Document: WT/DS339/R/Add.1 WT/DS340/R/Add.1 WT/DS342/R/Add.1 Page A-176 ANNEX A-2 RESPONSES AND COMMENTS OF PARTIES TO QUESTIONS FROM THE PANEL FOLLOWING THE SECOND SUBSTANTIVE MEETING A. M EASURES AT ISSUE
Document codes: WT/DS339/R/Add.1; WT/DS340/R/Add.1; WT/DS342/R/Add.1
Complainant: Canada
Respondent: China
Third parties: Argentina, Australia, Brazil, Japan, Mexico, Taiwan, Thailand
Dispute stage: Appellate Body
Agreements cited: Part I, para. 1.2, Part I, para. 7.2, Part I, para. 7.3  Protocol of AccessionArt. III:2, III:4, III:5, III:1, II:1, X:1, X:3  GATT 1994Art. 2.1  Trade-Related Investment Measures (TRIMs)Art. 3.1(b), 3.2  Subsidies and Countervailing Measures (SCM)

ANNEX A-2

RESPONSES AND COMMENTS OF PARTIES TO QUESTIONS FROM THE PANEL
FOLLOWING THE SECOND SUBSTANTIVE MEETING

A. M
EASURES AT ISSUE
167. ( China)Following up on China's response to Panel question No. 5,

(a) China states in the second paragraph of its response that "[t]he manufacturer's
determination, whatever the result , is subject to review and verification under Chapter IV of
Decree 125 (Articles 17-18)." (emphasis added) Please clarify whether even if the
manufacturer's determination based on self-evaluation is positive, i.e. that auto parts imported
should be characterized as complete vehicles, su ch a determination is still subject to review by
the Verification Center under Article 7 of Decree 127;

Response of China
1. China confirms that even if the manufacturer's self-evaluation is positive, such conclusion is
still subject to review. This is because the manufacturer's understanding of whether the imported
parts in that vehicle model should be characterized as having the essential character of a motor vehicle
may differ from what is contemplated by Decree 125. It is possible that the verification result would
demonstrate that the vehicle model does not meet one or more of the thresholds set forth in
Decree 125, even if the self-evaluation suggested a positive result. This has happened in several
cases.
Comments by the European Communities on China's response to question 167(a)
2. China's reply is contrary to the clear text of Article 7 of Decree 125 and Article 6 (2) and (3)
of Announcement 4. Article 7(2) of decree 125 clearly states
"If
 the self-evaluation suggests that the imported automobile parts should not be
characterized as complete vehicles, the automobile manufacturer shall request the
CGA to conduct a review" (emphasis added).
3. Article 7(3) further provides
"When an automobile manufacturer applies to the NDRC to be listed on the Public
Bulleting on On-Road Motor Vehicle Manufact urers and Products and applies to the
Ministry of Commerce for an Automatic Importation License, it shall submit the self-
evaluation results for the vehicle models fo r the vehicle models concerned. If the
imported automobile parts are not characterised as complete vehicles, the automobile
manufacturer shall also submit the review opinion by the CGA" (emphasis added).
4. Article 6, paragraphs 2 and 3 of Announcement 4 also make a clear distinction between the
obligations of the manufacturer depending on the results of the self-evaluation.
5. These provisions would have no meaning if the review is necessary in all cases. China's reply
demonstrates the arbitrary manner in which it describes the content of the measures to the Panel.

(b) In the last paragraph of its response to Panel question No. 5, China states that "the
effect of this system is that the determination of whether imported auto parts should be
classified as a motor vehicle is made prior to the importation of the parts, based on the self-
evaluation and verification process described above." (emphasis added) Please clarify whether
the "verification process" referred to in this pa ragraph is review process by the Verification
Center under Article 7 of Decree 125 or verifica tion conducted by the Center after importation
of auto parts under Article 17 of Decree 125.
Response of China

6. In order to respond to this question, China has to emphasize that the review and verification
process is conducted on a vehicle model basis. Article 19 of Decree 125 makes clear that the
manufacturer may request verification after the firs t batch of complete vehicles is assembled. The
first batch can be one vehicle or a small quantity of vehicles, a number that the manufacturer may
choose at its discretion. The verification will conc lude, on a per model basis, whether the imported
auto parts in that vehicle model, in their entirety, have the essential character of a complete vehicle.
7. The verification finding applies to all subseque nt importation of auto parts for the same
vehicle model until the manufacturer can demonstr ate, under Article 20.2 of Decree 125, that the
imported parts and components in that vehicle model no longer have the essential character of a motor
vehicle. There is no additional verification process that occurs after each entry of auto parts for that
vehicle model. Nor is there an additional verifi cation process that occurs after each assembly of a
motor vehicle of that vehicle model type. Th e evaluation and verification process results in a prior
determination of whether the auto manufacturer imports parts and components that have the essential
character of a motor vehicle in order to assemble a specific vehicle model.
Comments by the European Communities on China's response to question 167(b)
8. China does not reply to the question. It is cl ear on the face of the measures that there is a
verification process after
 the production of a new vehicle model has been completed. This is laid
down in detail in Article 19 of Decree 125 and Article 7 of Announcement 4. This verification
process is an obligation under the measures, not an option as Ch ina's use of the word 'may' suggests.
China's reply is contrary to the clear wording of the measures (see Article 19 of Decree 125: "An
automobile manufacturer shall submit a verification application to the CGA within 10 days after the
first batch of vehicles of the registered vehi cle model are produced/assembled …"; Article 7 of
Announcement 4: "The automobile manufacturer shall apply for verification to the Office within 10
working days after the vehicles of a to-be-registered registered new model are produced/assembled…"
(emphasis added)).
Comments by the United States on China's response to question 167(b)
9. In its response to part (b), China states that "[t]he evaluation and verification process results
in a prior determination of whether the auto manufacture r imports parts and components that have the
essential character of a motor vehicle in order to assemble a specific vehicle model." China implies
that its answer uses the term "prior" to mean "prior to the entry of the part into China's territory." To
the contrary, however – and based on the plain text of China's own measures – no determination is
final until the imported parts are either used in manuf acturing, or (if not used in manufacturing within
one year) the imported part is assessed a charge at a 10 per cent parts rate at the end of the one-year
period following importation.

10. First, verification is made, as China concedes in its answer, after the first batch of complete
vehicles is assembled. So, clearly a number of pa rts have to be imported be fore verification – China
cannot verify the assembled vehicle unless the parts are in the vehicle. Secondly, it is not simply the
first batch of vehicles that is affected – as Chin a states in its response to Panel question No. 171 –
China (remarkably) doesn't even know how long the verifications take, but acknowledges that the
verifications can take longer than 90 days. Unless China is blocking importations, parts will likely be
flowing into China during that period.
11. This information should also be viewed in light of Article 20 of Decree 125. The second
paragraph of that article notes that there may be a change in a vehicle's status under that measure
during the course of production, thus necessitating a "r e-verification" of the base model. Similarly,
the last paragraph of Article 6 of Annoucement No . 4 provides that "If the percentage make-up of
imported parts changes, such that the imported pa rts used in the vehicle model become Deemed
Whole Vehicles, or are no longer a Deemed Whol e Vehicle, the changed vehicle model should be
registered as a new vehicle model." During this shift and re-verification, presumably, parts will
continue to enter China.
12. The first paragraph of Article 20 points to anothe r factor – the inclusion of optional parts into
the base model. The manufacturer has to report to the local Customs office when optional parts are
fitted in, which will also require a re-verification.
13. Then there are also parts that may be damage d, replaced in the assembly process by other
(better-designed) parts prior to assembly, or otherwise not included into a new vehicle. The second
paragraph of Article 29 provides that when importe d parts are not used in the production of whole
vehicles for one year, the manufacturer shall make a declaration to Customs for payment of duties –
apparently at the parts rate. Accordingly, it is no t until production of a new vehicle that the charge on
a part is actually fixed.
168. ( China) China has explained throughout the proceedings that the determination under
the measures of whether certain imported auto parts should be characterized as complete
vehicles, i.e. an assessment of how to classify imported auto parts, is not made after the assembly
of imported auto parts into a complete vehicle, but made prior to the importation of such parts.
For example, China has stated in paragraph 13 of its second oral statement that "[t]he
classification of motor vehicles under Decree 125 is based on the declaration by the importer
that a shipment of parts and components is one of a series of shipments of parts and
components that can be assembled into a single article that has the essential character of a
motor vehicle. China considers that classifica tion based upon documentary evidence, including
the customs declaration, is consistent with a proper interpretation of the term 'as presented'
under GIR 2(a)."
 If that is the case, what is the rationale for the verification process under Chapter IV of
Decree 125? In other wo rds, under the measures at issue, why are auto
manufacturers/importers required to wait until th e assembly of auto parts into a complete
vehicle for further verification?
Response of China

14. In response to question 167(b), China has expl ained that the self-evaluation and verification
results in a prior determination of the essential char acter test. It is important to understand that
verification is conducted on a per-model basis. The verification finding will apply to all subsequent

importation of auto parts of the same vehicle mode l until the manufacturer can demonstrate that the
underlying facts in respect of that vehicle model have changed.
15. Chapter IV, and Article 19 in particular, con cerns the timing and basis on which this prior
determination is made. As described in Article 19, the manufacturer is to submit a verification
application within 10 days after the first batch of th e to-be-registered vehicle model is assembled. As
discussed in response to question 167(b), this could be a single example of the vehicle model to be
verified. The reason that Decree 125 requires verification based on an actual example of the motor
vehicle model in question (as opposed to conducting the verification on the basis of paperwork) is that
motor vehicles are complex products. It is theref ore prudent, and facilitates the verification process,
to examine an actual example of the motor vehicle model.
16. As emphasised in response to question 167(b), there is no additional verification process that
occurs after the assembly of each motor vehicle of that vehicle model type.
Comments by the European Communities on China's response to question 168
17. In its reply China admits that the final determ ination is made after manufacture of concrete
vehicles. The fact that this determination is thereafter applied
 in a standardised manner to all
imported parts that the manufacturer is forced to identify as being part of a given vehicle model is
irrelevant for the legal assessment of the measures. The fact that each vehicle does not need to go
through all the procedures in order for all imported parts in that individual vehicle being charged the
25 % duty is simply a rule that facilitates the practical administration of the measures.
18. Further, as China itself admits, this verification w ill need to be revised if there is a change in
the production leading to a modification of the stat us of the imported auto parts under the measures.
The classification of the imported auto parts will thus be determined by what actually happened
during the production and more precisely by the balance of local and imported auto parts used in that
production. If a modification leads to imported parts becoming characterised as complete vehicles, the
auto manufacturers is under the obligation to go through the process of self evaluation, registration
and review (Article 6(5) of A nnouncement 4). Failure to do so would expose the auto manufacturer
to sanctions (Article 36 of Decree 125). Conversel y, if imported parts are not characterised as
complete vehicles anymore, the auto manufacturer w ill have to apply for and go through verification
by Customs to avoid having to pay the 25% duty (Article 20(2) of Decree 125).
19. This also means that auto ma nufacturers using imported parts w ill have to constantly monitor
the process of production, and face administrativ e hurdles whenever the production cannot go as
initially planned. This takes away the flexibilit y needed in the production process to adapt to the
evolutions of the market or accide nts in production (parts broken) and seriously penalises the use of
imported auto parts.
Comments by the United States on China's response to question 168
20. The United States respectfully refers the panel back to its comments on China's response to
Panel question No. 167. The United States also notes that China acknowledges in its response to this
question that the verification is based on the assembled vehicle, not on documentation or the condition
of parts at the time of importation.
169. ( China) In relation to your response to Panel question No. 43, could China please clarify
whether its response is the same when "a uto part manufacturers", not automobile
manufacturers, import such key components or sub-assemblies.

Response of China

21. Article 2.1 of Decree 125 provides that the measure only applies to certain auto
manufacturers. Therefore, auto part manufacturers are not within the reach of the regulation. As a
result, when an auto part manufacturer imports the key components or sub-assemblies, they are
assessed at the corresponding parts rates.
22. This is exactly why Article 29 is necessary. Decree 125, without Article 29, would create an
incentive for auto manufacturers to relocate their importation throug h their suppliers in order to
circumvent the measure.
170. ( China) In response to Panel question No. 59, China states that it has deferred the
application of Article 21(3) of Decree 125 primarily because of the administrative complexity of
implementing this particular criterion. Plea se elaborate on the specific nature of such
complexity relating to the implementation of Ar ticle 21(3), including administrative complexity
relating to the implementation of Article 21(2).
Response of China

23. The specific difficulty encountered by the custom s is how to identify the fair value of the
parts. First, it is normal for a manufacturer to impor t many types of auto parts from a single exporter.
In these circumstances, it is possi ble for the manufacturer and the exporter to manipulate prices
among different types of auto parts, without affecti ng their overall interest in the transaction. Second,
the companies that export auto parts are often affilia ted with the auto manufacturer in China. As in
any affiliated-party transaction, it can be difficult to identify fair value in these situations.
24. The implementation of Article 21(2) is relativ ely easy by comparison to Article 21(3), as
Article 21(2) is based on the physical attributes of the motor vehicle model in question.
Comments by the European Communities on China's response to question 170
25. China's reply demonstrates very concretely how Article 21(3) of Decree 125 is unrelated to
the "objective characteristics of the product in que stion", which is the standard set out by the
Appellate Body for the purposes of tariff classification ( EC - Chicken Cuts , paragraph 246).
Article 21(3) of Decree 125 is an explicit local c ontent requirement. In its reply China makes entirely
unsubstantiated assertions of "manipulation of prices". The whole context of China's reply is at odds
with the fact that parts manufacturers are highly specialised and fragmented. China has previously
explicitly acknowledged this fact ( see China's reply to question 3 of the Panel and the EC's reply to
question 3 of the Panel).
26. China's reply also demonstrates the burden and legal uncertainty imposed by the measures on
the use of imported auto parts in the production of vehicles, as it is equally difficult for manufacturers
to accurately foresee how imported auto parts will be valued. It is worth stressing that this 60%
threshold concept also applies at lower level and is already in force. Thus, an assembly (or system)
will be characterised as imported if the price of its imported parts accounts for at least 60% of its total
price (Article 22(3) of Decree 125 and Article 24 of Announcement 4). A key part will also be
deemed as imported if imported parts account for more than 60% of its price (Note 2 in Annex 1 to
Decree 125).

Comments by the United States on China's response to question 170
27. China's response is puzzling in that China casually denies that the measures impose any real
administrative burden on the use of imported auto parts
1, and then in its respons e to this question and
Panel question No. 59, it indicates that the "adminis trative complexity" relating to the implementation
of Article 21(3) necessitates a two-year delay.
28. China's attempts to attribute the administrative complexity to "enforcement" issues are not
convincing. The first problem China postulates is that the manufacturer and exporter may manipulate
prices among different types of imported parts. Even if true, that fact would be irrelevant since the
overall 60% threshold refers to the aggregate valu e of all imported parts – shifting prices between
imports of the same model would not affect the aggregate total.
29. Next, China states that companies that export auto parts are often "affiliated" with auto
manufacturers in China. China, however, provides no evidence of the existence or extent of this
assertion, which is limited to a great extent by the fact that foreign participation in Chinese
automakers is limited to a minority share. 2 In any event, transactions between affiliates present a
common issue in customs valuation and would not present any unique problems in this context.
30. Finally, China asserts that implementation of Article 21(2) is "relatively easy" as it is based
on the physical attributes of the motor vehicle. Im plementation of Article 21(2) is far from "easy" for
either the auto manufacturer or the Customs administ rator. First, the manufacturer must account for
the origin of all "key parts" in the vehicles, which, as explained in the US comments on China's
response to Panel question No. 167, requires tracki ng many streams of different types of parts
obtained from various sources. In addition, pursuan t to Article 20 of Order No. 4, the manufacturer
must trace parts obtained from local supplie rs back through the second tier suppliers ( i.e., suppliers
two steps up the supply chain). And finally, the manufacturer must be able to verify whether under
Article 24 of Decree 125 and Article 18 of Order No . 4, "substantial processing" by one of the
suppliers has resulted in the parts being deemed as "domestic." These are not simple tasks for the
manufacturer or the administrative authority.
171. ( China) Please explain how long each step of the procedural requirements under the
measures at issue takes on average. Please al so provide any supporting evidence for your
answer.
Response of China

31. Unfortunately, China does not maintain these statis tics, so it is not possible to calculate an
average period of time or provide another form of est imate. As set forth in Article 19 of Decree 125,
auto manufacturers are to request a verification with in 10 days after the assembly of the first batch of
the vehicle model that is to be verified. Afte r receiving a complete set of documentation from the
Customs General Administration, the Verification Cent er is to complete the verification and issue a
verification report within 30 days. In some cases, the documentation submitted by the auto
manufacturer may give rise to further inquiries and on- site reviews, or may require the submission of
additional documentation. In these cases, the verifi cation of a vehicle model can take longer than 30
days.

1 See e.g. paragraph 175 of China's rebuttal submission and its response to Panel question No. 275.
2 Article 48 of the Policy on Development of the Automotive Industry (JE-18).

32. It is important to note that the evaluation and verification process does not prevent the auto
manufacturer from importing parts and components to assemble a particular vehicle model.
Comments by the European Communities on China's response to question 171
33. China's reply completely ignores the fact that the applications for review and verification
under the various procedural stages of the measures are publicly available on the website concerning
the measures < http://autoadmin.chinaport.gov.cn
>. A sample of currently pending applications has
been provided as Exhibit EC - 26. This demonstrates that the completion of the various procedures
under the measures can take years, during which the auto manufacturer will have no certainty on the
charge that will apply to the imported auto part s and therefore of the economic viability of its
investment as the 15% additional charge would simply make the vehicle uncompetitive (see first
written submission of the European Communities, para graphs 16, 68 to 74). China's reply that it
"does not maintain these statistics" and that "it is not possible to calculate an average period of time or
provide another form of estimate" is simply not tenable because China clearly possesses detailed
information on the different stages of the procedur es. Presumably China attempts to direct attention
away from concrete proof of the fact that the measures make imported parts less attractive.
34. China's reply that "the evaluation and ve rification process does not prevent the auto
manufacturer from importing parts and components to assemble a particular vehicle model" is also
difficult to reconcile with the text of Article 7(3) of Decree 125:
"When an automobile manufacturer applies ... to the Ministry of Commerce for an
Automatic Importation License, it shall submit the self-evaluation results for the
vehicle models concerned. If the imported au tomobile parts are not characterized as
complete vehicles, the automobile manufact urer shall also submit the review opinion
by the CGA".
35. Clearly, to get the import licence allowing the import, the auto manufacturer will need to go
first through the self-evaluation and the review by Customs when the self-evaluation has concluded
that the imported auto parts are not characterised as complete vehicles.
172. ( China) Let's assume that an automobile manufacturer/importer of auto parts is willing
to pay for its imports of auto parts the tariff rate applicable for complete motor vehicles in
accordance with the Chinese government's policy. Can such manufacturer/importer import
auto parts without going through the procedural requirements under the measures concerned?
Response of China

36. No. The hypothesis of this question is that the manufacturer would import parts and
components for a vehicle model that is not a registered vehicle model under Decree 125, but would
nonetheless declare the parts and components as elemen ts of an imported motor vehicle and pay the
25 per cent rate of duty applicable to motor vehicles. Setting aside the implausibility of this scenario,
this practice would create certain problems relating to customs administration. Most importantly, if
the parts and components are not related to a registered vehicle model, there would be no
documentary basis to ensure the correct classificat ion of the parts and components. This is why
Decree 125 requires an evaluation and verification of each vehicle model that is assembled using
imported parts and components.

Comments by the European Communities on China's response to question 172
37. China's reply demonstrates why the procedures are not related to customs administration and
enforcement of the 25% duty on complete vehicl es allegedly being circumvented by multiple
shipments of auto parts. If such was the purpose of the measures, there would be no reason to impose
them in the scenario envisaged by the Panel.
38. The question of the Panel and reply of China perfectly illustrates the claims and arguments
made by the European Communities under the TRIMs Agreement and Article III of the GATT 1994.
As soon as an auto manufacturer uses imported auto parts in its production process, the measures will
impose a host of administrative burdens, and the ulti mate threat of having to bear a 15% additional
charge sometimes several years after starting the whole procedure. The only way for an auto
manufacturer to escape the measures, and regain le gal certainty and flexibility in the production
process is to use exclusively lo cal auto parts (see first written submission of the European
Communities, paragraphs 114, 126, 147 – 158).
173. ( China) In respect of the import license necessary for the importation of auto parts in
China,
(a) Is an import license issued automatically upon application by importers or are there any
conditions attached to the issuance of such licen se? Please explain the procedural requirements
that automobile manufacturers/importers need to satisfy to order to obtain an import license for
the importation of auto parts;
Response of China

39. An import license is automatically issued upon ap plication by importers to the Ministry of
Commerce. No substantive condition is attached to the issuance of such a license. Article 7 of
Decree 125 requires the importer to submit the self-eva luation results for the vehicle model as part of
the documentation submitted with the license application.
Comments by the European Communities on China's response to question 173(a)
40. Before the allegedly "automatic" import licence can be granted, the automobile manufacturer
is obliged to carry out the self-verification for eseen in Article 7 of Decree 125 and Article 6 of
Announcement 4. If the conclusion of the self-verificati on is that the model is not "characterised as
complete vehicles" i.e. that it contains sufficien t local content (Articles 21 and 22 of Decree 125), the
manufacturer is obliged to provide also the review report from customs (Article 7(3) of Decree 125).
41. China's reply makes it clear that the import li cence is far from automatic as the manufacturer
is obliged to go through cumbersome and lengthy procedures before the licence is granted (see the
response of the European Communities to question 8 of the Panel). Indeed, China's reply is inherently
contradictory because China states on the one hand that no substantive conditions are attached while
in the next sentence China acknowledges that th e self-assessment is necessary (China ignores the
review report required under Article 7(3) of Decree 125) before the import licence can be granted.
(b) Can such auto manufacturers/importers import auto parts without an import license?
Response of China

42. It depends. Not all auto parts require an automatic import license.

Comments by the European Communities on China's response to question 173(b)
43. In its reply "it depends" China makes a general assertion without providing any justification
or argument. Moreover, this reply seems to be inconsistent with China's reply to question 172,
according to which Decree 125 must be complied with in all
 cases.
Comments by Canada on China's response to question 173
44. China claims that an import li cence is automatically issued upon application by importers to
the Ministry of Commerce. It also claims that no substantive conditions are attached to the issuance
of a licence. Canada considers this answer to be inaccurate.
45. The import licence contemplated in Article 7 of Decree 125 is not automatically issued upon
request. An importer must first examine, and declare to customs, the source of all parts used in vehicle
manufacture, and that must occur prior to importation. And if an importer's examination results in a
declaration that the parts used in a vehicle are not deemed to be whole vehicles, then the importer's
examination must undergo further review by cu stoms. A simple request for a licence is not sufficient
without this declaration; therefore, the grant of a licence is clearly conditional and not automatic. See
also Canada's comments on China's response to Question 219.
174. ( China) What documents are auto manufacturers required to provide at the border to
import auto parts into China?
Response of China

46. In respect of auto parts and components for registered vehicle models, this question is
answered by Article 14 of Decree 125. As set fort h therein, the importer must submit to customs (1)
an import declaration form; (2) the automatic import license market with "Characterized as Complete
Vehicles"; (3) any other licenses required in respect of that import entry; and (4) the other documents
that are normally required by the Customs (which are detailed in response to question 249 below).
175. ( China) At the second substantive meeting, China stated that it lists imported auto parts
originating in different countries that are char acterized as complete vehicles under China's
measures as complete vehicles in its import statistics. Does any importation document
submitted by automobile manufacturers/importers of auto parts that are characterized as
complete vehicles under China's measures show th e countries of origin of those parts? How
does China determine the country of origin for the "complete article" when it is assembled from
parts and components from various countries of or igin? Do China's import statistics match the
export statistics recorded by exporting countries in respect of such auto parts?
Response of China

47. As China stated at the second substantive meeting, the classification and statistics under
Chinese customs practice are consistent with each othe r. Thus, an entry of parts for a registered
vehicle model is recorded as a motor vehicle in Ch ina's customs statistics. Of course, the Chinese
customs authorities reconcile these statistics to ensu re that they reflect the number of registered
vehicle models that are actually imported (and not the number of shipments of parts and components
for registered vehicle models). This problem of reconciliation arises in any circumstance in which
customs authorities classify multiple shipments of parts and components as the complete article (for
example, under national split shipment or multiple conveyance rules).

