(d). 
E. ORAL STATEMENT BY AUSTRALIA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL  
1. Introduction 
5.76 The essence of the complainants' claims in this  dispute is that China has re-introduced 
discriminatory internal charges and administrative requirements on imported auto parts.  Australia's 
oral statement focuses on three key issues.  Firs tly, the proper characteri sation of the challenged 
                                                      
107 Appellate Body Report on Korea – Various Measures on Beef, para. 163. 
108Appellate Body Report on US – Shrimp , para. 116, quoting Appellate Body Report on US – 
Gasoline , page 22. WT/DS339/R 
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  measures.  Secondly, the interpretation of China's tariff schedule.  Thirdly, the general exception in 
Article XX(d) of the GATT 1994. 
2. Are the challenged measures border measures or internal measures? 
5.77 The main contested issue before this Panel is whether the challenged measures are border 
measures subject to Article II or internal measures subject to Article III of the GATT 1994.  It appears 
from China's first written submission
109 that its only defence to th e complainants' claims under 
Article III of the GATT 1994, Article 2 of the TRIM s Agreement, and Part I of China's Accession 
Protocol is that the challenged measures are border measures. 
5.78 The three complainants in this dispute have submitted a common factual background section.  
According to these facts, the challenged measures impose charges and administrative requirements on 
imported auto parts based on the use of those importe d parts in vehicle manufacturing that takes place 
after importation, rather than on the state of th e product upon presentation at the border.  Australia 
understands that these imported parts have entered into commerce and are in free circulation within 
China once they have passed the border. 
5.79 The commitment to binding tariff schedules provided for in Article II, and the national 
treatment obligation contained in Article III, are two of the core provisions in GATT 1994.  The 
demarcation between these two provisions has been  examined in a number of previous GATT and 
WTO cases.  In Australia's view, the guidance c ontained in previous cases, when applied to the 
present facts, leads to the conclusion that Chin a's measures are internal measures and not border 
measures.  These prior cases also suggest that cons iderations of substance over form should also 
factor highly in the Panel's analysis in the present dispute. 
5.80 The purpose of Article III is to ensure that in ternal measures are not "applied to imported or 
domestic products so as to afford protection to do mestic production".  According to the Appellate 
Body in Japan – Alcoholic Beverages II , the intention of Article III is "to treat the imported products 
in the same way as the like domestic products on ce they had been cleared through customs.  
Otherwise indirect protection could be given".110 
5.81 In EEC – Parts and Components , a case with many similarities of fact to the present dispute, 
a GATT Panel had to grapple with the question of whether a particular charge was a border measure 
or an internal measure.111  The impugned measure in that case imposed duties on finished products 
assembled or produced in the EEC rather than on importe d parts or materials.  In concluding that it 
was an internal measure the GATT Panel made two key points. 
5.82 Firstly, the GATT Panel held that the policy reason for the measure, namely to eliminate 
circumvention of duties, was irrelevant in determin ing whether it was a border measure or an internal 
measure.  However, it was relevant whether the char ge was due at the time or point of importation or 
whether it was collected internally. 
5.83 Secondly, the GATT Panel held that the designation of the measure under domestic law as a 
customs duty, along with treatment analogous to  a customs duty, was not dispositive of its 
characterisation as a border measure.  Otherwise cont racting parties would be able to readily defeat 
                                                      
109 China's first written submission, paras. 169-174. 
110 GATT Panel Report on Italy – Agricultural Machinery , para. 11; cited with approval in the 
Appellate Body  Report on Japan – Alcoholic Beverages II , page 16. 
111 GATT Panel Report on EEC – Parts and Components , paras. 5.4-5.8.  WT/DS339/R 
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  the objective of Articles II and III, namely that discr imination against products  from other contracting 
parties is only permissible by way of ordinary cu stoms duties imposed on importation and not by way 
of internal taxes. 
5.84 Belgian Family Allowances  is another case in which a GATT Panel found that the levy in 
question was an internal measure.  The fact that th e levy depended on the internal use of the product, 
and was not charged at the time of importation, were influential in arriving at this result.