48. China understands that this is a question about how to record the country of origin of a motor
vehicle, when it is imported in an unassembled fo rm. This is, in no sense, a question that is
implicated uniquely by the challenged measures. A typical and similar situation is the importation of
CKD kits. Many parts within a CKD kit can co me from different countries. For instance, BMW
maintains a global logistics centre in Germany. Pa rts produced in other countries are shipped to this
logistics centre, from which the parts are assembled into a CKD kit and shipped to a BMW assembly
facility. In this scenario, a quite similar country-of-origin "problem" arises. The fact that the CKD kit
was shipped from a German logistics centre does not mean that all parts in the CKD kit have a
German country of origin, or even that the CKD kit, in its entirety, has a German country of origin.
The country of origin of individual parts is not a decisive factor in determining the country of origin
of the CKD kit. This must be determined based upon the general character of the entire group of the
parts that make up the CKD kit.
49. In the majority of cases, the determination of the country of origin for a motor vehicle in
unassembled form does not pose a significant challenge to customs authorities. The country of origin
of a product is normally determined by application of a set of multi-tier rules, which may include the
alteration of tariff classification, the ad valorem percentage of parts from different origins, the
existence of a substantial manufacturing or processing step, and so on. In most cases, the rule of
origin of motor vehicles that are registered unde r Decree 125 is determined by reference to the ad
valorem percentage of parts from different origins, but each case is determined on its own facts.
50. With regard to the question of whether the import statistics of China will match the export
statistics of other countries, in most cases the fi gures will match, but there are always exceptions.
Again, this is not a question that is uniquely im plicated by the challenged measures. Take, for
example, a Chinese manufacturer that sells goods through a Hong Kong trading company to a US
importer, under circumstances in which the Chinese manufacturer does not know the destination of
the goods. The export statistics of China would record Hong Kong as the destination and the United
States would not appear in this entry. However, in the US import statistics, the country of origin of
the goods would be recorded as China. There would no way to match these two records.
51. A similar disjunction in import/export statis tics can occur when the exporting country
classifies the exported good differently than the importing country. For example, the exporting
country may consider that the goods fall under one HS heading, while the importing country considers
that they fall under another HS heading. In this circumstance, the exporting country's export statistics
for the good in question will not match the impor ting country's import statistics for the good in
question. This problem is not unique to motor ve hicles or parts and components of motor vehicles.
Major trading partners (such as the United States a nd Canada) have establis hed regular consultative
processes among customs authorities to reconcile these kinds of technical issues in customs statistics.
Comments by the European Communities on China's response to question 175
52. China states in its answer to the above ques tion that tariff classification under its customs
practice and import statistics are c onsistent with each other. China is therefore admitting that if it
misclassifies certain goods, as it is the case here with auto parts, its import statistics will be influenced
by such misclassification of goods. This is also pr oved by China's admission that "[t]hus, an entry of
parts for a registered vehicle model is recorded as a motor vehicle in China's customs statistics. Of
course, the Chinese customs authorities reconcile these statistics to ensure that they reflect the number
of registered vehicle models that are actually im ported (and not the number of shipments of parts and
components for registered vehicle models)." In ot her words, China explicitly states that entries of
parts subject to the measures at issu e are registered as if they were a complete vehicle. China's fatal
mistakes in the tariff classification of such goods ar e therefore transposed into its statistical system.

This runs directly against the object and purpose of the Harmonised System, which is precisely to
harmonize classification of goods and thus allow co mparison of trade statistics: a good leaves a
country as a brake, is registered as an export of a brake, but on import into China becomes an import
of a complete vehicle and is registered as such.
53. Concerning the issue of origin, the European Communities can agree on the suggested general
principles that the country of origin of a product is normally determined by application of a set of
multi-tier rules, which may include the alteration of tariff classification, the ad valorem percentage
from different origins incorporated into a product, the existence of substantial manufacturing etc.
However, China fails the mention that such legal a nd factual tests to determine the origin of a good
must be applied on a product-by-product basis and to products as presented at the border for customs
clearance. The origin of the auto parts must theref ore be determined individually and not on the basis
of what China incorrectly considers being a comp lete vehicle after manufacture. China's incorrect
characterization of the goods at issue as "complete ve hicles" also triggers the incorrect application of
rules of origin to auto parts.
Comments by the United States on China's response to question 175
54. China claims that "the classification and statistics under Chinese customs practice are
consistent with each other. Thus, an entry of pa rts for a registered vehicle model is recorded as a
motor vehicle in China's customs statistics. Of course, the Chinese customs authorities reconcile
these statistics to ensure that they reflect the numbe r of registered vehicle models that are actually
imported (and not the number of shipments of parts and components for registered vehicle models)."
This answer is non-responsive – it means nothing other than an assertion that China's import statistics
are consistent with themselves.
55. China entirely ignores the a fundamental objects and purposes of the HS Convention (the
agreement upon which China has based its entire defen se): namely, to ensure the consistency between
import, export, and production statistics, and to ensure the collection of meaningful trade statistics for
the purpose of trade negotiations. The reason China i gnores this key point is clear: China's measures
destroy the utility of China's import statistics on auto parts, and makes those statistics incompatible
with both other countries export statistics, and with China's own export statistics. In particular, by
classifying imported auto parts from various c ountries as "complete vehicles," China no longer
collects any meaningful statistics on auto part imports.
56. China's response uses the example of a CKD k it to discuss how to "record the country of
origin of a motor vehicle, when it is imported in an unassembled form." But this example only serves
to highlight the incompatibility of China's me asures with the objects and purposes of the HS
Convention. If a country exports to China a legitimate
 CKD kit, and assuming that GIR 2 applied to
that kit, the export statistics would show the expor t of a vehicle, and China's import statistics would
show the import of a vehicle. 3 Nothing here is problematic under the HS Convention's goal of
ensuring the usefulness and consistency of statistics.
57. The issue the Panel raises in this question is not addressed by China. If Country A exports
1000 gasoline engines to China and Country B expo rts 1000 chassis to China, Country A will include
1000 gasoline engines in its export statistics and Country B will include 1000 chassis in its export

3 If the importing and/or exporting country had more detailed statistical breakouts, the statistics could
also indicate whether the imported article was a CKD kit or a vehicle. Thus, if China wanted separately to track
imports of kits and imports of assembled vehicles, it would be free to do so consistent with its HS Convention
obligations.

statistics. However, it is clear from China's response that it neither reflects the importation of engines
from Country A nor the importation of chassis from Country B. If, for example, China determines
that Country B is the country of origin of the "m otor vehicle" and it does not record the number of
shipments of parts in its "reconciled" statisti cs, then presumably China records no importation
whatsoever from Country A. It is completely im plausible that import and export statistics will match
in these circumstances. It is also worth notin g that China acknowledges in its response to Panel
question No. 213 that parts will most commonly enter China in this fashion, i.e., through multiple
importations.
176. The European Communities stated durin g the second substantive meeting that the
economic reality of the automotive industry has resu lted in the standardization of parts, such as
tyres and navigation systems, which, as a conseque nce, fit in various vehicles models and that
"the identification of imported parts that belong to a given specific model is an entirely fictitious
condition imposed under the measures." (Europ ean Communities' second oral statement,
paragraph 7-8) On the other hand, China has be en of the view that automobile manufacturers
know exactly, inter alia, what auto parts and auto parts from which auto part manufacturers
are going to be used for a specific vehicle model.
(a) ( China and other complainants) Do you agree with the European Communities' view?
Response of China

58. No.
Response of Canada (WT/DS342)

59. Canada agrees with the European Communities. Ensuring the availability of parts in standard
formats – standardization or "commonization" of pa rts – is a major cost-reduction strategy for vehicle
manufacturers. This allows these manufacturers to r ealize economies of scale at a global rather than
regional level. At the same time, it allows parts manufacturers to deal with now-globalized supply and
production chains. Vehicle manufacturers have incorporated steadily increasing proportions of auto
parts used in different models, and across vehicle platforms. For example:
60. Ford implemented platform standardization and a globally-used engine series in module
production for Ford North America, Ford Europe, Matsuda and Jaguar.
4
61. DaimlerChrysler uses the same standardized platform to produce the Chrysler 300/300C,
Dodge Magnum and Dodge Charger in Canada.
62. GM and Ford developed jointly a new six-speed automatic transmission, for use in models
produced by both companies.5
63. A transmission system for a hybrid vehicle, jointly developed by GM, DaimlerChrysler and
BMW, is widely used in different vehicles, buses, trucks and cars.6

4 Koichi Shimokawa, "Reorganization of the Global Automobile Industry and Structural Change of the
Automobile Component Industry" (Massachusetts Ins titute of Technology, International Motor Vehicle
Program, issued June 20, 2002), online: http://imvp.mit.edu/papers/99/shimokawa.pdf (Exhibit CDA-33).
5 General Motors Press Release, "New Hydra-Matic 6T70 Six-Speed Automatic Delivers Performance
and Fuel Economy" (August 25, 2005), online:
http://media.gm.com/servlet/GatewayServlet?target=http://image.emerald.gm.com/gmnews/viewmonthlyrelease
detail.do?domain=3&docid=17537 (Exhibit CDA-34).

(b) ( All parties ) Please provide evidence supporting your respective views on the
commercial reality of the automotive industry.
Response of China

64. China could not identify a documentary source that discusses the interchangeability of auto
parts and components in general te rms. Part of the problem is that "interchangeability" in the
automobile industry has different meanings in di fferent contexts. Interchangeability of parts and
components is much lower between models produced by different auto manufacturers.
65. A specific example illustrates the low de gree of commonality among auto parts and
components, even between vehicle models produced by the same auto manufacturer. CHI-46 shows
the strut suspension systems for a derivative of the VW Passat B6 and for the VW Sagitar. Both of
these systems are a type of Macpherson Strut Suspension. Though these two suspension systems look
similar, the major parts, as shown in the illustrations, are not interchangeable with each other. As this
example shows, parts and components for different ve hicle models are usually different in terms of
shape, material, and structure, even when they form part of assemblies that are fundamentally similar
in design.
Response of the European Communities (WT/DS339)

66. This question is closely linked with question 217 a). The economic reality of the automotive
industry is well illustrated by the notion of an "automobile platform", which is a shared set of
components common to a number of different vehicle models including from different auto
manufacturers. Exhibits EC – 12 to 25 demonstrate how the industry is increasingly using such
platforms in order to cut costs, speed development time and increase flexibility to adapt to the changes
in the market. A platform can be stretched, made wider and taller, and can accommodate a range of
engines and transmissions. An increasing number of vehicles share the same platform though they
appear on the outside to be unique. This allows to share expensive key components such as engines,
instrument panels or suspension parts between differ ent models and thus to obtain volumes that make
it possible to be competitive and profitable.
67. This demonstrates how entirely artificial the Ch inese measures are in requiring that each part
be identified in advance as belonging to a specific vehicle model. In today's real world of the
automotive industry a large part of parts are not only common between different vehicle models of the
same manufacturer but even between different manufacturers.
Response of the United States (WT/DS340)

68. The United States agrees with the EC view. The present commercial reality in the automotive
industry is a trend toward the standardization of vehicle platforms (the basic structural components
underpinning a vehicle) and the sharing of parts and components across vehicles. The trend is a result
of the continuous cost and competitive pressures within the industry and is also common among many
other manufacturing industries. By sharing platforms, parts, and components, manufacturers save
money by not having to engineer, manufacture, a nd purchase specialized parts for every model they
make, enabling them to increase the number of models produced off of common platforms; reduce the

6 BMW, DaimlerChrysler, General Motors Pre ss Release, "Global Allia nce for Hybrid Drive
Development: Cooperation between BMW, DaimlerChr ysler and GM" (September 7, 2005), online:
http://media.gm.com/servlet/GatewayServlet?target=http://image.emerald.gm.com/newspublisher/support_file/0
9-07-2005/2007/en.doc (Exhibit CDA-35).

time it takes to bring out new models; and reduce service and warranty costs by using parts common
to many vehicles.
69. Many manufacturers design and build multiple models based on a single platform which
includes many shared components. "Because it is mo re expensive to produce and market a number of
small-volume vehicles rather than one big seller, car manufacturers have to adopt a variety of cost-
cutting strategies to survive. One approach is th e so-called 'platform' strategy, in which common
components are shared wherever possible between different models."
7 Many models may share
components, including vehicles that do not appear very similar, such as passenger cars and sport
utility vehicles or trucks. "What counts now is th e flexibility to make different sorts of vehicles,
especially on the same production line. Many of the SUV-type vehicles share parts with cars."
Manufacturers adjust production based on demand for particular models.
70. A specific example of parts that are common a nd interchangeable with different models is
tires. Exhibit US-6 shows the same original e quipment manufacturer tires used on three different
models. In general, tires of the same dimensi ons are interchangeable with tires on any model with
similar dimensions.
71. Additionally, the parts used in a particular m odel will change over time as improved or lower
cost parts become available, or a defect is detected in a part. Thus the specific parts used in a vehicle
model is constantly evolving.
72. It is also important to note that even if a manufacturer could identify that certain auto parts are
going to be used in a specific vehicle model, given the assembly-line process, the manufacturer would
have no idea into which particular vehicle a particular part is going to be incorporated. Moreover,
within a bulk shipment of parts, one cannot identif y in advance which parts will actually be used in
production, as opposed to being discarded as defectiv e, damaged in processing, or being held in
inventory for eventual use as replacement parts. Thus, there is not – and cannot be – a specific
vehicle identified with a collection of specific pa rts until that vehicle has actually been assembled
within China. (The United States notes that alt hough China asserts that it can identify parts of a
specific model at the border, China does not assert that it can identify parts of a specific vehicle.) As a
result, the measures wait until the vehicle has been assembled before making the final assessment of
charges. See Articles 5 and 28 of Decree 125.
Response of Canada (WT/DS342)

73. Canada understands the Panel's qu estion to relate to the general description of the automotive
industry in China as set out in Section A of the co mplainants' joint background (paragraphs 8-19 in
Canada's first written submission), which includes exte nsive exhibits setting out the complexity of the
market, and the fact that most auto parts manuf acturers in China are independent and produce for
various vehicle manufacturers. See, for example:
• Exhibit JE-4, at pages 19-22, listing a numbe r of parts suppliers and some of their
customers;
• Exhibit JE-5, describing vehicle manufacturers in China, including, at pages 19-25, the
major Chinese vehicle manufacturers and thei r different joint ventures with separate
independent foreign vehicle manufacturers, and, at pages 30-34, lists of various
independent foreign parts manufacturers' operations in China;

7"Wave goodbye to the family car," The Economist, 11 January 2001 (Exhibit US-5).

• Exhibit JE-14, at page 11, providing the case study of ASIMCO, a successful
independent foreign parts company in China.
• Exhibit JE-21 at page 17, which shows a ch art illustrating joint ventures in vehicle
manufacturing, showing that foreign vehicle manufacturers do not dominate their
Chinese partners (e.g ., SAIC and First Auto Works both have joint ventures with GM
and VW). Pages 3-4 show various auto part s companies broken down by region, together
with their market capitalization. For exam ple, Aisin Seiki in Japan has a market
capitalization listed at US$4.5 billion, Brem bo at US$536 million, and Magna at US$7.7
billion; and
• Exhibit JE-23, at pages 25-30, listing various parts manufacturers and their locations in
China and, at page 25, noting the broad cu stomer base of BorgWarner in China (FAW,
Dongfeng, Shanghai-VW, FAW-VW, Shangha i-GM, Changan Ford, Beijing Jeep and
Cherry).
74. In the event that it may assist the Panel furthe r, Canada has in addition prepared Exhibit
CDA-36.
8 That exhibit contains numerous citations, primarily links to the websites of individual auto
parts manufacturers, with a particular focus on the manufacturers of brake parts. Those links provide
an indication of the variety of parts manufacturer s involved in the manufacturing process, and support
the material cited above in establishing a number of key propositions relating to the commercial
reality of the automotive industry, both in China and abroad. Notably, these are as follows:
• most parts suppliers have many customers – c ontrary to China's suggestion that they are
controlled by particular vehicle manufacturers, they rarely rely on a particular company
for the majority of their sales;

• there are complex ownership relationships between foreign and domestic companies for
particular facilities in China. Foreign parts manufacturers and vehicle manufacturers do
not dominate the market – many Chinese owned companies compete with a variety of
foreign manufacturers; and

• most parts suppliers are legally independent of the major vehicle manufacturers, and,
where vehicle manufacturers have an ownership interest in a particular auto parts
production facility in China, it is most often a joint venture with local Chinese vehicle
manufacturers.

Comments by the European Communities on China's response to question 176(b)
75. In its reply, China compares the suspension of two different Volkswagen models (VW Passat
and VW Sagitar) to illustrate the low degree of commonality among auto parts and components used
by the same manufacturer. The EC notes that the suspension has a function which is strictly related to
the performance and the size of the vehicle, and th at therefore it is perfectly normal that a model
weighting 2270 kilos with a maximum speed of 246 km/h (such as the top version of the Passat) has a
different suspension than a model weighting 1870 ki los with a maximum speed of 194 km/h (such as
the lower version of the Sagitar, which is also known as "Jetta") (Exhibit EC-39).
76. The vehicle models used in China's example belong to different mode l ranges. A relevant
comparison would have been between models of the same range. The Sagitar/Jetta, for example, is

8 Auto Parts Suppliers – Internet links (Exhibit CDA-36).

developed on the same platform
9 and shares a great number of parts and components with several
other models, ranging from the light van VW Caddy, to the family car VW Golf, to the roadster Audi
TT (Exhibit EC-40). Moreover, even though the Passat and the Sagitar/Jetta belong to different model
ranges, they still share parts and components. For example, several versions of these two models have
the same engine (Exhibit EC-39, third and sixth page).
Comments by the United States on China's response to question 176
77. China asserts a low degree of commonality among parts between vehicles of the same
manufacturer. The measures provide a particular mean ing of "vehicle models". Article 25 of Order
No. 4 provides, "If additional configurations to the original vehicle model cause the imported parts
used in the new configuration to become Deemed Whole Vehicles, the additionally configured model
should be registered with the Leading Group O ffice as a new vehicle model." Thus additional
features like a more powerful engine, a sport coupe (as opposed to a regular coupe), or the inclusion
of special comfort or safety features could result in the creation of a different "model". In such
circumstances there would be especially high commonality of parts within the two "models".
Comments by China on Complainants' responses to question 176
78. In response to this question and question 217, the complainants submit extensive
documentation about the use of common vehicle plat forms in the automobile industry, none of which
directly responds to the question – does an auto manufacturer import parts and components with the
knowledge that it will use those parts and component s to assemble a specific vehicle model? The
complainants have sought to describe a world in which auto manufacturers import various parts and
components, and only then decide what kinds of car s they will assemble, and in what amounts. This
notion is entirely antithetical to modern systems of supply chain management, which seek to minimize
the costs of maintaining inventory by ensuring the delivery of specific parts as they are needed to
assemble a specific quantity of a specific product.
79. [ ], widely recognized as the world's most effici ent producer of automobiles, was a pioneer in
the application of just-in-time supply chain management. As [ ] describes:
"Just-in-Time" means making only "what is needed, when it is needed, and in the
amount needed." To efficiently produce a large number of products such as
automobiles, which are comprised of some 30,000 parts, it is necessary to create a
detailed production plan that includes parts procurement, for example. Supplying
"what is needed, when it is needed, a nd in the amount needed" according to the
production plan can eliminate waste, incons istencies, and unreasonable requirements,
resulting in improved productivity."
10
80. Thus, [ ] has "a detailed production plan" of what it is going to assemble (e.g., so many [ ] at a
specific assembly facility), and it then arranges for th e delivery of parts that are required to fulfill that
production plan, as they are needed, in the amounts th at they are needed. The parts arrive at the
assembly facility with a pre-determ ined relationship to the production of a particular vehicle model
for which that part is required. It is this pre-dete rmined relationship that allows the auto manufacturer
to know that a particular shipment of parts and components is related to the production of a specific
vehicle model.

9 Reference is made to the EC reply to question 176 and to exhibits EC-12 to EC-25 for an illustration
of this concept.
10 See CHI-49.

81. For these reasons, the complainants' effort to de pict some degree of commonality of parts and
components among different vehicle models misses the relevant point – even if a part is common to
two or more vehicle models, the auto manufacturer is aware that a particular shipment of that part is
associated with the assembly of a sp ecific vehicle model. It is not a "fiction," as the EC claims, for
the auto manufacturer to associate a specific impor t entry of parts with the production of a specific
vehicle model; the manufacturer would be aware of this association even in the absence of the
challenged measures.
82. Even so, the complainants have not , in fact, established that there is a high degree of
commonality of parts and components among different vehicle models. By emphasizing the use of
common platforms by an auto manufacturer, the complain ants have sought to leave the impression
that all platforms have common parts. But, as the EC itself notes, "a platform can be stretched, made
wider and taller, and can accommodate a range of engines and transmissions."
11 As the auto
manufacturer makes these types of adjustments to th e platform for a specific vehicle model, many of
the parts used in the assembly of that model will change, even in relation to other vehicle models
assembled on the same platform. As further evid ence of the commonality of parts among different
vehicle models, the United States provides the specific example of tires – parts of a motor vehicle that
are sold as after-market products, and that are meant to be replaced periodically by the owner of
vehicle. This is hardly evidence of a high degree of commonality among auto parts and components.
83. An example drawn from [ ]'s assembly operations in China illustrates the very low degree of
commonality of parts and components among different vehicle models. [ ] assembles the [ ] and the
[ ] at the same assembly facility in China. As shown in CHI-50, these cars, while not built on the
same platform, are similar types of passenger sedans. Of the thousands of parts that make up these
two vehicles, they have exactly five in common. These parts are as follows:
12
PARTS NUMBER PER VEHICLE
Tire wrench 1
Engine label 1
Starter relay 1
A specific type of screw 4
A specific type of screw 33

84. As this example shows, auto parts have a low degree of commonality, even between two
vehicle models assembled by the same auto manuf acturer at the same facility. This further
underscores the fact that the manufacturer is fully aware of the relationship between an import entry
of specific parts and components and the assembly of a specific vehicle model.
177. ( China) Canada states in paragraph 31 of its second oral statement that
"[d]ocumentary evidence in context is only one aspect of this assessment. Yet China
oversimplifies 'as presented' by claiming that 'a customs declaration or other documentary
evidence' is sufficient for classification purposes. China would treat it as the sole determinant."
Does China agree with Canada's statement? If not, why not?

11 EC answers after second meeting at para. 1.
12 This information is compiled from data that [ ] provided to the Customs General Administration in
connection with the evaluation process under Decree 125. China is submitting this information as confidential
information in accordance with the overall confid entiality of this submission, as established by Article 18.2 of
the DSU and paragraph 2 of the Working Procedures for the Panel.

Response of China

85. China does not agree with this statement, a nd does not understand the basis for Canada's
assertion. As China has explained, the customs decl aration establishes that a particular shipment of
auto parts and components is one of a series of sh ipments that, in their entirety, have the essential
character of a motor vehicle. China considers that th e fact that a particular shipment is one of a series
of related shipments is part of the "context" in which auto parts and components are presented to the
customs authorities. While Canada acknowledges the relevance of documentary evidence as an
element of the classification determination, it provides no basis for its (implicit) assertion that
Decree 125 makes an improper use of documentary ev idence. Moreover, as Canada itself explained
during the second substantive meeting of the Panel, the factors that will be relevant in making a
classification determination will vary from one circ umstance to another. Canada does not explain
why a particular weighting and balancing of these factors is prescribed by the rules of the Harmonized
System in any given circumstance, or in the circumstances addressed by the challenged measures.
Comments by the European Communities on China's response to question 177
86. It is clear e.g. under paragraph 41 of China's rebuttal submission that China puts significant
emphasis on the customs declaration, which under the measures obliges the importer to identify the
model for which the imported part is intended. This is circular. In the absence of the measures vehicle
manufacturers would not identify with certainty whethe r a given imported part will be used in a given
vehicle model. They would import parts in bulk on th e basis of estimated needs in different models be
it for manufacture, repair or spare parts. As st ated in paragraph 12 of the EC's second written
submission, it is paradoxically the contested measur es that create the fiction of different vehicle
models consisting of entirely differe nt parts. In any event, the requirement to identify the intended
internal use in China is a demonstration that the measures fall under Article III of the GATT 1994.
Comments by the United States on China's response to question 177
87. China's response asserts that "the fact that a particular shipment is one of a series of related
shipments is part of the 'context' in which auto parts and components are presented to the customs
authorities." China takes an extremely loose approach to how the shipments are "related"; presumably
all that is necessary is that one shipment contains a part or component that could eventually end up
being assembled into the same vehicle model as a part in the other shipment. The measures do not
examine or consider who the importer or the exporte r is, when the shipment was sent or when it
arrives, where the shipment originates or where it arrives, or how the parts are shipped. The "context"
of the measures is not concerned with "importation" or activities "related to importation", but rather
the measures are focused on the amount of local content used in a vehicle assembled in China.
88. In this regard, Article 5 of Decree 125 provides that "'Deemed Whole Vehicles' . . . refers to
imported parts used by an automobile manufact urer that are already Deemed Whole Vehicles when
the vehicle is being assembled. " Under Article 7 of Decree 125 (and Article 4 of Order No. 4),
verification is conducted "on-site" at the manufacturing facility. Verification pursuant to Article 19 of
Decree 125 examines the first batch of assembled vehicles. Moreover, vehicles will continue to be
assembled – under great uncertainty – until such time as China actually issues the results of the
verification. Article 20 of Decree 125 requir es reporting regarding optional parts "when optional
imported parts are fitted on," and provides for re-ver ification "during the course of production." And
Article 28 of Decree 125 requires manufacturers to decl are items to Customs "after the imported parts
are assembled and manufactured into whole vehicl es" at which point Customs will proceed with
categorization and duty collection.

89. The measures focus on assembly and the proportion of local and imported content in the final
vehicle. That is the "context" provided by the measures.
178. ( China) In response to Panel question No. 11, China states that it had adopted broad
policy instruments of the same nature of the au to parts measures in other industry sectors, but
it did not specifically name them or provide them. Could China please indicate such policy
instruments in other industry sectors.
Response of China

90. Question 11 asked whether China had adopted lega l instruments similar to the Policy on the
Development of the Auto Industry in relation to other industry sectors. These are not necessarily "of
the same nature" as the "auto parts measures." The measures at issue in the present dispute relate to
only one chapter of the Policy on the Developm ent of the Auto Industry, concerning the
implementation and enforcement of customs laws. W ith respect to broad policy instruments in other
industry sectors, the National Development and Reform Commission (NDRC) has issued several
Industry Development Policies, including, for ex ample, the Steel Industry Development Policy
(8 July 2005) and the Cement Industry Development Policy (17 October 2006).
Comments by the European Communities on China's response to question 178
91. To the knowledge of the European Communities, the broad policy instruments cited by China
in its reply to question 178 do not provide any measures similar to those imposed by China on imports
of auto parts (Automotive Policy Order 2004 an d its implementing measures, i.e. Decree 125 and
Announcement 4).
92. The European Communities emph asises again that Decree 125 and Announcement 4 do not
implement only one chapter of the Automotive Polic y Order 2004, but the whole of it (see e.g. the
second written submission of the European Communities, paragraph 24).
Comments by the United States on China's response to question 178
93. Given China's response, it appears that China does not have any policy instruments in other
industry sectors which, in relevant respects, are of the same nature as the auto parts measures.
B. L
EGAL NATURE OF THE MEASURES
179. China claims that parties have reached s ubstantial agreement on the principles that are
relevant to determining whether a particular measure or charge is subject to the disciplines of
Article II or to the disciplines of Article II I of the GATT (China, second written submission,
paragraphs 4 and 100):
(a) ( China) What are exactly these principles? Please explain how are they are found
within the meaning of the applicable GATT provisions?
Response of China

94. As China has explained throughout these proceedings, a measure or charge is within the scope
of Article II:1(b), first sentence, if it imposes an "ordinary customs duty" on the goods of another
Member "on their importation" into the customs territory. China does not understand any party in this
proceeding (including any third party) to have taken the position that the term "on their importation"

is defined by the point in time or space at which a charge is collected. That is, China does not
understand any party to have taken the position that a measure must be imposed, and a charge must be
collected, when goods physically cross the frontier in order for that measure or charge to fall within
the scope of Article II:1(b), first sentence. Under modern systems of customs administration, customs
duties are not "tolls" that are collected as a prec ondition to the movement of goods off the dock. On
the contrary, the parties have acknowledged that customs authorities impose customs-related
measures, and collect ordinary customs duties, after the point in time and space at which goods have
crossed the frontier.
95. Consistent with Article 31(3)(b) of the Vienna Convention, the term "on their importation"
must be interpreted in the light of the cons istent and widespread practice among Members of
imposing customs-related measures, and collecting customs duties, after goods have crossed the
frontier. As China documented in paragraph 103 of its second written submission, the interpretations
offered by the parties to this dispute (again, including the third parties) all point to the reason or event
that triggered the imposition of the measure or charge as the determinative consideration in evaluating
whether the measure or charge is within the scope of Article II:1(b).
13 Canada states, for example,
that "[i]n assessing the characterization of a charge, one must consider why, as well as how or when,
the charge is assessed." 14 At the meeting of the Panel with the third parties, Brazil referred to this as
the "event or events that trigger the application of the measures at issue."15
96. Consistent with these explanations, and consis tent with the practice of WTO Members, a
measure or charge is imposed on goods "on their importation" into a Member's customs territory if the
measure or charge is triggered by, or arises by r eason of, the importation of goods into the Member's
customs territory. A Member may impose a customs -related measure or collect an ordinary customs
duty after goods physically cross the frontier, prov ided that the measure or charge relates to a
condition or liability that arose by reason of the entry of the goods into the Member's customs
territory.
97. For the reasons that China has explained, Chin a considers that if a measure or charge is
determined to fall within the scope of Article II:1( b), the same measure or charge cannot be evaluated
under Article III of the GATT. The complainants' respective positions on the binary character of
Article II and Article III are not entirely clear. Canada, at a minimum, appears to accept that a
measure or charge that is validly within the sc ope of Article II cannot be analyzed under Article III.
16
Thus, there appears to be less scope of agreemen t among the parties concerning the factors that are
relevant in determining whether a measure or charge is subject to the disciplines of Article III.
Comments by the European Communities on China's response to question 179(a)
98. China's reply to question 179 (a) of the Panel is illustrative of the tactics it has chosen for
these Panel proceedings. First China tries to find agreement between the Parties that "on importation"
is not "defined by the point in time or space at which a charge is collected " (emphasis added). Then
China 'innocently' paraphrases this alleged 'agreeme nt' to meaning that "China does not understand
any party to have taken the position that a measure must be imposed, and a charge must be collected ,
when goods physically cross the frontier …. " (emphasi s added). "Collecting" has all of a sudden been
extended to "imposition and collecting". A couple of sentences later these 'principles' are extended to

14 Canada answers at p. 19 (emphasis added).
15 Written responses by Brazil to the Panel's questions to the third parties at p. 6.
16 See China rebuttal submission at para. 123.

"customs related measures" and th e "reason or event that triggered the imposition of the measures or
charge".
99. China paraphrases alleged "agreements" in order to widen such "agreements" almost ad
eternum to fit its own arguments. The European Co mmunities has set out a detailed analysis of the
factors relevant in the analysis of the respectiv e scope of application of Articles II and III of the
GATT 1994 in paragraphs 35 to 49 of its second written submission.
Comments by the United States on China's response to question 179(a)
100. In the first paragraph of its response, China atte mpts to conflate two distinct concepts, when a
charge is "imposed" and when it is "collected." The United States has previously provided comments
on these different concepts in its responses to Panel question Nos. 32, 87, and 180. Similarly, the
United States has addressed China's assertions rega rding the relevance of the "reason" for the
imposition of a change in its response to this question and to Panel question Nos. 181 and 183.
101. Finally, China seems to use the following method to determine whether a charge falls within
the scope of Article II or Article III: completely disregard Article III, see if the measure could
arguably fit within the definition of a customs duty, and then conclude that Article II applies to the
exclusion of Article III. That does not follow the type of approach or reasoning employed by
previous panels examining this or similar issues. See e.g. Belgium – Family Allowances, BISD 1S/59,
EEC –Parts and Components , BISD 37S/132, paragraphs 5.4-5.8, India – Autos, WT/DS146, 175/R,
paragraphs 7.217 et. seq., and EC – Asbestos , WT/DS135/R, paragraphs 8.83-8.100. Rather, each
charge must be examined based on its particular fa cts and circumstances, taking into account the text
of both Article II and Article III, in context, and in light of the object and purpose of the WTO
Agreement.
(b) ( Complainants) Do you agree with China? Please comment?
Response of the European Communities (WT/DS339)

102. The European Communities does not agree with China. The European Communities
considers that the Chinese measures fall within the scope of the TRIMs Agreement and Article III of
the GATT 1994 and therefore it cannot agree with the various unclear formulations China has offered
in support of its claim that the measures should be examined exclusively under Article II of the GATT
1994. The clear substantive criteria for this conclusi on have been set out in the submissions of the
European Communities, most recently in paragra phs 17 to 20 of its second oral statement and
paragraphs 35 to 56 of its rebuttal submission.
Response of the United States (WT/DS340)

103. In paragraph 4 of its rebuttal submission, China asserts that "the parties now appear to agree
on certain basic principles concerning the characterization of a charge in relation to the rights and
obligations of a Member under Article II and Artic le II of the GATT 1994" and that "the issue is
whether the charge is one that a Member is allo wed to impose by reason of the importation of the
product, or, alternatively whether the charge relate s to the status of a product after it has been
imported."
104. The United States does not agree that the parties have reached agreement on these
"principles". First, customs duties must be based on the condition of the article as imported, while
China's measures impose charges based on whether th e article is used in domestic production and on

the domestic content of the complete vehicle produced within China. Second, the issue is not whether
the charge is one that a Member is allowed to impose, as Article II and Article III do not grant
permission but rather provide restrictions on Members' measures. The fact that a measure is or is not
consistent with one obligation does not necessarily determine whether the measure is consistent with a
different obligation. A determination of whether a particular measure or charge is subject to the
disciplines of Article II or Article III requires an analysis of the language of those Articles, an analysis
China largely avoids.
Response of Canada (WT/DS342)

105. Canada does not agree that there is substantial agreement with China on the principles
relevant to determining whether GATT Article II a pplies, and in particular under what circumstances
ordinary customs duties may be charged under Article II:1(b), first sentence. Canada's position is that
ordinary customs duties must be assessed based upon the state of the goods as presented at the border,
which China's measures do not do. The legal founda tion for this argument is set out in detail in
Section II.B of Canada's second written submission.
180. ( Complainants) China claims that the parties agree that the time and place at which a
charge is collected is not the determinative consideration in evaluating whether that charge is
subject to the disciplines of Article II or Article III (China, second written submission,
paragraph 4). Do you agree, given the complainants' respective responses to question No. 87 see
to indicate that Canada disagrees with the European Communities' and the United States'
position on this point? Would you have a different position on the relevance of the time and
place if it would to refer instead to the calculation and assessment of the charge?
Response of the European Communities (WT/DS339)

106. The European Communities does not see any substantive difference in the positions of the
complainants on this issue. The European Communities is of the view that the precise time and place
of the actual collection of a charge is not determin ative in characterising the charge or the measure
that imposes the charge. In other words, the actual collection or payment of an ordinary customs duty
may occur after importation but the determination of the amount due must be made on importation i.e.
on the basis of the objective characteristics of th e product when presented for classification at the
border (see Appellate Body report in EC – Chicken Cuts, paragraph 246). The European Communities
prefers the word determination instead of the word s "calculation and assessment" of the charge used
in the question from the Panel although these notions could be considered in this context to be
synonymous.
Response of the United States (WT/DS340)

107. The United States does not believe that there is a disagreement between the complainants on
this point. The United States does not maintain that the time and place at which a charge is collected
is the determinative consideration in evaluating whether th e charge is an internal charge or a customs
duty. The United States does maintain, however, that this issue may be relevant to the
characterization of the charge. The United States co nsiders that the time and place of assessment or
calculation of the charge would also be relevant in evaluating whether the charge is an internal or a
customs duty.

Response of Canada (WT/DS342)

108. Canada does not consider that there is any disagreement between the complainants on this
point. As set out in more detail in answer to Question 87, and Section II.B of Canada's second written
submission, ordinary customs duties must be impos ed based upon the state of the product as it arrives
at the border. The actual payment need not take place at the border, nor even must the amount owing
be determined at that point (which could be char acterized as the "calculation" or "assessment" of the
charge), provided that the duty is levied in respect of the good as presented.
109. Canada does not agree with China's character ization of the issue, in its second written
submission at paragraph 4, as being "whether the charge is one that a Member is allowed to impose by
reason of the importation of the product". Article II:1( b), first sentence, only allows the imposition of
ordinary customs duties to products "on their importation", not "by reason of the importation". This is
discussed in detail in Canada's second written submission, in Section II.B.
181. ( Complainants) China submits that it does not perceive any substantial disagreement on
the understanding that the term "on their importation" under Article II of the GATT means
that the characterization of a given charge under that provision will depend upon the reason or
event that triggers its imposition. (China's second written submission, paragraph 103). Do you
agree? Please explain.
Response of the European Communities (WT/DS339)

110. There is a fundamental disagreement between China and the European Communities on the
interpretation of the notion "on importation" unde r Article II of the GATT 1994. China attempts to
link the contested measures with Article II in various artificial ways.
111. It is self-evident that the "reason or event" under Article II of the GATT that triggers the
imposition of an ordinary customs duty is the impor tation of the good into the customs territory of a
Member. However, the reason or event that trigge rs the imposition of the charges under the measures
is not the importation of the good into the custom s territory of China but the assembly, fitting,
equipping and manufacture of the imported parts into a complete vehicle after importation in
combination with an insufficient proportion (in value or amount) of domestic parts. Article II does not
allow that ordinary customs duties may be imposed as long as they somehow "depend upon"
importation.
112. China uses several very different notions in its attempt to define "on importation" and "the
reason or event that triggers its imposition" is only one of many
17. In particular China attempts to
extend the material scope of "on importation" sugges ting that "a charge is 'on … importation' of a
product (…) if the charge bears an objective relationship to the administration and enforcement of a
valid customs liability ".18 The European Communities reiterates that Article II:1(b), first sentence
does not contain any language that would allow the unprecedented extension of its scope in the way
China suggests.19 This criterion proposed by China is overly broad, lacks precision and is, therefore,
not suitable to distinguish internal charges and ordinary customs duties imposed "on importation".
113. As set out by the European Communities in its second written submission the term "on
importation" has a temporal and a material aspect (see paragraphs 39 to 49). China overstretches the

17 See second written submission of the European Communities, paras, 37 to 49.
18 See first written submission of China, para. 67 (emphasis added).
19 See the response by the European Communities to Question 90 from the Panel.

temporal side of "on importation" by referring to a "process of importation", which is not complete
before "all of the customs formalities required in co nnection with the importation of those goods have
been satisfied, and the goods are no longer subject to customs control".
20 Not surprisingly, China
maintains that the entire administrative procedure under Decree 125 and Announcement 4 is part of a
customs procedure which is not finished before charges are imposed pursuant to Article 28 of
Decree 125.21 China's position entirely ignores the panel report in EEC – Parts and Components ,
which rejected the question of goods being in free ci rculation as a relevant criterion in determining
whether a measure falls under Article II of the GATT.
114. Furthermore, these procedures can take months and even years to be completed and require
collecting and submitting information that has nothi ng to do with what is necessary for the purposes
of classifying goods under the Chinese schedule and clearing the goods through customs (such as the
annual production plan for the vehicle model or the list of domestic and foreign suppliers under
Article 9 of Decree 125). Exhibit EC – 26 demonstr ates that many applications made in 2005 and
2006 and most if not all applications made in 2007 under the procedures of the measures (see
Chapter 2 of Announcement 4 for details) are still pending before the Chinese authorities. Such
extremely lengthy and cumbersome procedures have nothing to do with normal customs procedures as
applied in the rest of the world including in the EC, US and Canada.
Response of the United States (WT/DS340)

115. The United States does not agree that the term "on their importation into the territory to which
the Schedule relates" means that the characteriz ation of a charge under Article II depends on the
alleged reason or event that purpor tedly triggers the charge. The "reason" that a customs duty is
assessed may be "because an item is imported". But an internal tax (for purposes of Article III:2) may
likewise be imposed "because an item is imported". Thus that factor is not determinative.
116. Article II:1(b) provides that, on the importation of a product into the territory of a Member,
the Member may not impose ordinary customs duties in excess of those set forth and provided in its
Schedule. The imposition of ordinary customs duties thus occurs at the time of importation of goods
into the territory to which a Member's Schedule relates.
117. As the United States has emphasized, China imposes a 25% charge on imported auto parts
only if (1) the part is actually used in the manufacture of a vehicle and (2) the amount of imported
content in that vehicle exceeds the thresholds set out in China's measures. A charge which is assessed
based on the level of local content contained in an internally manufactured product can not be
considered to be a charge on "importation."
Response of Canada (WT/DS342)

118. Canada does not agree. This is an attempt to in fer, without any justification in the text of
Article II, that the application of a border charge is somehow related to the ultimate justification for
importation, independent of the proper classifica tion of the good as presented at the border. The
reason or event that triggers a charge is the physical act of importation.

20 See the response by China to Question 87 from the Panel.
21 See the response by China to Question 135 from the Panel ("China has explained that Decree 125 is a
customs procedure to ensure the correct tariff classification of multiple shipments of parts and components that
are related to each other through their common assembly into a particular vehicle model.").

119. China attempts, incorrectly, to read the phr ase "impose as a condition of" into "on or in
connection with", found in the second, legally distin ct sentence of GATT Article II:1(b). China then
argues that its interpretation is linked to the term " on their importation" found in the first sentence. As
noted in paragraph 27 of Canada's second oral stat ement, there is a clear and important distinction
between these terms.
 Under Article II:1(b), first sentence, the reason or event does not change. Canada
has made clear in Section II.B of its second written submission that the "reason or event" is always the
same under Article II:1(b), first sentence, as or dinary customs duties may only be imposed on
products based upon their physical state when arriving at the border. Liability for a duty can only flow
from that single event.
120. There is no basis in Article II, or in the pr actice of WTO Members, for a suggestion that
ordinary customs duties may be imposed generally as long as they somehow "depend upon" the fact
of importation. As the panel in EEC –Parts and Components held, neither the policy purpose nor the
domestic description or characterization of a charge is relevant to the assessment of whether the
charge is internal. 22 That is directly applicable to this case, where the dependence of the internal
charges upon importation is only linked to the fact that the parts were at one time imported.
182. ( China) Canada claims that China concedes that if the imported content in a
manufactured vehicle changes after importation, imported parts may be found to be a Deemed
Imported Vehicle when the vehicle model was not self-assessed as such (resulting in higher
charge). Canada then concludes that "sel f-assessment is therefore nothing more than a
mechanism for the administration of an internal charge, whether or not at the border."
(Canada, second written submission, paragraph 36). Do you agree? Please explain.
Response of China

121. Canada's statement is incorrect. As explained in response to questions 167 and 168 above, the
classification of auto parts and components is based on the results of the verification report and the
declaration that the manufacturer provides to customs authorities when the auto parts enter China.
122. If the classification of a previously registered vehicle model changes between the entry of the
parts into China and the time at which the custom s duties are due, China allows the manufacturer to
pay duty on any such parts on the basis of the revised classification of the vehicle model. This is an
accommodation to the manufacturer, in that it recognizes the right of the manufacturer to submit a
revised evaluation of the vehicle model and to obtai n a verification of that revised evaluation. In
practice, this accommodation would ap ply, if at all, to a limited number of import entries. Because
customs duties are due on a monthly basis (as specifi ed in Article 31 of Decree 125), there will be a
limited number of auto parts and components for whic h the manufacturer has not yet paid duty at the
time that the Verification Center issues a report c oncluding that the vehicle model no longer has the
essential character of an imported motor vehicle. It is only in respect of parts and components that
fall within this narrow window that the manufactur er is allowed to pay the lower rates of duty
applicable to parts.
Comments by the European Communities on China's response to question 182
123. As the charges are "due" because of assembly and manufacture of parts into a complete
vehicle in combination with an insufficient numbe r or proportion of local parts the charges are
manifestly internal (Article 28 of Decree 125). The fact that China facilitates the payment or
collection of the charges by applying the results of the verification procedures under the measures in a

22 EEC – Parts and Components, GATT Panel Report, at p. 50.

standardised way after the first batch of vehicles has been manufactured is irrelevant under the legal
assessment of the measures.
124. Furthermore, China's assertion in its reply that "the classification of auto parts and
components is based on the results of the verificati on report and the declaration that the manufacturer
provides to customs authorities when the auto parts enter China" is counterfactual on the face of the
measures (see above comments on China's reply to qu estion 168). In addition, China's explanation
that, in most cases, the 25% duty on complete ve hicles will have anyway been paid before the
verification report concludes that parts are no l onger characterised as complete vehicles can only
mean that the measures impose a 25% charge (a llegedly to enforce the 25% Customs duty on
complete vehicles) on imported auto parts, whic h even by China's standards, do not qualify as
complete vehicles.
Comments by the United States on China's response to question 182
125. The United States again emphasizes that if the level of imported content in a manufactured
vehicle changes after some or all of the parts used in that vehicle have been imported, the imported
parts may be found to be a Deemed Imported Vehi cle – even if the vehicle model was not self-
assessed as such. This occurs through the operation of Article 20 of Decree 125
23 and the last
paragraph of Article 6 of Order No. 4.24
126. The structure of the measures establishes that fi nal categorization of an imported part occurs
after assembly, rather than at the border. If the pa rts were categorized at the border, there would be
no reason to impose a payment bond on all parts, a nd delay payment of the charge. The whole
structure of the measures is centered around the actual assembly of the vehicle.
127. Finally, China's response indicates that a ch ange may occur as an "accommodation to the
manufacturer," as if the delayed determination is a benefit to the importer. The change actually may
also result in the manufacturer being re quired to pay the additional charges. See Article 6 of Order
No. 4.
183. ( Complainants) For China the nature of a charge depends on whether it is one that a
Member is allowed to impose (a) by reason of th e importation of the product, or, alternatively,
(b) whether the charge relates to the status of a product after it has been imported. (China,
second written submission, paragraphs 4 and 112). Do you agree? Please explain.
Response of the European Communities (WT/DS339)

128. It would seem to the European Communities th at the distinction made by China between
'whether the charge is one that a Member is allo wed to impose (a) by reason of the importation of the
product, or, alternatively, (b) whether the charge re lates to the status of a product after it has been
imported' is nothing but a reformulation of th e words "on importation" and "internal" without
providing any additional substantive arguments.