112  In EEC – 
Animal Feed Proteins  a GATT Panel again lent support to the notion that in order to constitute a 
border measure a charge had to be collected at the time of, and as a condition to, the entry of the 
goods into the importing country.113 
5.85 In light of these previous cases, Australia supports  the thrust of Canada's arguments regarding 
the distinction between border measures and internal measures.114  Broadly speaking, internal 
measures regulate internal trade, while border measures regulate the process of importation.  Internal charges are imposed on activities occurring within the territory of a Member in relation to the normal 
internal trade of a product, while border charges are imposed at the time or point of importation.  A 
Member may not, at its discretion, "deem" imported products not to have entered into their internal 
commerce and thereby avoid its national treatment ob ligations, as China appears to have done in this 
case with the use of a 'bond' on imports at the point of importation. 
5.86 China has argued in this disput e that the challenged measures are designed to enforce its tariff 
schedule and prevent circumvention of its tariff bindings for motor vehicles.
115  However, China has 
not presented any evidence of a significant shift towards customs fraud in the automobile industry.116  
Furthermore, in Australia's view China has not e ffectively distinguished its challenged measures from 
the anti-circumvention duties at issue in EEC – Parts and Components .117  In particular, China asserts 
that imposing border charges after the time or point  of importation is permissible, so long as the 
charge fulfils a liability that arose as a condition of importation.118  Presumably, in an attempt to 
establish a nexus with importation, the measures at i ssue include a declaration made at the time of 
importation.  However, this declaration appears to be entirely focused on the way in which the 
imported parts will be used internally within China,  rather than on the conten ts of a consignment upon 
importation.  In addition, the charge is actually en forced after the point of manufacture once it can be 
established that a manufactured vehicle contains a certain percentage of imported parts.  Therefore, in Australia's view, the liability attaches interna lly, after the vehicle has been manufactured. 
5.87 Australia fully endorses the Eur opean Communities' systemic concern that, if the processing 
and manufacturing of products af ter importation into the territory of a Member were generally 
accepted as an intermediate step before tariff classi fication, the whole system of tariff classification 
would be rendered meaningless.
119  In addition, Australia shares Japan's systemic concern that 
acceptance of China's position would reduce the scope  of the national treatment obligations in 
Article III.120  In Australia's opinion such an interpreta tion would be incompatible with the object and 
purpose of both the WTO Agreement and the GATT 1994. 
                                                      
112 GATT Panel Report on Belgium Family Allowances , para. 2. 
113 GATT Panel Report on EEC – Animal Feed Proteins , paras. 4.13-4.18. 
114 Canada's first written submission, paras. 78-86. 
115 China's first written submission, paras. 3 and 43. 
116 See also Japan's third party submission, para. 2. 
117 See also Japan's third party submission, para. 19. 
118 China's first written submission, paras. 49-70. 
119 European Communities' first written submission, para. 140. 
120 Japan's third party submission, para. 22. WT/DS339/R 
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  5.88 In summary, Australia submits that China's meas ures at issue are properly characterised as 
internal measures and are inconsiste nt with Article III of the GATT 1994. 
3. What is the proper interpretation of China's tariff schedule? 
5.89 However, should the Panel determine that  the challenged measures constitute border 
measures, Australia supports the complainants' al ternative argument that China's measures violate 
Article II of the GATT 1994.
121 
5.90 The complainants in this dispute claim that Ch ina's measures at issue classify imported auto 
parts as automobile parts characterized as complete vehicles after importation, resulting in a tariff of 
25 per cent.  They argue that this violates China's commitment to apply a tariff of 10 per cent on 
imported auto parts under Article II.122  In its defence against this claim, China argues that it has been 
forced to impose the 25 per cent tariff on the autom obile parts characterized as complete vehicles to 
prevent countries attempting to circumvent the higher tariff by importing disassembled cars in multiple shipments. 
5.91 The essence of China's argument is that custom s authorities should classify as a complete 
article any group of parts that has the essential character of that article, regardless of their state of assembly or disassembly.  China argues that this is the case whether a group of parts enters the 
customs territory in one shipment or in multiple shipments.
123  China asserts that this position is 
supported by the "essential character" rule contained in GIR 2(a) .124 
5.92 Australia does not share China's interpretati on of the "essential character" rule for the 
following reasons. 