23 "If during the course of production, there is a change to the Deemed Whole Vehicle status of an item,
the automobile manufacturer may apply to Customs for re-verification of the basic-model vehicle. Customs,
pursuant to the new verification report issued by the Center, will determine the duty-paid price for calculating
duties."
24 "If the percentage make-up of imported parts changes, such that the imported parts used in the
vehicle model become Deemed Whole Vehicles, or are no longer a Deemed whole Vehicle, the changed vehicle
model should be registered as a new vehicle model."

129. Members are naturally allowed to impose ordi nary customs duties in accordance with their
schedules "on importation" in accordance with Article II:1 (b), first sentence. In contrast, Members
are not allowed to impose ordinary customs duties after importation or even in connection with
importation. As set out in paragraphs 39 to 49 of the European Communities' rebuttal submission, "on
importation" has a temporal and a material aspect. With the words "by reason of the importation of the
product" China appears to entirely ignore the tempor al aspect of the notion wh ile at the same time
blurring its material aspect.
130. It is not very clear what China attempts to ach ieve with its reference to "whether the charge
relates to the status of a product after it has been imported". In particular, the words "the status of a
product" are most unclear. In any event, the European Communities considers that it has demonstrated
that the charges are imposed after the products have been imported thus making the charges internal.
Response of the United States (WT/DS340)

131. As stated in the response to question No. 181, the United States does not agree that a charge
imposed "by reason of the importation of a product" is necessarily an ordinary customs duty. Any
internal charge imposed on an imported product b ecause it is an imported product may be considered
imposed "by reason of the importation of the product." Thus that criterion does not provide a useful
distinction between an internal charge and a customs duty.
132. It is also not clear what China means by stating "whether the charge relates to the status of a
product after it has been imported." A product c ould have any of a number of differing "statuses"
after being imported depending on the measures at issu e (for example, whether it is an input for VAT
purposes, a luxury good for a luxury tax, or is treated differently because it was imported).
Response of Canada (WT/DS342)

133. Canada does not agree. See responses to Questions 180 and 181, above.
184. (United States) In its response to question No. 106 the United States, unlike the other two
co-complainants, takes the position that although charges levied under Article 2(2) of Decree
125 would be in principle "ordinary customs duti es," the Panel should nevertheless address the
claims under Articles III:4, III:5 of the GATT a nd the TRIMS Agreement in regard to such
charges. Please, explain the legal basis for you r position given that under Article 2(2) of
Decree 125 no other provision of the measures apply to such importations.
Response of the United States (WT/DS340)

134. Under the second paragraph of Article 2 of Decr ee 125, if the importer so elects, Decree 125
does not otherwise apply to CKDs and SKDs impor ted by auto manufacturers, and the manufacturer
conducts clearance procedures and pay 25 per cent duties at their local Customs office. The original
US response to Panel question No. 106 misinterpreted that question; the United States in fact agrees
with Canada and the European Communities that in the scenario where the importer uses Article 2 of
Decree 125 for CKDs and SKDs, issues under Articles III:4 and III:5 of the GATT and Article 2 of
the TRIMs Agreement are not involved.
 (European Communities and Canada) Please, confirm that the European Communities
and Canada do not take the same position as th e United States on the need to address the claims
under Articles III:4, III:5 of the GATT and the TRIMS Agreement in regard to charges under

Article 2(2) of Decree 125. If confirmed, please explain in detail why you do not take such a
position.
Response of the European Communities (WT/DS339)

135. Provided the normal customs procedures are a pplied under Article 2(2) of Decree 125, the
European Communities considers that it would be su fficient for the Panel to decide whether it is in
accordance with Article II of the GATT 1994 to appl y the duty on complete vehicles to such kits
generally and in all cases. As the European Commun ities has demonstrated in its various submissions
(most recently see paragraphs 130 to 132 of the second written submission), such standard treatment
is inconsistent with Article II of the GATT 1994.
Response of Canada (WT/DS342)

136. Canada does not consider that there is an y fundamental disagreement between the co-
complainants. As Canada noted in response to Ques tion 33, CKDs or SKDs that contain virtually all
the parts for a vehicle in a single shipment can appropr iately be classified as whole vehicles at the six-
digit level. However, the fundamental point, as set out in detail in Sections II.E and F of Canada's
second written submission, is that the appropriate duty rate for such vehicles is 10% irrespective of
classification. This is characterized properly as a question of the proper application of China's
Schedule, Article II:1(b) first sentence, and paragr aph 93 of the Working Party Report. Of course, the
fact that an ordinary customs duty is not subject to scrutiny under Article III:2 does not mean that
such charges are exempt from scrutiny under GATT Article III:4 or Article 2 of the TRIMs
Agreement. See, for example, Canada – Autos
25 and Indonesia – Autos.26
137. However, where Article 2(2) of Decree 125 is applied to exempt imported parts from the
administrative burdens of the measures, and wher e ordinary customs duties are charged based upon
the state of those imported parts as they arrive together in China (i.e ., if it properly applies to the
narrow definition of CKD or SKD), then it is not necessary to examine this very specific (and very
limited) instance of the application of the measures under Articles III:4 and III:5, and the TRIMs
Agreement.
185. China submits that there is a "conceptu al difference" between charges under Article 29
of Decree 125 and other charges under the measu res. More specifically, China refers to various
aspects related to the former that differentiates it from the latter, inter alia : importation by
supplier not manufacturer, payment of applicable charge by supplier and difference paid later
by manufacturer (deduction from applicable char ge); such supplier would have completed the
"necessary customs formalities;" such imported auto parts wo uld no longer be subject to
"customs control"; "rules for bonded goods" would not apply in these circumstances; and
such imported auto parts would therefore be in "free circulation in China.
(a) (China ) Does the "duty bond" placed in acco rdance with Article 12 of Decree 125 by a
manufacturer assembling auto parts that have been imported by the manufacturer itself
guarantee the payment of the customs duties for th e importation of parts imported by suppliers
that are ultimately included in a vehicle model that is a "deemed whole vehicle"? Please
explain.

25 Canada – Autos, Panel Report, at paras. 10.73, 10.90.
26 Indonesia – Autos, Panel Report, at paras. 14.65, 14.91.

Response of China

138. The duty bond only covers parts imported by the auto manufacturer itself. Parts imported by
third-party suppliers go through the regular normal customs process and pay the import duty to the
customs.
Comments by the European Communities on China's response to question 185(a)
139. China's reply acknowledges that the procedures under the measures are not part of "the
regular normal customs process".
(b) (China) In the above example, if the "duty bond" also covers the supplier importation of
auto parts, how can this be reconciled with China's statement that "suppliers would have
completed the necessary customs fo rmalities" and that these parts will be in "free circulation"?
Please explain.
Response of China

140. See the answer to 185(a) above.
Comments by the European Communities on China's response to question 185(b)
141. See comment on China's reply to question 185 (a).
(c) (China) Please further elaborate your statement that the application of Article 29 of
Decree 129 is "conceptually different" and that it presents a "different set of issues in relation
to the characterization of the measure under Article II." What is then the key factor that sill
makes these charges fall under Article II of the GATT despite such "conceptual differences"
and a "different set of issues"?
Response of China

142. As discussed in paragraph 186 of China's s econd written submission, China considers that
charges collected pursuant to Article 29 could be c onsidered ordinary customs duties under Article II,
in that 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 vehicle.
Comments by the European Communities on China's response to question 185(c)
143. China does not answer the question and simply re peats the "mantra" it has chosen to use in
these proceedings.
(d) (China) In its response to question No. 83, Ch ina said that "in most cases" under
Article 29 of Decree 125 suppliers would have completed customs procedures and goods would
therefore be in free circulation. What a re the cases in which suppliers would not have
completed the customs procedures?
Response of China

144. The issue is largely one of timing. If a s upplier were to import parts and components and
send them directly to the auto manufacturer (as might be the case under modern systems of supply

chain management), it is possible that the supplier would not yet have paid the applicable customs
duties under normal customs procedures. This is be cause the importer is not always required to pay
the applicable customs duties at the time the goods cro ss the frontier. When the parts are sent directly
to the auto manufacturer, the importer is still responsib le for the payment of the applicable auto parts
duties.
Comments by the European Communities on China's response to question 185(d)
145. China's reply must presumably be understood as meaning that the reference to "in most cases"
in its reply to question 25 is irrelevant. In any case, China's reply clearly establishes that auto parts are
first subject to a charge of 10% which corresponds to the customs duty on parts paid by the importer
27
(i.e. the supplier in the case envisaged by Article 29 of Decree 125), and after an additional 15%
charge due by the auto manufacturer because of the assembly and manufacture of the imported part
into a complete vehicle with insufficient local content, i.e. an internal charge. The measures function
on the same basis for auto parts imported directly by the auto manufacturers. The fact that the
Customs duty and the 15% internal measure are due by the same person, and can thus be hidden under
a global 25% charge cannot affect the legal assessment under Articles II and III of the GATT 1994.
(e) (Complainants) Do you agree with China that despite these differences, Article 29 still
involves "border charges" under Article II of the GATT? Please explain.

Response of the European Communities (WT/DS339)

146. The European Communities is of the view that with the exception of Article 2(2) of
Decree 125, the measures are subject to Article 2 of the TRIMs Agreement and Article III,
paragraphs 2, 4 and 5 of the GATT 1994. All the st atements made by China in this connection, only
short of openly admitting a violation of the TR IMs Agreement and Article III of the GATT 1994,
demonstrate that it does not attempt to defend Ar ticle 29 of Decree 125 even under Article II of the
GATT 1994. Therefore the European Communities do es not agree with China that Article 29 of
Decree 125 involves "border charges" and doubts whet her China itself is genuinely maintaining such
a position.
Response of the United States (WT/DS340)

147. The United States maintains that all charges im posed by Decree 125 are internal charges in
breach of Article III:2 of the GATT. There are no "separate" charges imposed by Article 29 of
Decree 125. Under Decree 125, if the number or value of imported parts in a specific vehicle exceed
the designated thresholds, all imported parts in that vehicle will be assessed a 25% charge. Article 29
of Decree 125 allows a manufacturer to deduct from that charge the value of any customs duties that
another supplier has paid on one of the parts assembl ed into the vehicle. Accordingly there is no
"separate charge," only a permissible deduction upon provision of sufficient ev idence. Similarly, all
imported parts, regardless of their source, are counted together in determining whether the thresholds
in Articles 21 and 22 of Decree 125 have been met. Parts imported by suppliers and sold on the
domestic market to auto manufacturers are an inte gral part of Decree 125 – the only distinction
between those parts and parts imported by the manufacturer itself is the possible deduction of customs
duty paid by the parts supplier.

27 See last sentence of China's reply: "When the part s are sent directly to th e auto manufacturer, the
importer is still responsible for the payment of the applicable auto parts duties;"

Response of Canada (WT/DS342)

148. No, Canada does not agree that Article 29 of Decree 125 could involve "border charges".
Further, all charges that have been imposed unde r the measures are internal charges (other than
charges on CKDs/SKDs, as discussed in respons e to Question 184). As Canada sets out in
paragraph 4 of its second written submission, the e ffect of China's admission in response to Question
83 must be that charges under Article 29 are internal, and subject to Article III.
Comments by the United States on China's response to question 185(c)
149. China's response to part (c) of the question s hows the extremes to which it is distorting the
concept of an "ordinary customs duty". It argues th at its charge under Article 29 – which is imposed
(1) on a manufacturer that did not import the goods; and (2) after all customs formalities have been
completed and all customs duties have been paid – could nevertheless be considered ordinary customs
duties under Article II. This flies in the face of logic and the plain text of the GATT 1994, and serves
to highlight the untenable nature of China's asserti ons regarding the proper interpretation of "ordinary
customs duties" under Article II.
186. (Complainants) Is the "status" or "presentation" of the good at the border the most
important element in characterizing a measure as a border or internal measure? Please,
explain, indicating the legal basis of your respon se, including linking, if possible, the term "as
presented" with the language of Article II:1(b), first sentence, of the GATT.
Response of the European Communities (WT/DS339)

150. It is not possible to say whether the "status" or "presentation" of the good at the border is
generally the most important element in characterizing a measure as a border or internal measure as
the importance of a given criterion may depend on the context of each case and the Measure that is
under examination. However, a Measure that does not determine the good according to its objective
characteristics as presented for classification at the bor der but rather allows the determination of the
good to be made much later in time after manufac ture of that good into a different product falls
outside the scope of Article II:1 (b) first sentence of the GATT 1994.
Response of the United States (WT/DS340)

151. Article II:1(b) provides that products "shall, on their importation into the territory to which
the Schedule relates. . . be exempt from ordinary customs duties in excess of those set forth and
provided therein." The Article's use of "on their im portation into the territory to which the Schedule
relates" connects the imposition of the duties to the goods as they exist at the time of importation.
Accordingly, a relationship between the charge and the condition of the goods at the border, at the
time of importation, must be present in order for the charge to be an ordinary customs duty covered by
Article II:1(b).
152. The United States further notes that the findings of the Appellate Body in EC – Chicken Cuts
support the necessary connection between the c ondition of the good as imported and the customs
duty. In a dispute involving ordinary custom s duties under Article II:1(b), the Appellate Body
explained that "in characterizing a product for purp oses of tariff classification, it is necessary to look
exclusively at the 'objective characteristics' of the product in question when presented for
classification at the border." (EC – Chicken Cuts, paragraph 246).

153. Also important in characterizing the measure is an examination of the language used in
Article III:2. Article III:2 involves a relationship between products which have been "imported into
the territory" of a Member with "internal taxes or other internal charges". Thus, in contrast to
ordinary customs duties under Article II which are based on the article at the time of importation, an
internal charge under Article III:2 ma y be associated with the article as it exists after it is imported
into the Member's territory.
154. Key factors that support the finding of China's charges to be internal charges include:
− the level of the charge depends on details of manufacturing operati ons that take place
within China, after importation;
− the level of the charge cannot be dete rmined until this manufacturing process is
complete;
− ·the charge is imposed on manufacturers, not importers;
− ·the level of the charge is not determined based on the individual importer's shipment or
operations but instead may depend on what other parts from other countries and other
importers are used by the manufacturer;
− ·identical imported parts included in the same shipment can be subject to different
charges depending on their internal use; and
− ·the charge is imposed based on the level of local content in the assembled vehicle.
 In short, the operation of the measures revolv es around what occurs within China rather than
at the border.
Response of Canada (WT/DS342)

155. Canada considers that the issue in interpreti ng GATT Article II:1(b), first sentence, is not
what elements are necessary in characterizing a measure as a border measure, but on what basis
ordinary customs duties may be charged. In that regard, as Canada set out in Section II.B of its
Second written submission (including making reference to the term " as presented" in paragraph 23),
ordinary customs duties under Article II:1(b), first sentence, can only be levied based upon the rates
set out in a Member's Schedule. These rates are based upon the proper classification of an imported
product in its state as it arrives at the border.
156. This is consistent with the difference in language between th e first and second sentence of
Article II:1(b), namely "on their importation" compar ed with "on or in connection with importation".
China has attempted to make "as presented" the key in terpretative issue, when, at most, it is an aid to
inform an interpretation of Article II:1(b), first sen tence. Canada notes that the language in Article II
existed before the GIRs came into effect, and it is the former which is at issue in this dispute in
respect of Article II. Despite China's assertion that the complainants offer no interpretation of "as
presented", Canada has shown that the practice of WTO Members is to classify goods based on their

state in a single shipment as presented at the border.
28 Canada has also explained that GIR 2(a) is
simply a classification rule and was never designed as a rule to prevent circumvention.
157. As Canada set out in its sec ond written submission in Section II.B.2, other charges under
Article II may be applied during a longer (but al so limited) period of importation, although such
charges are not at issue in this dispute. Indicia of when the process of importation ends (and thus
when such charges may no longer be imposed) are pr ovided by Canada in para graph 31 of its Second
written submission.
(China) Does China agree? Please respond in detail, in particular in light of China's
statement in its second written submission, paragraphs 107-110, where China seems that
it does not reject the relevance of the "status" of the good at the border as an important
element in characterizing a measure.
Response of China

158. China perceives two closely-related respects in which the notion of the "status" or
"presentation" of goods at the border is potentially relevant to the present dispute. In China's view,
the term "as presented" is principally relevant to the present dispute in so far as it relates to the
application of GIR 2(a) to multiple shipments of pa rts and components that are related to each other
through their common assembly into a finished motor vehicle. This is a classification issue within the
Harmonized System, and relates to whether the ch allenged measures result in a proper classification
of auto parts and components that have the essential character of a motor vehicle. Seen in this
context, the term "as presented" relates to the interpretation and application of China's tariff schedule.
159. The complainants appear to have used the term "as presented" in a somewhat broader context,
to refer more generally to whether a particular measure or charge is imposed on goods "on their
importation" into a Member's customs territory within the meaning of Article II:1(b). Canada, for
example, states that "[f]or a charge, what is signi ficant is whether the charge relates to the product as
presented at a Member's border. Any border charge, wh ether collected at the border or at some later
time, may only relate to the product at that point in time."
29 The EC makes the same point. 30 Thus,
the complainants appear to be using the term "as presented" to interpret the scope of Article II:1(b).
160. China does not perceive a significant substantive difference between these two applications of
the term "as presented." In both instances, the interpretive inquiry leads to same question: What are
the factors that are relevant in determining the ma nner in which goods are "presented"? That is, what
factors can customs authorities properly take into account in evaluating the condition or status of
goods at the border? As China discussed in para graphs 107 to 110 of its second written submission,
one of the factors that is relevant in determining the condition or status of goods at the border is the
documentation that accompanies the entr y, including the customs declaration. This is consistent with
the WCO's statement to the panel in EC – Chicken Cuts that, in applying the essential character test,
"[r]eference can … be made to accompanying documents."
161. China considers that much of the present dispute, at this juncture, concerns the factors that
customs authorities may properly take into account in evaluating the condition or status of goods at

28 See generally Canada's second written submission, pa ra. 23, in particular fn. 20. See also Canada's
response to Question 32, para. 3, where the practices of Australia, India, and New Zealand are discussed. See
further US rule 19 C.F.R. § 141.1 (Exhibit CDA-37), discussed in answer to Question 210, below.
29 Canada Answers at p. 19 (emphasis added).
30 See China Rebuttal Submission at para. 107.

the border. Whether it is viewed as a classification issue under GIR 2(a), or whether it is viewed as a
question of the scope of the term "on their importa tion," the question before the Panel is whether the
complainants have established a specific interpretation of the term "as presented" with which the
challenged measures are inconsistent. As discussed in response to question 228 below, China does
not believe that the complainants have established such an interpretation.
162. More generally, the fact that the parties have u sed the term "as presented" to refer to both the
classification issue under GIR 2(a) and the scope of Ar ticle II:1(b), first sentence, simply underscores
the inseparability of the two issues. As China has explained, if the challenged measures result in a
correct classification of auto parts and component s that have the essential character of a motor
vehicle, the measures collect a valid customs duty on auto parts and components "on their
importation" into the customs territory of China. If the classification is correct, then it is a customs
duty that China is allowed to impose in accordan ce with its Schedule of Concessions. Such customs
duties are within the scope of China's rights and obligations under Article II:1(b).
Comments by the European Communities on China's response to question 186
163. In its reply China ignores the clear jurisprudence of the Appellate Body according to which
"in characterizing a product for purposes of tariff cl assification, it is necessary to look exclusively
 at
the 'objective characteristics' of the product in question when presented for classification at the
border" ( EC – Chicken Cuts , at paragraph 246, emphasis added). The European Communities has
repeatedly pointed to this clear standard set out by the Appellate Body. The European Communities
refers inter alia to its second written submission, paragraphs 67 to 132 (in particular paragraph 73).
Comments by the United States on China's response to question 186
164. China's response essentially repeats arguments it ha s made elsewhere. The United States will
merely comment here on China's assertion that th e complainants have the burden of establishing a
specific interpretation of the term "as presented." Even assuming that the charges at issue are customs
duties, and the United States maintains that they are no t, GIR 2(a) is not an element of the prima facie
case of the breach of China's tariff commitment on auto parts. Rather, it is China that has introduced
this language from outside the WTO Agreement in an attempt to argue that its WTO commitments
allow for such tariff treatment.
187. ( United States ) Why does the United States consider "as presented" in GIR 2(a) is
irrelevant to decide whether the measure is a border or internal measure? The United States
submits in paragraphs 13 and 16 of its second written submission that GIR 2(a) "is not relevant
to the consideration of China's obligations under GATT Article III, or to the question of
whether China's additional charges on imported pa rts are to be considered either as 'ordinary
customs duties' under Article II:1(b), or as internal charges under Article III:2?"
Response of the United States (WT/DS340)

165. The United States considers GIR 2(a) as irrele vant to deciding whether the measure imposes
internal charges or customs duties. That question turns on the app lication of the text of the GATT
1994 (particularly the text of Articles II and III) to the facts and circumstances in this dispute. And, to
be clear, this question does not turn on the cont ent of China's schedule of tariff commitments. 31 A

31 As the United States has explained, the United States does hold the view that the HS Convention and
GIR 2 can be used as a supplementary means of interpre tation for China's schedule, since China's schedule is
based on the HS nomenclature.