5.93 Firstly, China's view disregards the fundamental  principle that when goods are classified in 
the HS it is always done on the basis of the objec tive characteristics of the product at the time of 
importation, that is, as imported and presented to Customs on a shipment-by-shipment basis.  The 
intentions of the importer and differing duty rates are irrelevant. 
5.94 Secondly, China's view disregards the significance of the crucial phrase "as presented" 
contained in the "essential character" rule.  In  fact, this phrase only appears once in China's 
eighty-three page submission125 when China quotes the 'essentia l character' rule in full. 
5.95 Thirdly, Australia notes that China refers  to Australian practice in its submission.126  For the 
information of the Panel, Australian customs pract ice in relation to the "essential character" rule 
underscores that the value of the parts in relation to the value of the completed good is irrelevant.  
Rather, what is required is an examination of th e function, purpose and construction of the completed 
good to determine its essential character, and then an assessment whether th e parts when assembled 
also exhibit that essential character.  For example,  the essential character of a motor vehicle might 
well be described as transporting pe ople and goods using a motor.  To be classified as a motor 
                                                      
121 European Communities' first written submission,  paras. 207-281; United States' first written 
submission, paras. 116-122; Canada's first written submission, paras. 131-150. 
122 European Communities' first written submission, para. 280; United States' first written submission, 
para. 119; First Canada's first written submission, para.  44. 
123 China's first written submission, para. 2 
124 Annexed to the International Convention on the Harmonized Commodity Description and Coding 
System 1983. 
125 China's first written submission, para. 84. 
126 China's first written submission, para. 65.  WT/DS339/R 
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  vehicle, a collection of parts in a shipment, when assembled, must also exhibit that essential character.  
If a shipment includes all the parts necessary to form a motor vehicle, other than the motor itself, the 
parts would not have the essential character of a mo tor vehicle, and could not be classified as such.
127 
5.96 Fourthly, China's view undermines the ordinary meaning of the terms in its tariff schedule 
which provide for a clear separa tion between complete motor vehicles and parts thereof.  In 
Australia's view this is contrary to the pr inciple of effectiveness in treaty interpretation.128 
5.97 Therefore, in Australia's opinion, on a proper interpretation of China's tariff schedule, the 
challenged measures are inconsistent  with Article II of the GATT 1994. 
4. Scope of the general exception under Article XX(d) of the GATT 1994? 
5.98 China also asserts that the challenged measures are justified under Article XX(d) of the 
GATT  1994 as measures that are necess ary to secure compliance with China's customs laws.129 
5.99 Australia, like Japan130 and Argentina131, finds China's Article XX(d) arguments 
unconvincing.  China's assertion that the 'challenge d measures have little or no restrictive impact on 
international trade'132 does not sit comfortably with the material contained in the complainants' 
common factual background section.  According to  this material the challenged measures are 
impacting on the complainants' trade.  Moreover, the challenged measures are adversely affecting the 
business of the Australian automotive components and parts industry. 
5.100  Australia notes that China has not addressed the re quirements of the chapeau of Article XX.  
This is significant as according to the Appellate Body the purpose of the chapeau is to prevent "abuse 
of the exceptions of Article XX".133  Further, as a respondent seeking to invoke an exception, China 
bears the burden of proof under Article XX.134 
5.101  Therefore, Australia submits that China's me asures should not be afforded protection under 
Article XX(d) of the GATT 1994. 
F. ORAL STATEMENT BY BRAZIL AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL  
5.102  The present dispute raises several questions of syst emic interest to all WTO Members.  In this 
oral statement, Brazil offers some thoughts on what  it considers a key interpretative question before 
the Panel, namely: how should the Panel charact erize China's Policy Order 8, Decree 125, and 
Announcement 4, as a matter of WTO law?  In ot her words, are the measures at issue "border 
measures", to be examined under Article II of the GA TT 1994, or "internal measures", to be examined 
under Article III of the GATT 1994? 
5.103  Brazil notes that the parties to this dispute provide  different answers to this question.  At this 
stage, Brazil does not express any views on the prope r characterization of the measures at issue. 
                                                      
127 Minister for Industry and Commerce v Zyfert  and Collector of Customs for NSW v Putale Pty Ltd  in 
Full Federal Court of Australia. 
128 Appellate Body Report on  US – Gasoline , page 23. 
129 China's first written submission, paras. 201-214. 
130 Japan's third party submission of Japan, paras. 49-56. 
131 Argentina's third party submission, paras. 28-36. 
132 China's first written submission, paras. 213. 
133 Appellate Body Report on US – Shrimp , para. 116. 
134 Appellate Body Report on US – Wool Shirts and Blouses , page 14. WT/DS339/R 
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  However, and bearing in mind the important dis tinction between the disciplines of Article II and 
Article III of the GATT 1994, Brazil highlights key c onsiderations regarding the differences between 
those articles. 
5.104  Article II prevents Members from affording imported goods treatment that is less favorable 
than the treatment set forth in the Member's Sche dule of Concessions.  As the Appellate Body has 
confirmed, "a Schedule is made an integral part  of the GATT 1994 by Article II:7 of the GATT 1994. 
Therefore, concessions provided for in that Schedule are part of the terms of the treaty."
135  Moreover, 
those Schedules "represent a common agreement among all Members."136  Since Schedules reflect the 
balance of concessions negotiated by the Members, as the Panel in EC - Chicken Cuts137 stated, they 
should not be subject to unilateral modification w ithout appropriate compensation.  Thus, Members 
cannot accord to the commerce of other Members treat ment less favorable than the treatment provided 
for in the relevant schedule.  By contrast, Ar ticle III of the GATT 1994 gives expression to the 
obligation not to discriminate between domestic  and imported goods once the latter have been 
"cleared through customs."138  Under Article III, Members enjo y discretion to alter domestic 
regulations provided that they respect their obligations related to non-discrimination. 
5.105  In assessing whether measures fall under Article II or Article III of the GATT 1994, a panel 
must give meaning to the different scope of those Ar ticles.  In order to do so, Brazil submits that the 
Panel should take into account the condition for the imposition of the measures.  In this sense, the 
characterization of a measure as a "border" or an "internal" measure will most likely depend on the 
event that triggers its operation. For the sake of a bbreviation, Brazil will generally refer to this event 
as the "taxable event". 
5.106  The first sentence of Article II:1(b), which appli es to "ordinary customs duties," refers to "the 
products... on their importation"139  The second sentence of Article II:1(b) applies to "all other duties 
or charges of any kind imposed on or in connection with the importation."140  This language reflects 
the notion that the taxable event giving rise to the imposition of an "ordinary customs duty" is the 
importation of a product.  Similarly, the reference to "other duties or charges of any kind", in the 
second sentence of Article II:1(b), establishes a conn ection between the taxable event and the act of 
importation. 
5.107  In contrast to a custom duty or other charge  under Article II of the GATT 1994, an internal 
tax or other internal charge in the sense of Article III:2 applies to products which have been "imported 
into the territory of any contracting party."141 Thus, the taxable event in Article III:2 is not the act of 
importation. The same is also true of the triggeri ng event in the case of measures affecting internal 
trade that are subject to Article III:4. 
5.108  Hence, given that the taxable event is the ke y criterion in determining whether the measures 
at issue fall under Article II or Article III of th e GATT 1994, the Panel must determine whether the 
condition for the application of the measures is the importation of products or rather the use of those 
products within China. In Brazil's view, the character ization of the taxable event in domestic law is 
relevant, but not decisive of its character in WTO law. 
                                                      
135 Appellate Body Report on EC – Computer Equipment, para. 84. 
136 Appellate Body Report on EC –  Computer Equipment, para. 109. 
137 Panel Report on EC - Chicken Cuts, para. 7.320. 
138 GATT Panel Report on Italy – Agricultural Machinery , para. 11; cited with approval by the 
Appellate Body in Japan - Alcoholic Beverages II , at page 16. 
139 Article II:1(b) of the GATT 1994. 
140 Id. 
141 Article III:2 of the GATT 1994.  WT/DS339/R 
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  5.109  In assessing the taxable event for purposes of WTO law, some of the elements of the 
measures highlighted by the parties and the third parties might help the Panel.  In Brazil's view, those elements include, among others:  (i) the identity of the person liable to pay the charge imposed by the 
measures (i.e., the importer or the manufacturer);  (ii)  the "in bond" versus "in free circulation" status 
of the products within China;  (iii) the time of collection of the duties;  (iv) the agency or authorities responsible for the administration of the measures; a nd (v) the title or legal definition of the measures 
as characterized by China's legislation. In examin ing these, and other relevant elements, the Panel 
should consider them in their appropriate context and having regard to relevant Chinese legislation 
and GATT provisions. 