Member's tariff schedule establishes tariff bindings, it does not and cannot redefine the meaning of
"ordinary customs duties" in Article II.
166. As the United States has explained, it sees no b asis under customary rules of interpretation of
public international law, as reflected in the Vienna Convention , for the HS Convention to serve as
context for interpreting Articles II and II I of the GATT 1994. Accordingly, and a fortiori, the United
States sees no basis under customary rules of interpreta tion of public international law, as reflected in
the Vienna Convention , for considering an interpretive rule adopted under the HS Convention as
context for interpreting Articles II and III of the GATT 1994.
167. Furthermore, GIR 2(a) deals with the proper classification of items under the HS
nomenclature. Tariff classification is only relevant in the interpretation of China's schedule of tariff
commitments. If a charge is an internal charge, then tariff classification and China's tariff schedule is
irrelevant. China's assertions regarding the app licability of GIR 2(a) are entirely circular. China
starts with the presumption that the charges are ordinary customs duties under Article II of the GATT
and then draws on GIR 2(a) for support of its position. There is no basis for this presumption.
(Canada) Do you agree with the United States? Please explain the legal basis for your
position, in particular in light of Canada's argument in paragraph 23 of its second
written submission, which seems to contradi ct the Unites States', and Canada's second
oral statement (paragraph 13), which seems to be in agreement with the United States'
above mentioned statement.
Response of Canada (WT/DS342)

168. Canada agrees with the United States that GIR 2(a) is not relevant to consideration of
Article III, including whether the measures impose in ternal charges under Article III:2. Paragraph 23
of Canada's second written submissi on and paragraph 13 of Canada's second oral statement are not
inconsistent with one another. Both point to the same conclusion that GIR 2(a) is only relevant for
classification purposes under Article II, but does not speak to the appropriate customs duties to be
applied under that Article or the delin eation between Article II and Article III.
32 In addition,
paragraph 13 of Canada's second oral statement complements paragraph 23, as it notes that the
context for the operation of the GIRs must be taken into account. That is, Rule 1 is sufficient to
resolve most classification issues respecting auto pa rts (which requires China to classify first under
appropriate headings, including 87.06).
169. Canada sets out in paragr aphs 18-22 of its second written submission why the point for
charging ordinary customs duties under Article II:1(b) must be based upon the state of a product as it
arrives at the border. This is exactly the same pe riod of time contemplated for classification in the
Harmonized System, as indicated by the practice of WTO Members,
33 and the term "as presented" in
GIR 2(a), which was specifically included to clarify that it applies based upon the state of a product as
it arrives at the border and is presented to the customs authority of a WTO Member. That
interpretation is consistent with the view of the WCO Secretariat in answer to Question 1, which notes
that the term "as presented" refers to "the mo ment at which the goods are presented to Customs". 34
This is further supported by the Appellate Body, which in EC – Chicken Cuts noted with approval the

32 Also see paras. 41-51 of Canada's second writte n submission, which point out that GIR 2(a) is
relevant simply as part of the Harmonized System for international standards of classification.
33 See fn 28, above.
34 See also Exhibit CDA-15, cited in Canada's second written submission at para. 23.

statement by the WCO Secretariat that classification is done based on the essential characteristics of
the product as it arrives at the border.
35
170. Therefore, given the correct meaning of "as presented", GIR 1 and 2(a) are only relevant as
context to classify products under Article II, but ar e not relevant to delineate between Articles II and
III. However, even if (contrary to Canada's submissions and the express statement by the WCO
Secretariat and the Appellate Body) the Harmonized System allows classification of a product based
upon its state after manufacturing, that would be a question for the WCO, not the WTO. As the United
States rightly pointed out during the second hearing, China's membership in the WCO cannot give it
greater latitude in applying Article II:1(b) than WTO Members who are not also members of the
WCO.
171. See also Canada's answer to Question 225 rega rding paragraph 13 of Canada's second oral
statement.
(European Communities and China) Do you agree with the United States? Please explain
the legal basis for your position.

Response of the European Communities (WT/DS339)

172. The European Communities understands that the Unite d States is pointing to the fact that the
determination of the applicable charges is made afte r the parts have been used in the manufacture of
the vehicle. The European Communities is of the view that GIR 2(a) is not relevant in a context where
the determination of the charge is made after importation. Therefore, the European Communities
shares the position of the United States. The impositi on of the 25 % charge on parts after manufacture
into complete vehicles and therefore after the parts have been presented to customs at the border falls
under Article III of the GATT 1994 and is inconsis tent with Article III:2 of the GATT 1994 as no
such internal charge is imposed on domestic like products.
Response of China

173. China does not agree with the US position. As China discusses in detail in response to
questions 186 and 234, a charge is within the scope of Article II:1(b), first sentence, if it fulfils an
ordinary customs duty that a Member is allowed to collect in accordance with its Schedule of
Concessions. In the context of the present dispute, the relevance of the term "as presented" in
GIR 2(a) pertains to whether the challenged measures collect the ordinary customs duties that China is
allowed to collect in relation to the entry of auto parts and components that have the essential
character of a motor vehicle. This question is di rectly relevant to whether the measures collect an
ordinary customs duty within the scope of China's rights and obligations under Article II.
Comments by the United States on China's response to question 187
174. China's response states that "a charge is within th e scope of Article II:1(b), first sentence, if it
fulfils an ordinary customs duty that a Member is allowed to collect in accordance with its Schedule of
Concessions." (Emphasis added.) Again, China is attempting to expand on the text of the GATT.
There is no mention, or concept, in the GATT of "fulfilling" an ordinary customs duty. A charge is or
is not a customs duty. And nothing in Article II: 1(b) "allows" a Member to depart from other GATT
obligations.

35 EC – Chicken Cuts, Appellate Body Report, at para. 246.

188. ( Canada) Paragraph 17 of Canada's second oral statement states that under the
measures, two otherwise-identical imported goods are given two different tariffs rates solely on
the basis of their end use. Can Canada please explain how applying two different tariffs to the
same goods is an internal measure within the meaning of Article III.
Response of Canada (WT/DS342)

175. Paragraph 17 of Canada's second or al statement discusses "China's approach". Canada does
not accept that the measures in fact impose tariff rat es as properly contemplated in Article II. In
paragraph 17, Canada describes the systemic legal eff ect that would arise in respect of the application
of Article III if China's argument on this point we re accepted. Canada made the referenced statement
to highlight the absurdity that would ensue under an Article III "likeness" analysis if two completely
different tariff classifications can be given to two id entical goods solely based on their end-use, when
both are identical to a domestic equivalent. The Appellate Body has made it clear in Japan –
Alcoholic Beverages II and EC – Asbestos that tariff classification is one factor used to assess
"likeness" under Article III.
36 Yet this criterion would become co mpletely useless if a Member could
classify or re-classify a product once already in the internal market based on its end-use.
176. Returning to the example cited in Canada's second oral statement, two imported brake
cylinders that are in all ways identical to a third, domestic unit may be "classified" differently under
the measures (and thus have different tariffs) because of their end-use (see the examples on the chart
on pages 26-27 of Canada's first written submission). Under China's approach it is not possible to say
to which imported brake cylinder the domestic cylin der should be compared in the case of a possible
violation of Article III; tariff classification could effectively become the single factor for determining
likeness. The value and certainty of Article III are th ereby diminished. It is this point that Canada
raises in paragraph 17.
189. (All Parties) Is there a limit to what can legally be considered to be part of the
"importation" process? If so, what is it and what is the legal basis for your response?
Response of China

177. China considers that the elements of any impor tation process must bear a relationship to the
implementation and enforcement of valid customs concerns, such as the collection of ordinary
customs duties. There are two principal legal bases for this understanding.
178. First, as China noted in response to question 55 from the Panel, the Kyoto Convention defines
the term "Customs formalities" as "all the operati ons which must be carried out by the persons
concerned and by the Customs in order to comply with the Customs law ." The scope and content of a
Member's customs law is disciplined, in part, by its WTO commitments. As China has explained, a
Member may not include any provision within its customs law and seek to enforce that provision as
part of the importation process. Rather, the question in each instance is whether the provision at issue
is one that is consistent with the rights and obligations of the Member under Article II, i.e ., whether it
is a valid customs concern. To the extent that it is , a Member may adopt customs formalities as part
of the importation process to implement and enforce that provision.
179. This conclusion is further supported by the Appellate Body's findings in EC – Bananas III.
As China explained in response to question 85, EC – Bananas III supports the conclusion that the

36 Japan – Alcoholic Beverages II , Appellate Body Report, at pp. 20-22; EC – Asbestos , Appellate
Body Report, at para. 85.

elements of an importation process must be germane to the enforcement of a measure or charge that
the Member is allowed to maintain or impose by reason of the importation of the product. Thus, the
limitation on the elements of the importation process is defined by reference to the types of charges
and measures that the Member is allowed to maintain on the importation of the goods at issue.
Response of the European Communities (WT/DS339)

180. The European Communities emphasises that "im portation process" is not a term used in
Article II:1(a), first sentence of the GATT 1994. If importation in reality involves several steps, which
may be described as a "process"", any such "impor tation process" finds its limits in the "broad
purpose of Article III of avoiding prot ectionism" (Appellate Body Report in Japan – Alcoholic
Beverages II, p. 16). Otherwise Members would be at liberty to extend the process of importation well
beyond the border and the scope of Article II, which effectively would render Article III meaningless.
181. The "importation process" must be confined to those procedures genuinely necessary to clear
the products through the customs. The importation fo rmalities must be in place and applied in good
faith. If the alleged importation process does not de termine the product i.e. determine its objective
characteristics when presented to customs at the bor der in accordance with the jurisprudence of the
Appellate Body
37, the procedures that extend beyond this purpose and relate to the internal use of the
imported goods become necessarily procedures that affect the internal sale, offering for sale,
purchase, transportation, distribution or use of the imported product within the meaning of
Article III:4 of the GATT 1994. As pointed out by the panel in EEC – Parts and Components the fact
that a Member treats imported parts as not being "in free circulation" cannot support the conclusion
that duties are levied "in connection with importation" within the meaning of Article II:1 (b) of the
GATT. This reasoning must apply a fortiori in the context where a Member claims that the duties are
levied "on importation", which is a narrower concept than "in connection with importation". The mere
description or categorization of a charge or a procedure under the domestic law of a Member cannot
be relevant for determining the issue of whether th e Measure is subject to Article III or II of the
GATT 1994 (see paragraph 5.7. of the panel report in EEC – Parts and Components).
Response of the United States (WT/DS340)

182. Yes. First of all, "importation" must be interp reted consistently with the ordinary meaning of
that term. Please see the US response to question No. 191 in this regard. In addition, if no limits were
placed on what may constitute "importation," the distinction between Articles II and III would be
eviscerated.
Response of Canada (WT/DS342)

183. Canada submits that ordinary customs duties must crystallize based upon the status of goods
the moment they enter the territory of a Member , although procedures relating to determining that
liability (e.g., testing, va luation, administrative review of classification) may occur later. For more
detail, see Canada's second written submission, Section II. B generally and in particular paragraphs 27
to 32 regarding the "process" of importation that a pplies for certain charges (but not ordinary customs
duties). Canada would in particular like to draw th e Panel's attention to paragraph 31, which indicates
when the process of importation is over.

37 EC - Chicken Cuts, at paragraph 246.

Comments by the European Communities on China's response to question 189
184. Since the European Communities is of the view that the measures breach Article 2 of the
TRIMs Agremeent and Article III of the GATT, it is clear that the European Communities disagrees
with China's apparent position that the measures are genuinely necessary to clear the products through
the customs. The European Communities has also explained in its reply to question 189 why the
measures have nothing to do with normal customs procedures (see paragraph 9) and China itself
acknowledges in its reply to question 185 (a) that th e measures are not part of the regular and normal
customs process.
190. ( United States ) Please clarify whether it is the Unites States' position that the
Article III:2 "internal charge" is the 15 per cent additional charge paid once the auto parts
imported under the measures have been assembled into a complete vehicle?
Response of the United States (WT/DS340)

185. As a legal matter, the United States consider s that the entire charge imposed by China's
measures is an internal charge subject to Article III:2. The internal charge is the 25% charge on
imported parts, as indicated in paragraph 83 of th e first US submission. As a practical matter,
however, if the measures at issue were to disa ppear, China could collect a 10% duty (generally
speaking) on the parts under its general customs procedures, so that as an economic matter the
additional charge on parts imposed by the measures amounts to 15%.
191. ( United States) The United States, in paragraph 19 of its second oral statement, says that
the only sensible way to view "imported" is with its normal meaning, that is "the time when the
product enters the Member's customs territory." Can the United States please explain how it
has determined that this is the ordinary meaning of the word "imported".
Response of the United States (WT/DS340)

186. The ordinary meaning of "imported" or "impor tation" refers to the movement of a product
from outside a territory to inside that territory. The New Shorter Oxford English Dictionary defines
"import" as "bring or introduce from an external source or from one use etc. to another; spec. bring in
(goods etc.) from another country." Similarly Merriam-Webster's Collegiate Dictionary defines
"import" as "to bring from a foreign or external source; esp: to bring (as merchandise) into a place or
country from another country." And Blacks's Law Dictionary defines "importation" as "the act of
bringing goods and merchandise into a country from a foreign country." (Exhibit US-7)
187. It is also important to note that the langua ge in Article II:1(b) of the GATT refers to
"importation into the territory to which the Schedule relates" (emphasis added), also linking
importation directly to the concept of territory.
188. China also recognizes the common meaning of "imported." In its response to Panel question
No. 37, China states:
A basic feature of the customs process that Ch ina has adopted to give effect to this
interpretation of the term "motor vehicles" is to defer the completion of customs
formalities in respect of parts that are declared as parts of registered vehicle models
until the auto manufacturer has imported and assembled all of the imported parts and
components that it will use to assemble that vehicle model. Until this process is
complete, the imported parts and components are subject to a customs bond and

remain under customs control in accordance with the customs laws of China.
(emphasis added).
 Thus while asserting that a part is not "impor ted" until all customs formalities are completed,
China nonetheless acknowledges the ordinary meaning of imported as "bringing into the country."

192. (Complainants) In their response to question No. 105, the complainants state that
charges under Article 2(2) of Decree 125 appear to be "ordinary customs duties." In its
response to that question and question No. 106 the European Communities conditions such
characterization to a certain understanding of ho w charges under Article 2(2) of Decree 125 are
assessed. Would China's response to question No. 58 fulfil such conditions? If not, why not?
Response of the European Communities (WT/DS339)

189. Provided none of the procedures of the measures apply and provided the import licence is
genuinely automatic, the procedural elements in Chin a's reply to question 58 of the Panel would fulfil
the procedural conditions set out in the reply of the European Communities to questions 105 and 106.
However, if the "automatic import license" is the one required by Chapter III of Decree 125
(Articles 13 to 16 thereof) and if the self-verification is always required even in situations foreseen by
Article 2(2) of Decree 125, the importation of CKD/SKD kits would not be subject to ordinary
provisions of the Customs Law of the People's Republic of China.
190. As regards the substantive elements in Ch ina's reply to question 58, the European
Communities does not agree that CKD/SKD kits can automatically be classified as motor vehicles. In
this respect reference should be made e.g. to para graphs 130 to 132 of the rebuttal submission of the
European Communities.
Response of the United States (WT/DS340)

191. In its response to question No. 106, the Europ ean Communities conditions its characterization
on two factors: (a) that only normal general customs procedures are applied; and (b) that the CKD or
SKD kit consists of all the parts necessary to assemble a vehicle presented to customs at the same
time and in a single consignment. China's response to question No. 58 would seem to satisfy the first
of these conditions. China's respon se also seems to indicate that the entire kit would be imported
simultaneously in a single shipment. If so, that would satisfy the second condition. Whether the kit
was properly classified as a whole vehicle would still need to be assessed on a case-by-case basis,
including an assessment of whether only assembly ( as opposed to other operations) were required to
produce a complete vehicle from the kit.
Response of Canada (WT/DS342)

192. China's response to Question 58 is consistent with Canada's understanding, discussed in more
detail in response to Question 184, that Article 2( 2) of Decree 125 applies ordinary customs duties to
"true" CKDs/SKDs.
193. (China) In its response to question No. 15 China clarifies that all imports of CKD and
SKD kits into China kits have been made under Ar ticle 2(2) of Decree 125. As a matter of law,
if a manufacturer or supplier opts not to import CKD and SKD kits under of Art. 2(2) of
Decree 125, would it have to follow the same re gular procedures applicable to the importation
of other auto parts? Please, explain in detail?

Response of China

193. Article 2(2) of Decree 125 states that to im port CKD and SKD kits, th e importer shall make
customs clearance at the Customs wh ere the auto manufacturer is located and pay import duties. This
requirement is to reiterate the normal customs proc edure for imports. There are no other procedures
for the importation of CKD/SKD kits. Article 21 defi nes the collections of parts and components that
have the essential character of a motor vehicle, which includes CKD/SKD kits. However, CKD/SKD
kits are imported as motor vehicles under the ordinary customs procedures for imports.
Comments by the European Communities on China's response to question 193
194. China's reply is manifestly erroneous on the face of the measures and in contradiction with the
first explanations provided by Ch ina on Article 2(2) of Decree 125.
38 Article 2(2) of Decree 125
provides for an option for the importer, not an obligation. The word "shall" is simply not used in the
provision. It states very clearly "may ". Article 7 of Decree 125 applies to all auto manufacturers
importing auto parts to produce and assemble comple te vehicles, and Article 21(1) further clarifies
that the measures apply to imports of CKD and SKD kits, unless the option under Article 2(2) of
Decree 125 has been exercised.
Comments by the United States on China's response to question 193
195. China's response states that an importer of CKD and SKD kits "sha ll" follow the normal
customs procedures when importing those kits – i. e. shall not follow the special rules created by
Decree 125 and Order No. 4. The actual text of Ar ticle 2(2) of Decree 125, however, provides that
the importer "may" conduct customs clearance through the normal procedures. Thus, on the face of
the measures, the selection of import method is optional.
194. ( European Communities) In its response to question No. 83 China recalls its citation of
the EC Anti-dumping anti-circumvention measure in its first written submission
(paragraph 125) to make the point that Article 29 serves the same purpose as the "end-user
controls" under that EC measure, which aims at importations through suppliers. Please,
comment on such statement and its relevance to this present case.
Response of the European Communities (WT/DS339)

196. The example quoted by China concerning bicycle parts is not at all an end use control under
the customs law of the European Co mmunities. On the contrary, the system at issue was set up in the
framework of the anti-circumvention measures agai nst bicycle parts in the anti-dumping field. The
exemption certificates apply for the future and ar e linked to a specific and well identified importer.
Once an importer is exempt under the described anti-circumvention certificate system it can import
parts without paying the duty on bicycles (i.e. it is exempt from anti-circumvention measure) up to the
time such exemption certificate is withdrawn. In ot her words, once such a cer tificate is issued, the

38 See first written submission of China, paragraph 38: "Because there is no doubt as to the proper tariff
classification of CKD/SKD kits, imports of CKD/SKD k its are exempt from the provisions of Decree 125.
Article 2 of Decree 125 states that importers of CKD/ SKD kits can declare these imports to the relevant
Customs authorities, and the provisions of Decree 125 wi ll not apply. Thus, the importer of CKD/SKD kits can
declare these imports as complete vehi cles at the time of importation, pa y the complete vehicle duty rate, and
avoid the bonding and record-keeping requirements of Decree 125"; paragraph 195: "Article 2 of Decree 125
exists precisely because there is no doubt as to the prop er tariff classification of imported CKD/SKD kits – they
are classified as complete vehicl es. Manufacturers may therefore impor t CKD/SKD kits, pay the appropriate
motor vehicle duties at the time of importation, and bypass the procedures established under Decree 125."

imports of parts are no longer subject to any furthe r control. In contrast, end-use requirements are by
definition linked to the importation of a good only and have no link to a specific and well identified
importer. In other words, they apply to all importers importing the goods at issue.
197. The European Communities strongly opposes the argument that anti-circumvention measures
in the field of anti-dumping can be equated to ordinary tariff classification matters for the reasons
already set forth in previous submissions to the Pa nel (see in particular replies to questions 86 and
132 of the Panel).
195. ( Complainants) Do the complainants agree with the concepts and definitions used by
China in relation to "customs clearance", in particular its use of the Kyoto Convention and the
WCO Glossary of International Customs Terms? (see China's response to Panel question No. 55).
Should the Panel take into consideration these defi nitions as well as other definitions from the
Kyoto Convention and the WCO Glossary ?
Response of the European Communities (WT/DS339)

198. The Appellate Body in EC - Chicken Cuts stated that the HS Nomenclature should be taken
into consideration as context while examining the classification of goods in the WTO's schedule of a
WTO Member, but it never stated that other internati onal Conventions related to customs law, such as
the Kyoto Convention, or non-binding instruments, such as the WCO's glossary, are context within the
meaning of Article 31 of the Vienna Convention on the Law of Treaties.
199. By combining and misinterpreting the provisions of the Kyoto Convention, which aims at
building up minimum standards concerning the si mplification and harmonization of customs
procedures, with the so-called "WCO glossary" Ch ina tries to give the wrong impression that the
process of importation can be delayed in time forever at the entire discretion of each WTO member.
In other words China's theory would unduly expa nd the scope of Article II GATT 1994 by rendering
Article III meaningless.
200. This being said, the WCO Glossary and in turn General Annex to Chapter 2 of the Revised
Kyoto Convention simply defines customs clearance as "The accomplishment of the Customs
formalities necessary to allow goods to enter home use, to be exported or to be placed under, another
Customs procedure" while Specific Annex B to the Revised Kyoto Convention states that "clearance
for home use means the Customs procedure which provides that imported goods enter into free
circulation in the Customs territory upon the paym ent of any import duties and taxes chargeable and
the accomplishment of all the necessary Customs formalities".
201. It must also be stressed that the d esign and structure of Chapter 3 of the Revised Kyoto
Convention concerning "Clearance and other customs formalities" aims at speeding up the
importation process at the border level and there is no thing in it that supports China's view about the
existence of an almost never ending process of importation and clearance. Indeed, Article 3.30 of the
chapter reads as follows: "3.30. Standard Checking the Goods declaration shall be effected at the
same time or as soon as possible after the Goods declaration is registered."
Response of the United States (WT/DS340)

202. The definition of "customs cleara nce" is not relevant to any issue in this dispute, nor is the
term "customs clearance" even used in any of the WTO provisions at issue in this dispute.
Accordingly, the Panel has no need to consider these definitions that China has presented to the Panel.

203. While the collection of customs duties may not occur until after goods have been imported
into the customs territory, the tariff classificati on and its corresponding duties must not be based upon
a change in the condition of the auto part that o ccurred after its importation. In the United States'
rebuttal to China's response to Panel question No. 55, the United States explained that the relevant
consideration in this case is whether China's measu res enforce the collection of a customs duty under
China's tariff schedule for which an auto part w as liable when it entered the customs territory of
China.
204. The United States also notes that the General Annex of the Revised Kyoto Convention
(CHI-38) contains certain "Definitions" of customs terms. Chapter 1 of the General Annex contains
standards that articulate the general principles for th e interpretation of the General Annex. The first
standard provides that "[t]he Definitions … in this Annex shall apply to customs procedures and
practices specified in this Annex and, insofar as applicable, to procedures and practices in the Specific
Annexes." Therefore, the definition of "clearance " as set forth in the Definitions to the General
Annex of the Revised Kyoto Convention is limited in scope to the pr ovisions of the General Annex
and this instrument does not represent itself as setting forth categorical meanings of customs terms.
205. The WCO's Glossary of International Customs Terms (CHI-39) is a publication made
available to inform the public by the WCO, but it has no formal status under the HS Convention. The
Glossary often defines terms by reference to the Revised Kyoto Convention , but this approach does
not render the Glossary as an authoritative tool in interpreting the Convention.
Response of Canada (WT/DS342)

206. Canada does not take issue with the definitions of "customs clearance" used by China to the
extent that they support the conclusion that "cus toms formalities are routinely concluded after the
goods have been released into the customs territory ." However, as noted in Canada's second written
submission at paragraphs 25 and 26, th at term is not useful for interpreting the application of ordinary
customs duties under Article II:1(b), first sentence. Further, the Kyoto Convention definitions do not
support China's measures for several reasons, set out below.
207. As China points out in footnote 12 to its response to Question 55, the Kyoto Convention
entered into force in 2006, thus, unlike the Harmonized System Convention, it cannot form context for
the negotiation of China's Schedule. China refers to it as evidence of customs "practice", but practice
cannot be based upon a general permissive statem ent. Practice must be based on what customs
authorities actually do, yet China has shown no evidence of practice, much less common and
consistent practice, similar to its measures.
208. It is noteworthy that China did not include the whole text of the treaty.
39 While China uses the
definition of "customs clearance" to support a tr ade-restricting customs process, the object and
purpose of that treaty is rather to streamline and si mplify customs procedures. This is set out in the
Preamble's reference to trade promotion:
ENDEAVOURING to eliminate divergence between the Customs procedures and
practices of Contracting Parties that can hamper international trade and other
international exchanges,

39 International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto
Convention), as amended by the Protocol of Amendment, adopted June 1999, entered into force February 3,
2006 (Exhibit CDA-38).