5.110  In sum, Brazil considers that, as a preliminar y matter, the Panel must decide whether the 
contested measures are to be considered under Ar ticle II or Article III of the GATT 1994. After 
resolving this question, the Panel would examin e the substantive arguments and evidence submitted 
by the parties and third parties regarding the WTO provisions that the Panel finds to be relevant. 
G. O
RAL STATEMENT BY JAPAN AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL  
1. Argument 
(a) Arguments relating to the GATT Panel Report in EEC – Parts and Components  
5.111  First, we would like to address so me points on the China's argument on EEC – Parts and 
Components , by expanding on the arguments in our written submission. 
5.112  As discussed in our written submission, at issue in EEC – Parts and Components was an EC 
regulation to prevent circumvention of anti-dumping duties.  China states there are two reasons why 
the reliance upon EEC – Parts and Components is misplaced142.  First the measure at issue in EEC – 
Parts and Components differed from the Chinese measures concerned.143  Second, EEC – Parts and 
Components interpreted Article II of the GATT 1994 to include charges imposed "conditional upon" 
the importation, but did not find that charges collected after importation were necessarily excluded.  
China further states that charges are considered to be imposed "conditional upon" importation as long 
as they "bear[] an objective relationship to the ad ministration and enforcement of a valid customs 
liability"144.  Japan would like to comment on these statements of China.   
5.113  First, China argues that the administration of  the measures concerned is different from the 
procedure identified by the panel in EEC – Parts and Components .  Under the measures, China 
argues, it first conducts a pre-investigation, then , following the pre-investigation, an importer is 
required to declare whether imported parts will be used to assemble a vehicle model.  Since the 
importer's declaration is made at the time of im portation and such importation is secured by the 
provision of bond, China considers that the duties are imposed conditional upon the entry of goods into China
145.  
5.114  As stated in our submission, the fact that a measure requires some action at the time of 
importation does not mean that the measure is therefore a border measure.146  The declaration by 
importers made under the measures concerned focuses on what happens after the time of importation.  
                                                      
142 China's first written submission, para. 51. 
143 id. para. 52. 
144 id. para. 67. 
145 id. para. 60. 
146 Japan's third party submission, para. 16. WT/DS339/R 
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  To put it differently, the declaration is based on the content of the completed auto vehicle after it is 
manufactured and assembled in China, not the contents  of a particular consignment upon importation.   
5.115  Also the fact that auto parts concerned re main in bonded status does not support China's 
argument.  The panel in EEC – Parts and Components clearly stated that "the fact that the EEC treats 
imported parts and materials subject to anti-circumve ntion duties as not being 'in free circulation' … 
cannot …. support the conclusion that the anti-circumvention duties are being levied 'in connection with importation' within the meaning of Article II:1(b)."
147  Therefore, China's explanation of the 
measures in dispute does not distinguish them in any relevant way from the measures at issue in EEC 
– Parts and Components and does not support China's claim that the measures are subject to Article II 
of the GATT 1994. 
5.116  Second, China states that, since the charge imposed under the concerned measure bears "an 
objective relationship to the administration and en forcement of a valid customs liability," "the 
challenged measures are border measures within the scope of Article II".148   
5.117  This seems to be just an attempt to argue that  when something is domestically categorized as 
a customs rule, the imposition of charges under the rule should be considered to be covered by 
Article II.  However, the fact that a WTO Member treats certain measures as "customs practices" for its domestic regulatory or administrative purposes does not have a bearing on the issue of whether the measures are within the scope of Article II or III of the GATT 1994.  Indeed, EEC - Parts and 
Components  demonstrates that all the measures c onducted by "customs authorities" are not 
necessarily border measures for purposes of the GATT 1994 analysis.   