DESIRING to contribute effectively to the development of such trade and exchanges
by simplifying and harmonizing Customs procedures and practices and by fostering
international co-operation.
209. Further, China's measures do not comply with requirements of the treaty in other material
aspects, such as General Annex Chapter 3 (Cl earance and Other Customs Formalities) which
provides:
Examination of the goods
(a) Time required for examination of goods
3.33. Standard
When the Customs decide that goods declar ed shall be examined, this examination
shall take place as soon as possible after the Goods declaration has been registered.
40
 This is inconsistent with the measures, which provide for verification, not after declaration,
but before and after manufacturing in China.

210. Finally, China cites and relies (in Exhibit CHI-38) on Specific Annex B – Chapter 1 for the
definitions of "clearance for home use" and "goods in free circulation". But, as set out in Articles 5,
8(3), 8(4) and 9(2) of the Kyoto Convention, those specific annexes are subject to separate acceptance
by parties to the Kyoto Convention , and bind only those that have accepted them. Most Members,
including China, have not accepted Specific A nnex B1. China has only accepted two Annexes – D1
and G1.41
196. ( All parties ) Is "importation" different from the "process of importation"? Please
explain.
Response of China

211. China is not aware of any relevant provision of a covered agreement that refers to the
"process of importation," and thus is uncertain as to the intention of this qu estion. As China has
explained in response to several questions from the Panel, including question 167 above, the term
"importation" in Article II:1(b), first sentence, is not defined by reference to the point in time or space
at which a charge is collected. Charges may be collected after the point at which goods physically
cross the border, so long as the charge is one that the Member is allowed to collect by reason of the
importation of the product at issue. This fact nec essarily contemplates that there can, and often will
be, an importation process that extends beyond the point at which the goods cross the frontier. As
China explained in response to question 55 from the Panel, the entire structure of the Kyoto
Convention supports this conclusion. However, for the reasons that China set forth in response to
question 189 above, the existence of such a process does not, by itself, alter a Member's substantive
rights and obligations under Article II – any such pr ocess must give effect to a condition or charge
that the Member is allowed to maintain or impose by reason of the importation of the product.

40 Kyoto Convention, General Annex, Chapter 3, "Clearance and Other Customs Formalities", at p. 4
(Exhibit CDA-38).
41 Kyoto Convention , Position as Regards Ratifications and Accessions, Document PG0137E1a,
25 July 2006 (Exhibit CDA-39).

Response of the European Communities (WT/DS339)

212. The European Communities would like to stress th at Article II, paragraph 1(b), first sentence
of the GATT 1994 refers to ordinary customs duties imposed "on importation". The "process of
importation" is not a term used in this provision. China clearly refers to the "process of importation"
in order to extend the scope of Article II:1 and rend er Article III meaningless. In this respect the
European Communities refers to its second written submission, paragraphs 42 and 43.
Response of the United States (WT/DS340)

213. Article II of the GATT uses the term "importation", while Article III refers to "imported"
goods. The United States is not aware of the use of the term "process of importation" in the GATT.
Accordingly, the definition of the phrase "process of im portation" is not relevant to any issue in this
dispute.
Response of Canada (WT/DS342)

214. Yes, with respect to the imposition of ordinary customs duties under Article II:1(b), first
sentence, compared with other charges imposed under Article II in general. See Canada's second
written submission, Section II.B for a discussion of the terms "on their importation" in the first
sentence of Article II:1(b) in contrast with the broader period (which can be characterized as the
"process of importation") relating to other charges governed by Article II.
Comments by the European Communities on China's response to question 196
215. China's reply is illustrative of its tactics in these proceedings. It is China itself that has
introduced the notion of "process of importation" in its reply to question 37 of the Panel. Now China
claims ignorance of the concept although in its repl y to question 37 China stated that "it is the
completion of this process that marks the turnin g point between permissible discrimination under
Article II and impermissible discrimination under Ar ticle III". China's reply to question 196 provides
a completely different position. It is difficult to keep track of the ever changing position of China in
this regard. In substance the European Communities refers to its reply to question 196.
197. ( All parties ) Given the statements of the parties in their respective responses and
rebuttals, should the Panel be primarily guid ed by the language of Article II:1(b), first sentence,
regarding the nature of the measures issue? To what extent can the language of the second
sentence of Article II:1(b), in particular its additional term "in connection with," define the
scope of the first sentence?
Response of China

216. As China explained in response to question 97 from the Panel, the use of the term "in
connection with" in Article II:1(b), second sentence, most likely reflects the broader variety of duties
or charges that are encompassed by the term "other duties or charges," and the broader variety of
events or conditions that could trigger the impor ter's obligation to pay them. Because of this
difference in subject matter, China does not consider that the term "in connection with" in the second
sentence can be used to define the scope of the first sentence of Article II:1(b).

Response of the European Communities (WT/DS339)

217. "In connection with" in the second sentence of Ar ticle II:1 (b) provides important context for
the interpretation of the notion "on importation" in the first sentence of Article II:1 (b) of the
GATT 1994. It demonstrates the narrowness of th e notion of "on importation", which cannot be
extended to any charge or procedure which is a pplied only "in connection with" importation but not
"on" importation (see e.g. the second written submission of the European Communities,
paragraphs 44 to 46). In any event, the European Communities is of the view that the procedures and
the charges imposed under the measu res (with the exception of Article 2(2) of Decree 125) are not
even connected with importation but are rather internal.
Response of the United States (WT/DS340)

218. The language of the second sentence of Article II:1(b) provides context for the meaning of the
language used in the first sentence. The first sentence of Article II:1(b) links the imposition of
"ordinary customs duties" with "on their importati on into the territory." The second sentence uses a
more expansive set of terms - "all other duties or charges of any kind" and "imposed on or in
connection with the importation." The second sentence is thus a broader "catch-all" provision, while
the first sentence focuses on a particular charge imposed at a particular point.
Response of Canada (WT/DS342)

219. As set out in Canada's second written submissi on, Section II.B, the relevant language for
interpreting ordinary customs duties is Article II: 1(b), first sentence. The second sentence is only
applicable to the separate question of "other duties and charges". Th e Appellate Body's analysis in
Chile – Price Band System confirms that ordinary customs duties are assessed under the first sentence
only, and other duties and charges by the second.
42 As explained in Canada's second written
submission at paragraphs 28-29 and the response to Question 186, above, "in connection with" is used
because it encompasses both direct charges and other, indirect "duties and charges" that can be
applied throughout the process of importation.
Comments by the European Communities on China's response to question 197
220. As stated by the European Communities in its reply to question 197, "in connection with" in
the second sentence of Article II:1 (b) provides im portant context for the interpretation of the
narrower notion "on importation" in the first se ntence. The European Communities therefore
disagrees with the reply of China.
198. ( Complainants) Is the European Communities' position against "splitting the measures",
in particular in relation to Article 29 of Decree 125, in contradiction with the position of the
other co-complainants (compare the complainant's respective responses to question No. 101)?
Response of the European Communities (WT/DS339)

221. The European Communities understands that this question is directed mainly at Canada and
the United States. However, the European Co mmunities does not see any difference between the
complainants on this issue on which the European Communities has perhaps only been more explicit
than Canada and the United States. All co-compl ainants accept that charges under Article 2(2) of
Decree 125, i.e . in circumstances where the measures would not apply, could be examined under

42 See Chile – Price Band System, Appellate Body Report, e.g., at paras. 151-157, 281-285.

Article II of the GATT 1994 (US responses to qu estion 101, para. 68, Canada's responses to
question 101, para. 1) while all other charges under the measures are internal charges.
Response of the United States (WT/DS340)

222. No. As indicated in the response to question No. 185, the United States does not consider that
Article 29 of Decree 125 can be split from the rest of the measures.
Response of Canada (WT/DS342)

223. There is no contradiction between the positions of the complainants on this point.
224. With respect to Article 29 of Decree 125, Cana da agrees with the European Communities that
it is not possible to separate those aspects of the measures from the aspects that relate to imports of
parts directly by vehicle manufacturers. This is so notably because all imported parts (regardless of
importer) are considered collectively for purposes of the thresholds under the measures. In any event,
Canada reiterates its conclusion, stated in respon se to Question 101, that charges under the measures
are internal (other than charges on CKDs/SKDs, as discussed in response to Question 184).
199. ( China) China submits that "the delineation between Article II and Article III requires
some understanding of what it means for products to have completed the process of
importation. It is the completion of this process that marks the turning point between
permissible discrimination under Article II and impermissible discrimination under
Article III." (China's response to Panel questio n No. 37) If one were to follow China's
reasoning:
(a) Would this mean that it is up to each WTO Member to determine how long the
importation process takes within its internal sy stem depending on its own national objectives
and purposes?
Response of China

225. No. As China explained in response to question 189, the permissible limits of the importation
process are defined by reference to the types of me asures or charges that a Member is allowed to
maintain or impose in respect of the importati on of goods, in accordance with its rights and
obligations under Article II. China further explaine d in response to that question that Members can
maintain customs procedures that are germane to the implementation and enforcement of these rights
and obligations.
226. This does not mean that a Member can "determine how long the importation process takes
within its internal system depending on its ow n national objectives and purposes." China has
consistently explained that it is not its position that a Member may defer the "process of importation"
as long as it chooses, and impose whatever discriminatory measure or charge it wishes as part of that
process.
43 Rather, the question is whether the process gi ves effect to a measure or charge that the
Member is allowed to maintain or collect in accordance with its rights and obligations under
Article II. These parameters are defined by the righ ts and obligations that the Member has negotiated
with other WTO Members under Article II, not its "national objectives and purposes."

43 See , e.g., China rebuttal submission at para. 119; China Answers at 31; China Answers at p. 35;
China Answers at p. 105.

Comments by the European Communities on China's response to question 199(a)
227. China's reply is essentially the same as to qu estion 189. It is clear that the European
Communities disagrees with China's apparent positio n that the measures are genuinely necessary to
clear the products through the customs. China itself acknowledges in its reply to question 185 (a) that
the measures are not part of the regular and normal customs process. As Exhibit EC – 26
demonstrates, the various procedures under the measur es can take years before they are completed.
This is a prime example of how a Member attempts to bring a discriminatory measure under the scope
of Article II through labelling internal procedures as customs procedures.
(b) If yes, would the determination of whether a measure falls within the scope of Article II
or Article III depend on each Member's own definition of "importation" and/or domestic
regulations on "the completion of the process of importation"? Please explain.

Response of China

228. Please see the response above to question 199(a).
Comments by the United States on China's response to question 199
229. As the United States stated in its response to Panel question No. 196, the United States is not
aware of the use of the term "process of importa tion" in the GATT. China's response to Panel
question No. 196 confirms that understanding. In s hort, "the permissible li mits of the importation
process" that China refers to is not useful in interpreting the meaning of Article II of the GATT.
200. ( Complainants) Do you agree with China's statement that "[i]t is simply not the case (...)
that "physical segregation" in "sealed containers ," (...) is a necessary element of a bonding
procedure, either under Chinese law or under int ernational customs practice. Nor is it a
necessary element for goods to remain under customs control. Physical segregation is simply
one form of customs control procedure, ordinarily used in the case of entry into special areas
such as free trade zones." (Chi na's second written submission, footnote 84 to paragraph 117).
Please explain.
Response of the European Communities (WT/DS339)

230. Physical segregation in sealed containers or other means of transport is the most common
feature and a standard pre-requisite of the cust oms procedure that China refers to as "bonding
procedure" both in the law of the European Communities and in international customs practice. Under
EC law this is provided for by Article 357 (1) of Commission Regulation (EEC) No 2454/93 of
2 July 1993 laying down provisions for the implem entation of Council Regulation (EEC) No 2913/92
establishing the Community Customs Code (Official Journal L 253, 11.10.1993, p. 1–766).
231. The documents and the guarantee or security deposit do not amount to a genuine bonding
procedure as the goods do not remain in the physical c ontrol of the customs and are used internally in
China in the manufacture of vehicles. The elements China is referring to as a "bonding procedure"
constitute simply an attempt to create a fiction of ongoing customs procedures.
Response of the United States (WT/DS340)

232. China's argument is an attempt to obfuscate the distinction between two very different
customs concepts. One customs concept is the requi rement that goods be entered under some sort of

financial guarantee or bond, to ensure the collecti on of revenue upon the final assessment of duties.
The second concept is a customs regime under whic h goods are maintained under customs control,
such as in a "bonded warehouse," so that the g oods are limited in how and where they may be
transported or used. China's measures are of the first type – a financial guarantee that provides no
restrictions on how the goods may be used within Ch ina. But, China – in order to attempt to support
its argument that its measures do not impose internal charges --would like the Panel to believe that its
measures are of the second type (involving customs cont rol on the use of the goods.) But this simply
is not true.
233. As the United States indicated in its response to Panel question No. 17, the bond referred to
by China in Article 12 of Decree 125 is simply a financial guarantee, and does not involve any control
by Chinese customs on the disposition of the part after it is imported into China.
234. China's statement is an attempted refutation of Canada's answer to Panel question No. 17.
Canada's reference to the "physical segregation" of goods has been taken out of context by China.
Canada did not assert that parts imported into Chin a must be physically segregated in order to be
bonded. Canada's key point was that the auto part s imported by China and subject to Decree 125 "are
not restricted from entering the internal market" by means of physical segregation in a bonded facility,
such as a warehouse or free trade zone. Whether the goods enter the customs territory "in bond"
(meaning with a "financial guarantee" for the payment of duties owed) does not affect the condition of
the goods upon importation for classification purposes.
Response of Canada (WT/DS342)

235. Canada agrees that "physical segregation" is , as described, "simply one form of customs
control procedure" and, thus, goods do not necessarily ha ve to be in "sealed containers" at some point
in a bonding procedure. However, as Canada describe d in paragraphs 33, 34, 37 and 38 of its second
written submission, goods must remain under the physical control of customs, and thus not available
for internal use within a Member. This control is exercised both as part of the process of importation
generally (i.e ., longer than the "snapshot" on which ordina ry customs duties must be assessed, as
Canada notes in Section II.B.2 of its second written s ubmission) and to maintain control over some or
all of the imported product in order to assess the good (in its state as it arrived at the border) for
purposes of applying ordinary customs duties (e.g., for testing).
236. The documentary and financial requirements (akin to a "security deposit") under the measures
that China refers to as "bonding" are not of the sam e nature, and do not relate to any of the accepted
criteria listed in paragraph 31 of Canada's second wr itten submission. The mere fact that an importer
posts security and files documentation in relation to an imported product does not prevent that product
from being available for use internally in China. If such requirements were able to accomplish that
effect, the protection of Article III:2 against internal charges could be entirely circumvented, as a
Member could deem a product under its control and subject to Article II in perpetuity.
201. ( Complainants) Please indicate, supporting your resp onse with evidence, the reasons
why the complainants believe auto parts impo rted by manufacturers under the measures (i.e.,
not those imported by suppliers under Article 29 of Decree 125), are de facto not
 under Customs
control (see, e.g., European Communities' first written submission, paragraph 54).
Response of the European Communities (WT/DS339)

237. It is not possible to provide documented ev idence of the negative. However, China has
acknowledged that in reality the alleged bonding status of the goods is limited to providing a financial

guarantee and the customs officials do not, as a matter of fact, follow and control each and every
single auto part after they have been imported to Ch ina. The actual collection of the charges is due on
the imported parts that the manufacturer used in th e previous month to produce the relevant vehicle
model (Article 31 of Decree 125). This demons trates that the bonding requirements under the
measures are a fiction. This follows also a contrario from Article 30 of Decree 125 (see also China's
reply to questions 16, 18 and 19 of the Panel), which is the only instance where the goods are
genuinely under customs supervision. The European Communities would like to point out in
particular that in its reply to question 19 of th e Panel, China attempts to use the procedures under
Article 30 of Decree to demonstrate the extent of the general customs supervision under the measures.
As China itself recognises that Article 30 of Decree 125 is not relevant under the present proceedings,
it cannot use the genuine bonding requirements th ere under to defend the other elements of the
measures.
Response of the United States (WT/DS340)

238. The United States indicated in its answer to Panel question No. 17 that the United States
understands that China has clarified that the bond requirement is simply a financial guarantee, and
does not involve any control by th e Chinese Customs on the disposition of the part. In that context,
the absence of control by the Chin ese Customs on the disposition of the auto part means that the auto
part enters the internal market whereupon its condition may be modified through subsequent
assembly. China has not asserted that its Customs authorities retain any physical control over the
goods once they are imported into the territory of Chin a. To the contrary, in footnote 14 of its first
written submission China states that the "bond" require ment is limited to a financial guarantee (at the
10% ad valorem rate) and in pa ragraph 116 of its second written subm ission China confirms that the
parts are released to the importer. Furthermore, China has not cited to, and cannot cite to, any
provision of Decree 125 that imposes any sort of customs control on the use of imported parts under
the measure. (In other words, Decree 125 does not prevent the importer from selling the imported
parts to other parties, nor does it prevent or limit any possible use or disposition of the part.)
Accordingly, imported auto parts are used freely at the manufacturing sites of vehicle and auto parts
manufacturers with no restrictions. Indeed the "financial guarantee" is only necessary because the
merchandise has entered commerce without any other control.
Response of Canada (WT/DS342)

239. The issue relating to "customs control" is whether the financial and documentary
requirements under the measures result in imported pr oducts being unavailable for internal use in
China. But imported auto parts covered by the measur es are available for intern al use. They are used
in the same way as domestic parts and imported parts not subject to the measures (such as those
bought from third parties, which China concedes in response to Questions 20(a) and 83, and in
paragraph 116 of its second written submission are not "bonded"). As Canada noted in paragraph 38
of its second written submission, the only importe d auto parts under customs control are those
excluded from coverage by Article 30 of Decree 125.
202. ( China) Canada submits that "[w]hen an auto part arrives at China's border, the
charge that crystallizes on it at that time, 'o n importation', is a charge based upon the proper
classification of that part as it physically exis ts at that point in time – generally 10%. China
implicitly recognizes this by imposing a bond based on the 10% parts rate." (Canada's second
written submission, paragraph 33 – footnote omitted). Does China agree? Please explain.

Response of China

240. China disagrees. There is no necessary concordan ce between a bonding rate and the rate of
duty at which the article will be assessed, and Canada has not demonstrated otherwise.
Comments by the European Communities on China's response to question 202
241. The European Communities fully agrees with the position of Canada as expressed in the
question. Canada has made a valid prima facie argument, which China, in its response, cannot simply
shrug off by alleging that the burden of proof is still with Canada. It is for China to rebut a prima
facie argument with something more concrete than a mere assertion.
203. ( All parties ) To what extent is the GATT and WTO jurisprudence on the delineation
between Articles XI and III:4 of the GATT relevant to address the issue of the delineation
between Articles II and III of the GATT and, in particular, the nature of the measures before
the Panel? Please explain, in particular in light of, inter alia , Canada – FIRA (GATT Panel
Report, L/5504 - 30S/140, paragraph 5.14), India – Autos (Panel Report, WT/DS146, 175/R,
paragraphs 7.217, 7.221-7.224 and 7.257-7.262, including footnote 410 to paragraph 7.221, citing
Panel and Appellate Body Reports in Korea – Various Measures on Beef ), EC – Asbestos (Panel
Report, WT/DS135/R, paragraphs 8.94-8.95), and Dominican Republic – Import and Sale of
Cigarettes (Panel Report, WT/DS302/R, paragraphs 7.258-7.260).
Response of China

242. China considers that this jurisprudence is hi ghly relevant, and underscores the importance of
the threshold issue in this dispute concerning the classification of the challenged measures in relation
to Article II or Article III.
243. As a preliminary matter, it is important to note the textual similarity between Article II:1(b)
and Article XI:1. Article II:1(b) applies, in rele vant part, to the goods of another Member "on their
importation" into the customs territory. Article XI:1 applies to restrictions, inter alia, "on the
importation" of goods from another Member. The di fference between "their" and "the" is simply one
of style and conformity with the structure of the respective sentences; there is no substantive
difference between the scope of these two provisions.
244. The jurisprudence to which the question refers makes two importa nt points, as relevant to the
present dispute. The first is that the scope of Article XI must be interpreted in relation to the scope of
Article III so as to maintain the distinction between these separate articles of the GATT, and to avoid
reducing either article to superfluity or inutility.
44 Moreover, these provisions must be interpreted to
maintain what the Appellate Body has referred to as "the distinction normally made in the GATT
between restrictions affecting th e importation of products (i.e. bor der measures) and restrictions
affecting imported products (i.e. internal measures)."45 The panel in India – Autos considered that it is
only in the context of state trading enterprises th at there has been a "blurring of the traditional
distinction between measures affecting imported products and measures affecting importation …" 46
245. This distinction is equally relevant in the re lationship between Article II and Article III. As
China has explained throughout these proceedings, a di scriminatory charge that a Member is allowed

44 See, e.g., Canada – FIRA at para. 5.14.
45 India – Autos (Panel) at para. 7.221 n. 410, quoting Korea – Various Measures on Beef at para. 766.

to collect on goods "on their importation" into its customs territory – i.e., a customs duty under
Article II – cannot simultaneously be analyzed as an "internal charge" under the disciplines of
Article III.
47 This would have the effect of rendering inutile a Member's right to impose customs
duties in accordance with its Schedule of Concessions . It is precisely for this reason that an
evaluation of a measure or charge in relation to Article II must include an assessment of whether the
measure or charge is one that the Member is allo wed to maintain or impose in respect of imported
products under Article II. Such a charge or measure is not subject to the disciplines of Article III.
246. The second important point that this jurispruden ce establishes is the interpretation of the term
"on." The Panel in India – Autos found that "[a]n ordinary meaning of the term ' on', relevant to a
description of the relationship which should exist between the measure and the importation of the
product, includes 'with respect to', 'in connection, a ssociation or activity with or with regard to.'" 48
This supports China's interpretati on of the term "on their importation" to encompass charges that a
Member collects by reason of (or "with respect to," or "in connection, association or activity with")
the importation of a product, without regard to the exact point in time or space at which the charge is
collected.
Response of the European Communities (WT/DS339)

247. The specific paragraphs identified in the jurisp rudence referred to in the question address the
respective scopes of Article XI and III:4 of the GA TT although other aspects such as the relevance of
the Ad Article III have also been touched upon.
248. The European Communities shares the broad thrust of the analysis in paragraphs 7.221 to
7.224 in India – Autos in which the panel considered that "[w]hile other provisions in the WTO
Agreement may usefully be considered as part of the context which informs the meaning of a given
provision, the scope of a provision should not be assumed a priori to vary depending on the mere
presence of other provisions which may have some relevance to the situation: the contours of a
provision should flow from its terms, as read in context alongside the other provisions of the
agreement" (paragraph 7.223). This means that the wording in Article XI must be understood
independently in the context of that provision as is the case with Article II.
249. As regards the notion "on importation" in Article XI:1 the panel in India – Autos considered
that the ordinary meaning of the term "on" (releva nt to a description of the relationship which should
exist between the measure and the importation of the product) includes "with respect to", "in
connection, association or activity with or with regard to".
250. The context of Article II:1(b) is different and points out to a more narrow interpretation of the
notion "on importation" because the second sentence of Article II:1(b) explicitly distinguishes
between the notions of "on" importation and "in c onnection with" importation. In this respect the
jurisprudence relating to the delineation between Arti cles XI and III:4 is helpful in demonstrating the
narrowness of the notion of "on importation" in Article II:1(b) of the GATT 1994.
251. This case law addresses another important issue, namely the relevance of the text of Note Ad
Article III. It is important not to be guided by the text of the Ad Article to the detriment of the clear
text of Article III itself. The Ad Article III addresses the specific issue where an internal tax or other
internal charge, or any law, regulation or require ment which in fact applies to an imported product
and to the like domestic product and is collected or enforced in the case of the imported product at the

47 See, e.g., China rebuttal submission at para. 124.
48 India – Autos at para. 7.257.

time or point of importation, is nevertheless to be re garded as an internal tax or other internal charge,
or a law, regulation or requirement of the kind referred to in paragraph 1 of Article III, and is
accordingly subject to the provisions of Article III. This is a clarification of a specific situation.
252. It is clear on the face of the text of Article III itself that internal taxes and other internal
charges, and laws, regulations and requirements affecting the internal sale etc. should not be applied
to imported or
 domestic products so as to favour domestic like products. In other words and as already
stated by the European Communities in its reply to question 88 from the Panel, the language of
Article III does not require that a charge, law, or regulation must apply to both domestic and imported
products to be considered internal under Article I II of the GATT 1994. If the scope of Article III was
limited to situations where internal charges, laws, regulations or requirements are applied to both
domestic and imported goods, it would render the most blatant discriminations outside the scope of
Article III. In such a case a Member would be allowe d to impose an additional internal charge or an
additional internal procedure only on imported pro ducts. This is the situation with the Chinese
measures.
Response of the United States (WT/DS340)

253. The United States has discussed the relations hip between Articles II and III of the GATT
1994 in paragraphs 75-80 of its fi rst written submission and in its r esponse to Panel question No. 37.
Other provisions of the GATT 1994 may usefully be c onsidered as part of the context which informs
the meaning of Articles II and III and their relations hip to one another. The meaning of those two
articles, however, must be interpreted based on their ordinary meaning, read in context alongside the
other provisions of the agreement, and in light of the agreement's object and purpose.
49
254. The panel and Appellate Body reports referred to in this question provide guidance in the
analysis of the relationship between Articles XI and III:4 of the GATT 1994. There are some
important differences between Article XI and Article II that affect each article's interrelationship with
Article III. First, Article XI speaks in terms of "restrictions . . . on importation" and extends to a
broad range of limitations that may be imposed upon the importation of goods. (See the US response
to question No. 279). In contrast, the first sentenc e of Article II:1(b) relates to the imposition of a
specific type of charge, ordinary customs duties. The phrase "on importation" may have a narrower
scope when it is referring to a specific charge as opposed to restrictions in general. This interpretation
is bolstered by the language in the second senten ce of Article II:1(b) which contrasts the phrase
"imposed on or in connection with the importation" with the use of "on their importation into the
territory" in the first sentence. That contrast is not present in Article XI. Accordingly, the guidance
provided by the panels in India – Autos and and Dominican Republic – Import and Sale of Cigarettes
regarding the term "on importation" in Article XI
50 is not transferrable to the meaning of "on
importation" in Article II.

49 See India – Autos at para. 7.223, "While other provisions of the WTO Agreement may usefully be
considered as part of the context wh ich informs the meaning of a given provision, the scope of that provision
should not be assumed a priori to vary depending on the mere presence of other provisions which may have
some relevance to the situation: the contours of a provision should flow from its terms, as read in context
alongside the other provisions of the agreement."
50 India – Autos at para. 7.257 and Dominican Republic – Import and Sale of Cigarettes at paragraph
7.258.

Response of Canada (WT/DS342)

255. The various provisions of the WTO Agreement may provide context for the interpretation of,
among others, Articles II and III. It follows that the jurisprudence, in respect of the delineation
between Articles XI and III:4, may be relevant fo r providing context for u nderstanding the process of
importation. In particular, Article XI (together with Articles I and III) is relevant to confirm that there
is an "importation" stage after which both Article II and Article XI are no longer applicable. For
example, the panel in Canada – FIRA confirmed that there is a separate, narrow "importation" stage,
after which Article XI no longer applies – this is necessary to ensure that Article III requirements are
not rendered superfluous. The same logic equally applies to Article II.
256. Canada sets out in Sections II.B.1 and II.B. 2 of its second written submission the proper
interpretation of when ordinary customs duties ma y be imposed pursuant to Article II:1(b), first
sentence. There is a discrete point in time when a product enters a customs territory when liability for
ordinary customs duties crystallizes. There is th en a longer general "importation" phase when any
charge other than ordinary customs duties under Artic le II can apply. Similarly, under Article XI, the
importation phase is a distinct concept that extends th e discipline of the Article to the wide range of
possible restrictions or limitations that may be applied in the context of the importation (or
exportation) process.
257. However, while Article XI is useful in unders tanding the general concept of the process of
importation, the precise meaning of the words in Artic le XI must be read in the context of that
provision, and may not be precisely the same as the same words in the context of another Article.
51
Article XI relates to qualitative impediments to importation or exportation in general terms. There is a
notable difference between Article II and Article XI, in that Article II:1(b) contemplates two separate
periods of time ("on their importation" in the firs t sentence, and "on or in connection with" in the
second sentence), whereas Article XI applies genera lly to prohibit protectionism in the importation
stage as a whole throughout both periods. This is an alogous to the distinct analysis of likeness that
occurs under Articles III:2 and III:4, where both th e concept of likeness in the first sentence of
Article III:2, and the concept of "directly compe titive and substitutable" in the second sentence, are
both imputed into the concept of likeness in Article III:4.52
258. This was considered in both India – Autos and Dominican Republic – Import and Sale of
Cigarettes. That consideration must be considered not on ly in the distinct context of Article XI, but
also in the context of the measures at issue in those cases. For example, in India – Autos the analysis
related to a "trade balancing" requirement. That requirement prohibited importation of CKDs by a
manufacturer if an equivalent value of automob iles was not also exported. While the measure in
question in effect prohibited imports unless certain conditions were met, it was not applied "at the
point of importation" because it was applied th rough agreements with vehicle manufacturers. 53 There
was no question that the measures at issue limited imports; 54 the issue was with respect to the
relationship in time between physical importation and the time of conclusion of those agreements.55

51 India – Autos, Panel Report, at para. 7.223.
52 See, e.g., EC – Asbestos, Appellate Body Report, at paras. 99-101. Similarly, in Dominican Republic
– Import and Sale of Cigarettes the Panel found at paragraph 7.258 that "in the context of Article XI" it may be
appropriate to read into "on importation" the phrase "in connection with". See also India – Autos, Panel Report,
para. 7.257.
53 India – Autos, Panel Report, at paras. 2.1-2.5.
54 India – Autos, Panel Report, at para. 7.278.
55 Footnote 410 in India – Autos , specifically referenced in this question, relates to the special
disciplines applicable to state enterprises where Article XVII apply. This situation does not apply here.

259. With respect to paragraphs 8.94 and 8.95 of the Panel Report in EC – Asbestos , the only
relevance would be to re-affirm that Article III can have broad application and apply at the border. As
stated in Canada's response to Question 88, if a charge or law had to apply to both domestic and
imported products, this would have the absurd r esult of allowing measures to violate the national
treatment principle so long as they do not apply to domestic products. The statement in
paragraph 8.95 is also relevant to support Canada's answer to Qu estion 273, that Article III:4 can
apply to customs procedures that are more bur densome than necessary (i.e., as was found in US –
Section 337 Tariff Act).
Comments by the European Communities on China's response to question 203
260. This case law does not address the relationshi p between Article II and III of the GATT 1994
as China appears to suggest. As the European Comm unities stated in its reply to question 203 of the
Panel, this case law highlights the important difference
 in the context of the notion "on importation"
under Article II:1 (b) and Article XI of the GATT 1 994 respectively. China's reply entirely ignores
this fundamentally important context, which demo nstrates that the notion of "on importation" is
narrower under Article II:1(b) than under Article XI.
Comments by Canada on China's response to question 203
261. Canada would like to emphasize that the Pa nel's attention to the cited paragraphs
demonstrates how China ignores the specific c ontext of importation under GATT Article II and
interprets individual words in a mechanistic fashion.
262. China does this by misapplying the logic of the panel in Dominican Republic – Import and
Sale of Cigarettes. GATT Article XI:1 applies to the whole of the importation phase, and to direct and
indirect import and export restrictions. Accord ingly, it may be appropriate to read into "on
importation" the phrase "in connection with" in the context of Article XI, since the latter phrase
connotes both a general phase of importation and the a pplication of direct and indirect measures to
that importation phase. 56 The distinction between the specifi c act of importation and the general
importation phase is also seen in the different la nguage used in the first and second sentences of
Article II:1(b) (i.e., "on or in connection with" in II:1(b), second sentence, refers to the general
importation phase).
263. A perfunctory reading of individual words does not satisfy the requirement of the interpreter
to consider the language of a treaty provision in co ntext, and the light of its object and purpose, yet
this is precisely what China proposes the Panel s hould do. Given the contextual differences between
Article XI and Article II:1(b), the expressions " on their importation" and "on the importation" cannot
be read as synonymous by virtue of containing the word "on".
204. ( All parties) If the Panel were to take into consideration the Panel Report in EEC – Parts
and Components, should the Panel also take into account the clarifications made by Mr. Groser,
member of the Panel, at the GATT Council Meeting of 3 April 1990 (C/M/240, pages 21-23) on
the scope and content of the report?

56 As the panel noted in Dominican Republic – Import and Sale of Cigarettes , Panel Report, at
para. 7.258.

Response of China

264. China does not consider that the remarks of Mr. Groser before the GATT Council Meeting
materially alter the parties' unde rstanding of the panel report in EEC – Parts and Components, or its
relevance to the present dispute.
265. As China explained in its first written submissi on, the principal relevance of the panel report
in EEC – Parts and Components is to highlight the important differences between the measures at
issue in that dispute and the measures that the EC s ubsequently adopted to bring itself into conformity
with its GATT obligations.
57 For the reasons that China explai ned, the measures at issue in the
present dispute do not share the flaw that the panel identified in EEC – Parts and Components, in that
the measures do not impose duties on parts and component s after they have entered free circulation in
China. Rather, like the revised EC measures, the assessment of dut y liability is based on the prior
investigation of whether parts and components for a specific vehicle model should be classified as the
complete article, and the declaration that the importer makes to customs authorities when the goods
enter the customs territory.
Response of the European Communities (WT/DS339)

266. As a matter of principle the European Communiti es does not believe that statements made by
one member of the panel should be taken into account for the purposes of interpreting an adopted
panel report. It appears also that the discussion was particularly prompted by preliminary points raised
by the losing party i.e. the European Communities, which, as stated on p. 24 of the document, had not
yet finalized its position. Subsequently the Europ ean Communities accepted to adopt the report. The
European Communities does not see anything particular ly relevant for the present Panel proceedings
in the observations of Mr Groser. In any event, it would seem systemically important not to give
weight to ad hoc observations made outside the scope of the standard panel proceedings.
Response of the United States (WT/DS340)

267. The Panel Report in EEC – Parts and Components should stand on its own and should not be
considered to be altered by the subsequent comments of a member of that panel. Mr. Groser noted
this himself as the GATT Council Meeting minutes pr ovide: "He stressed, however, that the Panel
had completed its work with the circulation of the report and that the Panel's findings should be
considered by the Council as they were set out in the report. Nothing which he would say at the
present meeting was, therefore, meant to add to, or detract from, the Panel's findings in L/6657."
(C/M/240, page 21).
Response of Canada (WT/DS342)

268. The scope and content of the report must be dete rmined on the basis of the report itself, and
not subsequent commentary. Canada notes that Mr. Groser's comments (on p. 21) were preceded by
the caveat that they were not "meant to add to, or detract from, the panel's findings" in EEC – Parts
and Components.
Comments by the European Communities on China's response to question 204
269. The European Communities agrees with China that the remarks of Mr Groser are not relevant
to the present dispute.

57 See China first written submission at paras. 54-61.

270. China's other remarks in its reply are outside th e scope of the question. In this respect it is
sufficient to refer to EC's reply to question 132 of the Panel. The European Communities is also
puzzled by China's assertion that "the measures at issue in the present dispute do not share the flaw
that the Panel identified in EEC – Parts and Components , in that the measures do not impose duties
on parts and components after they have entered free circulation in China". Under the EC measures
condemned in EEC – Parts and Components , the parts were not considered in free circulation before
being assembled and leaving the assembly or production plant
58. Thus, the EC measures – just like
China claims for its measures – did not "impose duties on parts and components after they have
entered free circulation in [the EC]". The panel in EEC – Parts and Components explicitly rejected
the argument presented by the EEC based on the status of the goods as not being in free circulation
(see paragraph 5.7 of the panel report). China's reference to EEC – Parts and Components is therefore
erroneous.
Comments by the United States on China's response to question 204
271. In its response, China expands upon its argument in paragraphs 54-61 of its first written
submission to state that "the measures at issue in the present dispute do not share the flaw that the
panel identified in EEC – Parts and Components , in that the measures do not impose duties on parts
and components after they have entered free circulati on in China." China did not in fact argue in its
first submission that the EEC measures imposed du ties on parts and components after they "entered
free circulation." That was probably because the EEC measure at issue expressly provided that the
parts could only be considered to be in free circulation "insofar as they will not be used in an
assembly or production operation...."
59 Thus under EEC law, the parts were not "in free circulation."
That was of course a legal fiction, as is the case with respect to China's measures.
C. GENERAL INTERPRETATIVE RULE 2(A)
205. ( Complainants) In paragraphs 17 and 29 of its second written submission, China argues
that the complainants' position is that China' s tariff rates for motor ve hicles apply only when
the importer imports a completely finished moto r vehicle, fully assembled, with absolutely no
parts missing based on the complainants' argu ment that paragraph 93 of the Working Party
Report committed China not to apply GIR 2(a) to classify CKD or SKD kits as motor vehicles.
Further, China states in footnote 5 that the United States believes that China is not allowed to
apply GIR 2(a) under any circumstance.
(a) Do you agree with China's statement ab ove? If not, why not? Under what
circumstances, would China be allowed to apply GIR 2(a)?
Response of the European Communities (WT/DS339)

272. As set out by the European Communities in its first written submission, the ordinary meaning,
context and object and purpose of headings 87.01 to 87.05 (and in particular headings 87.02 to 87.04)
of China's tariff schedule clearly point to complete motor vehicles. As further set out in its first
written submission (in particular pa ragraphs 251 to 253), there are so me exceptional situations where
the general explanatory note to Chapter 87 of the Ha rmonized System foresees that an incomplete or
unfinished vehicle may be classified as the corresponding complete or finished vehicle provided it has
the essential character of the latter. The explanator y note provides as examples "a motor vehicle, not
yet fitted with the wheels or tyres and battery" and "a motor vehicle not equipped with its engine or

58 See EEC – Parts and Components, paras 2.5, 2.6, 3.8, 3.22 to 3.26, 3.35 and 5.5.
59 EEC – Parts and Components, BISD 37S/132 at para. 2.5.

with its interior fittings". In all cases where a la rge collection of automotive parts is presented to
customs, the classification must be made on a case by case basis. In the light of the explanatory note
to chapter 87, the overwhelming majority of the part s must be present and fitted together in order for
the collection of parts to be classifiable as a co mplete vehicle. As the European Communities has
acknowledged in its reply to question 118 of the Panel, it is prepared to accept that an SKD kit or even
a CKD kit consisting of all parts necessary to make a complete vehicle could be classified as the
complete vehicle provided only assembly operati ons are involved. Howeve r, China's reply to
question 71 demonstrates that CKD and SKD kits ar e often subject to "further working operation for
completion into the finished state" (see Note VII to GIR 2 (a)).
Response of the United States (WT/DS340)

273. The United States does not agree with China's statement. Nothing in the position of the
United States states or implies that China cannot apply GIR 2(a) to incomplete or unfinished
automobiles having the essential character of a co mplete vehicle, or to automobiles presented
unassembled or disassembled. (As the United States has explained, China's measures – if considered
to impose regular customs duties – go far beyond GIR 2(a) by classifying bulk shipments of auto parts
as complete vehicles.)
274. Contrary to China's contentions, Paragraph 93 of the Working Party Report has nothing to do
with GIR 2(a). Paragraph 93 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.
60
 China's argument confuses two very different matters – tariff classification, and tariff
treatment. The HS Convention governs tariff classification at the 6-digit level, and provides no
obligations regarding tariff treatment.61 In fact, it is common for parties to the HS Convention to have
more detailed breakouts (for example, at the 8-di git level) and to use those 8-digit breakouts to
provide different tariff treatment to articles that fa ll under the same 6-digit HS heading. In contrast,
Paragraph 93 addresses the tariff treatment of CKDs and SKDs – not their tariff classification.
275. Because the HS Convention addresses tariff cl assification, and Paragraph 93 addresses the
different matter of tariff treatment, China is wr ong in arguing that GIR 2(a) somehow presents
conflicts between the HS Convention and the Working Party Report. Rather, it is a simple matter for
China to act consistently with both. In par ticular, if China classifi es CKDs/SKDs under the HS
heading for complete vehicles, it can (and indeed must under its Paragraph 93 obligation) provide a
separate tariff breakout under that heading for C KDs/SKDs, and provide a tariff treatment of 10% for
the CKD/SKD breakout. As Canada has noted, it in fact is not unusual for countries to provide
separate tariff lines for whole vehicles and for CKDs/SKDs.
62
276. Moreover, the very text of Paragraph 93 refu tes China's argument that GIR 2(a) requires that
a complete vehicle and articles covered by GIR 2(a) (such as certain CKDs/SKDs) must enter under

60 WT/ACC/CHN/49 (Ex. JE-26).
61 HS Convention, Art. 9 (Ex. JE-35).

the exact same tariff line. The text of paragra ph 93 explicitly notes the possibility that China might
create separate tariff lines: ("If China created such tariff lines ....).
Response of Canada (WT/DS342)

277. No. Canada's position, as stated in paragra ph 70 of its second written submission, is that
China can only charge the 25% rate on assembled vehi cles. But this does not mean that a vehicle can
avoid the assembled rate merely by removing a si ngle part (such as wiper blades or tires). Members
that have separate lines for CKDs in their na tional customs tariffs have procedures for such
classifications.
63
278. Canada submits that China's customs authorities have reasonable discretion, in keeping with
relevant WTO obligations (e.g ., as set out in GATT Article X), to make a determination of whether a
product, in the state in which it arrives at China's border, is "assembled" or a CKD/SKD. If it is the
latter, even if classified as a whole vehicle, China is obligated to charge no more than a 10% duty in
accordance with paragraph 93 of the Working Part y Report. Without prejudice to future disputes,
Canada illustrates what it submits would be a reasonable approach, in keeping with China's
commitments, taking as an example the picture Ch ina provided as Exhibit CHI-5, described by China
variously as an SKD or a whole vehicle with its tires removed:64
• If the shipment is a whole vehicle with only its tires removed, it would be reasonable for
China to classify it as an assembled whole vehicle and charge the whole vehicle rate.
• If, however, the shipment is only an assembled body with chassis, but all other parts
(e.g., engine, transmission, axles, etc.) were shipped unassembled in the same shipment
with that body and chassis, th en China could either classify the constituent parts
separately and charge them the appropriate rates (generally 10%), or classify the
shipment as an unassembled whole vehicle, and charge it at the CKD/SKD rate of 10%.
Comments by China on Complainants' responses to question 205
279. In response to this question, the United States claims that "if China classifies [CKD/SKD kits]
under the HS heading for complete vehicles, it can ( and indeed must under its Paragraph 93
obligation) provide a separate tariff breakout under that heading for [CKD/SKD kits], and provide a
tariff treatment of 10% …" 65 Once again, the United States is engaged in a wholesale re-writing of
the commitment that China actually made in paragraph 93 of the Working Party Report.
280. All parties agree that, under the Harmonized System Convention, customs authorities must
apply the General Interpretative Rules in the classifica tion of entries. This requirement is stated in
Article 3.1(a)(ii) of the Harmonized System Convention (each Member "shall apply the General Rules
for the interpretation of the Harmonized System …"). As a party to the Harmonized System
Convention, the classification of CKD/SKD kits as motor vehicles is not optional for China, as the US
comment appears to suggest ("if China classifies [CKD/SKD kits under the HS heading for complete

63 See for example, the Putale and Zyfert cases, cited by Australia in its oral statement, which decided
whether the imported products at issue fell under a particular tariff line in Australia's Customs Tariff for
"assembled" motor vehicles.
64 See paragraph 36 of China's first written submission, describing the shipment as "SKD kits prepared
for shipment to China" which "appear" to have only the tyres removed; and paragraph 20 of China's second
written submission where it states that Exhibit CHI-5 is "a car with its tyres removed".
65 US answers after second meeting at para. 45 (emphasis added).

vehicles …"). Thus, what the United States is actually claiming is that China must create separate
tariff lines for CKD/SKD kits with a 10 per cent rate of duty. Indeed, the US must believe that China
was required to create these separate time lines when it acceded to the WTO , as China was a member
of the Harmonized System at that time and was re quired to apply GIR 2(a) to the classification of
CKD/SKD kits.
281. Once again, the United States is trying to re-write a commitment that was expressly
conditional (" if China created such tariff lines …") in to a commitment that was present and
unconditional at the time that China joined the WTO ("China must create such tariff lines …"). There
is simply no basis for this re-writing of the commitment that China actually made.
206. ( China) Are the complainants required to make a prima facie showing that China has
misapplied the essential character test under GIR 2(a) to sustain their claims that China has
violated Articles II or III of the GATT? Please explain the legal basis for your answer.
Response of China