5.118  The same is true with regard to China's asser tion that there are widespread practices of WTO 
Members supporting its argument.  Japan notes that the domestic practices of those Members are not 
determinative as to whether charges imposed under a measure are covered by Article II or Article III 
of the GATT 1994.  Indeed, many of those practi ces may constitute internal regulations and not 
border measures, just like the measure at issue in EEC – Parts and Components .  The test concerning 
Article II and III is an autonomous test the outcome  of which is not determined by the choice of 
Members to treat the measures as "customs measures" or "internal regulations" for domestic administrative or regulatory purposes.  
5.119  Moreover, China's measures are not comparable to the other measures to which China refers. 
China's measures reach very far i ndeed. For example, foreign manufact urers in China are responsible 
for "customs duty" payments even if they purchase parts in China's domestic market from suppliers 
who previously imported the parts. 
5.120  For the reasons stated above and in our writte n submission, Japan respectfully requests that 
the Panel find that the measures in dispute operate as internal measures and impose charges subject to 
Article III:2 of the GATT 1994. 
(b) The challenged measure violate the TRIMs Agreement 
5.121  Japan agrees with the EC's argument that the concerned measures are inconsistent with the 
TRIMs Agreement. 
                                                     
 
147 GATT Panel Report on EEC – Parts and Components, para. 5.7. 
148 China's first written submission, para. 67, 68.  WT/DS339/R 
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  5.122  China claims that the complainants fail to dem onstrate that the measures are inconsistent with 
the TRIMs Agreement because the me asures are not internal measures
149.  In this regard, Japan is of 
the opinion that the measures should be examined under the TRIMs Agreement. 
5.123  In Indonesia – Autos , the Panel indicated that the TRIMs Agreement required two elements 
for showing a violation thereof; first, the existence of a Trade Related Investment Measure (TRIM) and second, the inconsistency of the TRIM with Ar ticle III or Article XI of the GATT 1994.  In 
particular, as regards the second element, the chapeau  of the Illustrative List of the TRIMs Agreement 
states as follows: 
"TRIMs that are inconsistent with the oblig ation of national treatment provided for in 
paragraph 4 of Article III of the GATT 1994 include those which are mandatory or 
enforceable under domestic law or under ad ministrative rulings, or compliance with 
which is necessary to obtain an  advantage, and which require: 
(a) the purchase or use by an enterprise of products of domestic origin or from any 
domestic source, whether specified in term s of particular products, in terms of 
volume or value of products, or in terms of a proportion of volume or value of its 
local production;" 
5.124  It is important to note that, the Illustrative Li st provides that, if (i) the compliance with the 
TRIMs at issue is necessary to obtain an adva ntage and (ii) the TRIMs include local content 
requirements, the TRIMs " are inconsistent with the obligation of  national treatment provided for in 
paragraph 4 of Article III of the GATT 1994 ."  Japan considers that the measures fit all these 
conditions and, therefore, violate the TRIMs Agreement. 
5.125  First, as pointed out in our submission, several provisions of Policy Order 8 shows that the 
objective of the measures is to assist and protect  the nascent domestic Chinese auto industry and to 
provide incentives for foreign manufactures to locate an increasing proportion of their manufacturing 
and supply base in China
150.  The Policy Order 8 and its implementing measures, therefore,  constitute 
TRIMs under Article 1 of the TRIMs Agreement.  
5.126  Second, with regard to an advantage, the panel in Indonesia – Autos  found that "[t]he lower 
duty rates are clearly 'advantages' in the meaning of the chapeau of the Illust rative List to the TRIMs 
Agreement";  as such, the panel found that the Indonesian measures fell within the scope of the 
TRIMs151.  China's measures also provide lower duty rates,  10 per cent, to auto parts meeting criteria, 
instead of 25 per cent for others without fulfilling the criteria.  It is clear that the Chinese measures 
fall within the scope of the TRIMs. 
5.127  Finally, the measures require that "the aggr egate price of imported components attains 60 per 
cent or less" in order to obtain the advantage.152  This requirement clearly falls under the local content 
requirements under paragraph 1(a) of the Illustrative List , which provides "the purchase or use by an 
enterprise of products of domestic origin, … in  terms of a proportion of … value of its local 
production." 
                                                      
149 See id. para. 172. 
150 Japan's third party submission, para. 51. 
151 Panel Report on Indonesia – Autos , para. 14.89. 
152 Art. 21 of Decree 125.