282. The Appellate Body has explained that a complaining Member must "put forward evidence
and legal argument sufficient to demonstrate" that the challenged measures are inconsistent with the
relevant provisions of the covered agreements.
66 In the present dispute, the complainants have opted
to bring an as such challenge to the challenged measures. The Appellate Body has observed that:
By definition, an "as such" claim challenges laws, regulations, or other instruments of
a Member that have general and prospective application, asserting that a Member's
conduct—not only in a particular instance that has occurred, but in future situations
as well—will necessarily be inconsistent with that Member's WTO obligations. In
essence, complaining parties bringing "as such" challenges seek to prevent Members
ex ante from engaging in certain conduct. The im plications of such challenges are
obviously more far-reaching than "as applied" claims.67
283. When challenging a measure as such, the complainants "are required to present evidence as to
the scope and meaning of the challenged measure, including, for example, the text of the measure
supported by evidence of its consistent application." 68 Likewise, "[t]he party asserting that another
party's municipal law, as such, is inconsistent with relevant treaty obligations bears the burden of
introducing evidence as to the scope and meaning of su ch law to substantiate that assertion. Such
evidence will typically be produced in the form of the text of the relevant legislation or legal
instruments, which may be supported, as appropriate , by evidence of the consistent application of
such laws …" 69
284. In respect of the essential character test, the fundamental problem with the complainants' case
is that they have failed to present evidence and legal arguments sufficient to identify the specific
instances in which the challenged measures will necessarily result in a misapplication of this standard.
As China explained in its oral statement at the second substantive meeting, the complainants have
failed to define the boundaries of the essential charac ter test as it relates to parts and components of
motor vehicles under Chapter 87 of the Harmonized System, and to substantiate those boundaries by
reference to evidence and legal arguments. Nor ha ve the complainants demonstrated a consistent

66 US – Wool Shirts at p. 16.
67 US – Oil Country Tubular Goods Sunset Reviews at para. 172 (emphasis added).
68 US – Oil Country Tubular Goods Sunset Reviews at para. 257 (emphasis added).
69 US – Carbon Steel at para. 157 (emphasis added).

application of the challenged measures that has resu lted in a misapplication of the essential character
test to parts and components of motor vehicles. Having failed to meet their burden of proof, the
complainants have provided the Panel with no basis to distinguish between those instances, if any, in
which the measures will necessarily result in a misapplication of the essential character test, and those
instances in which it will not. Therefore, the Panel cannot find that the challenged measures, as such,
are inconsistent with the essential character test under GIR 2(a).
Comments by the European Communities on China's response to question 206
285. The European Communities has made a prima facie showing that the measures are
inconsistent with Article 2 of the TRIMs Agreement and Article III of the GATT 1994 and,
alternatively, inconsistent with Article II of th e GATT 1994. China has referred to the Harmonised
System and GIR 2 (a) thereunder as its defence. As a matter of principle it is for China to provide the
detailed arguments why GIR 2 (a) justifies its measur es. However, as a matter of fact the European
Communities has demonstrated that under all the cr iteria under Articles 21 and 22 of Decree 125, the
measures necessarily lead to tariff classification that is not consistent with the essential character test.
In this respect the European Comm unities refers in particular to paragraphs 112 to 117 of its second
written submission.
Comments by the United States on China's response to question 206
286. As an initial matter, as the United States has argued elsewhere, GIR 2(a) deals with the proper
classification of items under the HS nomenclature and is only relevant in the interpretation of China's
schedule of tariff commitments (which in turn is relevant to the alternative claim of a breach of
Article II). If a charge is an internal charge a nd thus subject to Article III:2, then GIR 2(a) is
irrelevant. See US response to Panel question No. 187.
287. With respect to an alterna tive claim under Article II (should the Panel conclude that the
charges are "ordinary customs duti es"), the United States has made a prima facie showing that China
has breached its obligations under Article II and Chin a's schedule of tariff commitments. GIR 2(a) is
not part of the WTO Agreement, and is not part of the US prima facie case. Rather, China has raised
arguments based on GIR 2(a) in an attempt to rebut the prima facie case.
70 That said, the United
States has presented sufficient eviden ce and argument to sustain its claims on this issue. See e.g., US
responses to Panel question Nos. 116, 117, 128, 208, and 209.
207. ( Canada) Do you agree with China that one of the principal differences between the
CBSA determination (on the disassembled furniture case) and Decree 125 is that Decree 125
specifies the precise thresholds at which China w ill consider a collection of imported auto parts
to have the essential character of a motor ve hicle and that by doing that, Article 21 of
Decree 125 makes these measures more transparent and predictable to importers? (China's
response to Panel question No. 124)
Response of Canada (WT/DS342)

288. No, Canada does not agree. Canada's Me morandum D10-14-38 Tariff Classification of
Furniture Imported in Disassembled Condition (" the Memorandum") only affects those importers
where there are proper grounds to suspect that they ordered a finished piece of furniture for retail sale
(not where what was actually ordered was parts, unlike the measures), but had the parts shipped
separately. Those importers should in any event ha ve based their business decisions on the tariff rate

70 Rebuttal submission of the United States, paras. 27-31.

for finished furniture since that is what was actu ally ordered, so the possible application of the
Memorandum to the shipment should not make their business any less predictable. They will have no
additional administrative burden, nor will their costs increase beyond what they would have projected.
289. In contrast, China's measures provide uncertainty to importers of auto parts. Unlike Canadian
practice regarding furniture as set out in the Memora ndum, where complete furniture is ordered, here
auto parts must be declared as "Deemed Whole Ve hicles" in order to receive an import licence.
Further, the measures ensure that every importer of auto parts, unless they know that the imported
parts will be used for retail sale as spare parts, must take account of the measures. The importer in
China may not know who their ultimate customer is, or whether the vehicle that will be produced with
the parts has already been found to be subject to charges under the measures. Ev en if they knew that
the ultimate vehicle was not covered by the measures, and thus that imported parts used in it would
not be Deemed Whole Vehicles, they do not know if the vehicle will be re-assessed based upon a
difference in valuation, or on changes in sourcing ( as illustrated in the examples described in the chart
in Canada's first written submission, paragraph 65 – notably the third example for changes of sourcing
and the fifth example for differences in valuation).
290. The importer's contract with the vehicle manufacturer might in addition impose punitive costs
on the importer if domestic-content levels from the pa rts supplier are not met. Further, even if the
importer knows that the parts will not be Deem ed Whole Vehicles based upon the model in which
they are eventually used, and even if they know that the model will never be reassessed such that the
parts become Deemed Whole Vehicles (for example, because the vehicle manufacturer goes to great
lengths to ensure that it has more than enough domestic content), the importer still must track the
imported content of its parts to comply with the administrative burden imposed by the measures.
208. ( Complainants) Do you agree that national governments have the discretion, within
their obligations under the GATT, in applying their Schedules, to interpret whether a
particular shipment of parts of a given pro duct has, on a case-by-case basis, the essential
character of the whole?
Response of the European Communities (WT/DS339)

291. The European Communities is of the view that the Harmonised System limits the discretion
of the Members in applying their schedules under the GATT. As its name already indicates, the
Harmonized System aims at harmonising the tariff classification of goods. However, in view of the
variety of different goods in the market and the e normous volumes of trade in goods world-wide, it is
not possible to write down exhaustive criteria for a ll possible situations that customs authorities may
be faced with in their daily work. It is therefore necessary to have interpretative rules that apply in
those exceptional situations where the nature of the good is not immediately apparent in the light of
the headings of the schedules. The customs au thorities of the Members do possess this kind of
practical and limited discretion, which however is guided by the objective of harmonised tariff
classification. In this instance the discretion is lim ited by the notions of "as presented" and "essential
character" and the specific Explanatory Note to chapter 87.
Response of the United States (WT/DS340)

292. The HS nomenclature does not in every instance specify what does or does not constitute the
"essential character" of a complete article. Howeve r, the HS nomenclature does place limits on the
determination. For example, when a less than co mplete article has its own heading (such as a vehicle
chassis), that item must be classified under its specific heading, and cannot be classified as a complete
vehicle.

Response of Canada (WT/DS342)

293. Canada agrees that Members generally have the discretion under Article II to apply lower
tariff rates than the bound rates set out in their Schedule, as long as that discretion does not violate
Article II or other provisions of the WTO Agreement (e.g., Most-Favoured-Nation obligations in
Article I). Canada also agrees that Members have the discretion to classify parts which have the
essential character of the finished good either as pa rts or as the finished good (as noted in the
quotation cited in footnote 77 of Ca nada's second written submission), in accordance with the rules of
the Harmonized System, including GIR 2(a) as appropriate. However, China is not applying its
Schedule within its obligations under the GATT , but instead acts inconsistently with Article III, and
acts as if it is only bound by its WCO obligations, which it erroneously applies.
209. ( Complainants) If your answer to the previous qu estion was yes – do you believe that
this discretion is somehow different if a Member sets forth criteria that it will apply to all
shipments of parts of a given product to determine whether they have the essential character of
the whole? What is the legal basis for your position?
Response of the European Communities (WT/DS339)

294. China's systematic treatment under the measures of imported goods contrary to their objective
characteristics and contrary to the explicit wording of the headings of schedules has nothing to do
with discretion. The material conditions set out in Articles 21 and 22 of Decree 125 and their
application under the 'multiple shipments' theory of China amounts to tariff classification at will. This
is anarchy, not discretion. Any general conditions a Member applies under its schedules should be set
out explicitly in the schedules and be otherwise c onsistent with its WTO ob ligations (Appellate Body
Report in EC – Export Subsidies on Sugar, paragraphs 211 to 223).
295. The European Communities accepts that Member s may adopt instruments and use documents
that guide customs authorities and importers in the co ntext of particular kinds of shipments. However,
such guidance must be in accordance with the Harmonised System and the Member's WTO
obligations.
Response of the United States (WT/DS340)

296. A Member may set forth criteria that it will apply to all shipments of parts of a given product
so long as the criteria set forth are consistent with the Member's obligations under the GATT 1994
and other WTO Agreements and – if the Member is also a party to the Harmonized System
Convention – its obligations under the Harmonized System Convention. Article 3(1)(a) of the
Harmonized System Convention requires that each Cont racting Party is required to undertake that its
Customs tariff and statistical nomenclatures 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.

297. If Decree 125 imposed customs duties, it would be inconsistent with the Harmonized System
Convention because it does not apply the General In terpretative Rules and the Section Notes that
require goods to be classified in their condition as imported under the heading that most accurately
describes the good. If Decree 125 were considered a valid interpretation of the Harmonized System,
it would void (empty out) several headings and subheadings that specifically describe automobile
assemblies, subassemblies, and parts.
Response of Canada (WT/DS342)

298. Canada does not take issue with Members setting fo rth guiding criteria to apply to particular
shipments of goods to determine their classification. This approach is illustrated with respect to kit
cars in Canada (Exhibit CHI-17), and other shipments elsewhere (e.g ., EC Regulation 2127/2005,
Exhibit CHI-14). However, Canada s ubmits that such criteria must be in accordance with the rules of
the Harmonized System and consistent with a Me mber's WTO obligations. Canada has set out in
paragraphs 41-51 of its second writte n submission why the measures, even if applied to a single
shipment of all parts at the border, do not cl assify in accordance with the requirements of the
Harmonized System.
210. China states in paragraph 43 of its second wr itten submission that "[t]he significance of
the WCO's interpretation, as pertinent to this di spute, 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."
(a) ( China) Please elaborate on this statement based on the specific language of the HS
Committee Decision at issue. In other words, where in the Decision does China find support for
such an interpretation?
Response of China

299. The conclusion that the term "as presented" do es not preclude the application of GIR 2(a) to
multiple shipments of parts and components arises as a necessary implication of the interpretation that
the HS Committee adopted. If the term "as presented" were limited to a single shipment (however a
"shipment" might be defined), it would not be co nsistent with this unders tanding of the term "as
presented" to conclude that "the questions of split consignments and the classification of goods
assembled from elements originating in or arriving from different countries" were "matters to be
settled by each country in accordance with its own national regulations." Both of the circumstances
referred to in paragraph 10 of the HS Committee decision necessarily entail an application of
GIR 2(a) to classify parts and components that arrive in more than one shipment. In finding that these
are applications of GIR 2(a) to be determined by each country in accordan ce with its national laws
and regulations, the HS Committee must have cons idered that the term "as presented" does not
preclude these applications of GIR 2(a).
Comments by the European Communities on China's response to question 210(a)
300. Even China acknowledges now that these is nothi ng in the "decision" of the HS committee
that explicitly provides for the unpr ecedented interpretation that China attempts to give of the notion
of "as presented" in GIR 2 (a). China refers to a "necessary implication", which in reality amounts to a
mere assertion by China. As th e European Communities stated in paragraph 27 of its second oral
statement, the phrase "elements originating in or arriving from different countries" in that decision
have absolutely nothing to do with the "multiple shipments" theory China has invented for the

purposes of these Panel proceedings. The European Communities also refers to its reply to
question 210 (b) and paragraphs 100 to 111 of its second written submission.
Comments by the United States on China's response to question 210(a)
301. China mistakenly asserts in its response to Panel question No. 210(a), that: "Both of the
circumstances referred to in paragraph 10 of the HS Committee decision necessarily entail an
application of GIR 2(a) to classify parts and components that arrive in more than one shipment. In
finding that these are applications of GIR 2(a) to be determined by each country in accordance with its
national laws and regulations, the HS Committee must have considered that the term 'as presented'
does not preclude these applications of GIR 2(a)."
302. This is a mischaracterization of the meaning of the HS Committee "decision"
71 and the proper
meaning of the term "as presented" and is inc onsistent with the proper interpretation of the
Harmonized System. As the complainants have expl ained, the "decision" does not make findings on
this issue, and thus the HS Committee d ecision repeatedly cited to by China does not stand for the
proposition that GIR 2(a) applies to multiple shipments of bulk parts. Rather the "decision" notes that
the question of multiple origin is not addressed by GIR 2(a). See WCO Secretariat Response to Panel
question 12. See also US Responses to Panel question No. 210, paragraphs 50 and 51.
(b) ( Complainants) Does the term "as presented", explicitly or implicitly, 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? What is the legal basis for
your view?

Response of the European Communities (WT/DS339)

303. It is inherent in the ordinary meaning of the words "as presented" that it cannot include
multiple shipments of goods presented to customs at different times, different places, from different
origins and destined for different importers. As the WCO secretariat has confirmed, "as presented" in
GIR 2 (a) "could be understood to mean the mome nt 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 trade
statistics nomenclatures" (point 1 of the reply from the WCO secretariat). It is clear from the ordinary
meaning of the words and the reply from the WCO secretariat that the concept does not and cannot
cover 'several moments' and 'several places', which are necessary preconditions for China's position.
304. Furthermore and more fundamentally, the Appellate Body has confirmed that "in
characterizing a product for purposes of tariff classification, it is necessary to look exclusively at the
'objective characteristics' of the product in ques tion when presented for classification at the border"
(EC – Chicken cuts , paragraph 246). The notion of multiple shipments of products goes directly
against this formulation of the Appellate Body as multiple shipments denotes several products that are
presented to customs at different times and at different places.
Response of the United States (WT/DS340)

305. The United States interprets the term "as presented" as explicitly precluding the application of
GIR 2(a) to shipments of goods that are not imported together. The legal basis for this view is that

71 It is noteworthy that even the WCO Secretariat's re ference to Paragraph 10 is merely a portion of the
"Summary Record," and not a decision of the Harmonized System Committee. See the WCO Secretariat's
response to the Panel's question 11.

contracting parties to the Convention of the Harmonized System are obligated to apply GIR 1 and the
relevant section and chapter notes. Under GIR 1, "c lassification shall be determined according to the
terms of the headings and any relative Section or Ch apter Notes and, provided such headings or Notes
do not otherwise require, according to the [other GIRs]." Contracting Parties cannot ignore the
physical condition of the merchandise and consider what processes the importation will subsequently
undergo to determine the classification. In addition, as the United States has explained, this view is
based on the plain meaning of "as presented," and the fact that "as presented" replaced "as imported,"
and is intended to have the same meaning. Finally, the United States has explained that China's
interpretation of "as presented" is completely at odds with the object and purpose of the HS
Convention of ensuring consistency of import and export statistics and of facilitating trade.
306. The matter of split consignments, which was addressed in the 1995 decision, involves a
different issue. Indeed, China acknowledges this : China states in its response to Panel question
No. 138, that: "[A] 'consignment' is generally unde rstood to mean a set of goods handed over to the
custody of a transport carrier for delivery, whether those goods are packed in one container or in
multiple containers. A consignment is 'split' when the carrier breaks the consignment into multiple
modes or stages of delivery (e.g., it loads the containers making up the consignment onto two
different vessels). There are a variety of reasons w hy this could occur, such as the need to balance
loads (a consideration that is partic ularly relevant in air transport) or an opportunity to take advantage
of costs savings in shipment." Accordingly, th e treatment of split consignments mentioned in the
HSC decision does not provide support for China's over-reaching measures. The multiple shipments
of motor vehicle parts that are deemed to be whol e motor vehicles per China's measures are not split
consignments, but rather, multiple shipments of goods from different countries that were never
consigned for shipment together.
Response of Canada (WT/DS342)

307. Canada does not believe that it is necessary for th e Panel to come to a final determination of
all the precise situations in which the term "as presented" in the Harmonized System may apply to
certain shipments of multiple goods. That would be a matter for the WCO, not the WTO. However,
Canada does note, as was explained in the second oral h earing, that "as presented" refers to GIR 2(a)
itself, not the peripheral and specific exception re ferred to in the WCO Decision. The WCO Decision
simply referred to previous consideration of this matter, which, as Canada demonstrated in its second
written submission,
72 was based upon practice relating to the ability of importers to classify certain
products (notably machinery, and not motor vehicles) imported in separate shipments as one product.
See also Canada's response to Question 224. Moreove r, Canada has shown clear subsequent practice
that WTO Members who are also WCO members interpret "as presented" to mean classification based
on the objective characteristics of a product in a single shipment.73
308. China has failed to rebut this direct evidence. Instead, China's sole example was its suggestion
that the United States has a rule that "any goods arriving on the same ship, and destined for the same
consignee, will ordinarily be classified on a combined basis". 74 Canada defers to its co-complainant
on this point, but notes that the text cited in China' s oral statement, footnote 15, refers to what needs
to be included on "one entry", and "entry" is defi ned in 19 C.F.R. § 141.0a as "documentation" – it
therefore appears to apply to a documentary requirement, not classification. 75 However, in any event,
the US rule is not before this Panel, and if a WT O panel were to consider that question it would be

73 See above, at fn. 28.
74 China's second oral statement, at para. 24.
75 Exhibit CDA-37.

very different since the principal issue in this di spute, the imposition of ordinary customs duties based
upon the state of goods after they arrive in a Member's customs territory, would not be at issue.
76
309. The Panel can easily determine that the plain meaning of the terms of the Harmonized System
as a whole, including the term "as presented" as contained in GIR 2(a), does not support China's
erroneous interpretation of GIR 2(a) that it may aggregate shipments from different suppliers to
different importers at different times from different countries based on the state of those shipments not
as they arrive at the border, or as they first arrive at China's customs, but based on their state after
manufacturing. Further, as Canada has set out above and in its second written submission,77 China has
not provided any evidence of Member practice showing otherwise.
Comments by China on Complainants' responses to question 210(b)
310. In response to Question 210(b), Canada states it "does not believe that it is necessary for the
Panel to come a final determination of all the precise situations in which the te rm 'as presented' in the
Harmonized System may apply to certain shipment s of multiple goods. That would be a matter for
the WCO, not the WTO."78 The United States, on the other hand, "interprets the term 'as presented' as
explicitly precluding the application of GIR 2(a) to shipments of goods that are not imported
together."79 The EC likewise claims that "[i]t is inhere nt in the ordinary meaning of the words 'as
presented' that it cannot include multiple shipments of goods presented to customs at different times,
different places, from different origins …" 80
311. In point of fact, the WCO has now confirmed that members of the Harmonized System may
apply GIR 2(a) to classify multiple shipments of parts and components as a single entity. There is no
better evidence of the complainants' inability to de fine and substantiate th eir understanding of the
term "as presented" than the fact that, at this late stage in the Panel proceedings, one complainant
appears to acknowledge the application of GIR 2(a) to multiple shipments, and takes the position that
this particular application of GIR 2(a) is a ma tter for the WCO to resolve, while the other two
complainants take the position that the applicati on of GIR 2(a) to multiple shipments is expressly
prohibited – in contradiction to the decision of th e HS Committee. These positions are simply not
consistent with a clear and unambiguous understanding of the term "as presented."
312. As China explained in response to question 228, it is not China's obligation to identify and
prove the circumstances in which the challenged measures would necessarily be consistent with its
WTO obligations. Rather, it is the complainants' obligation to identify and prove the circumstances in
which the challenged measures would necessarily be inconsistent with China's WTO obligations.
(c) ( All parties) The WCO stated in response to the questions from the Panel (page 4) that
"[d]ecisions of the HS Committee, including the Explanatory Notes and any amendments
thereto, are not binding (See Article 3.1(a) of th e Convention). Contracting Parties to the HS
are requested to inform the Secretariat in case th ey are not able to implement any decision by
the HS Committee. The Secretariat has not rece ived such a notification with respect to the
decision at hand." In this regard, what are the implications that arise when no contracting

76 The provision dealing with liability for duties in the part cited by China (at 19 C.F.R. § 141.1)
notably emphasizes that, with respect to customs dutie s, "Duties and liability for their payment accrue upon
imported merchandise on arrival of the importing vessel within a Customs port".
77 At paras. 53, 54 and 57.
78 Canada answers after second meeting at p. 19.
79 US answers after second meeting at para. 50.
80 EC answers after second meeting at para. 44.

parties to the HS have informed the WCO Secret ariat that they are not able to implement the
HS Committee Decision at issue? Does it mean that the Decision is in fact binding on the
Contracting Parties as China submits?
Response of China

313. As China explained in response to question 111, the question of whether the decision of the
HS Committee is formally binding on the WCO member s is not relevant to the present dispute. As
China has explained, in finding that the application of GIR 2(a) to multiple shipments is a matter to be
resolved under national laws and regulations, th e WCO has necessarily interpreted GIR 2(a) as
containing no prohibition on this particular applica tion of the rule, and has found that this application
of the rule is not otherwise inconsistent with the Harmonized System. The fact that the WCO
Secretariat has received no notifications from WCO members concerning their inability to implement
the decision of the HS Committee simply confirms that this decision of the HS Committee has not
proven to be particularly controversial or detrimental to the operation of the Harmonized System.
Response of the European Communities (WT/DS339)

314. First of all it should be clarified that, from a technical point of view, the wording "Decision"
of the HS Committee covers only the adoption of Explanatory Notes, amendments thereto and
Classification opinions. Despite of its heading, th e document China is referring to is a working
document concerning the result of a technical discussion only. The only legally relevant decision
taken was to amend Explanatory Note VII to GIR 2 (a) with respect to the relevant assembly
operations.
315. Second, the HS Committee decision is from 1995 while the Recommendation of the Customs
Co-operation Council on the Application of the Harmonized Committee Decisions was adopted in
June 2003. There is no suggestion that the recommendation is to apply retroactively.
316. Third, both under the Harmonized System Convention and under Community law the WCO's
decisions (i.e. Explanatory Notes, amendments th ereto and classification opinions) are not binding
irrespective of the fact whether the WCO has or h as not received a notification from a Member of the
HS Convention concerning such decisions. This is confirmed by the secretar iat of the WCO in its
reply to the Panel.
Response of the United States (WT/DS340)

317. As the United States indicated in its response to Panel question No. 111, in the context of the
Harmonized System, a decision taken by the Harmonized System Committee is not legally binding on
its members. Decisions of this committee are considered advice and guides to the interpretation of the
Harmonized System. US Customs authorities consider that these decisions often provide valuable
insight into how the Harmonized System Committ ee views certain provisions. In rendering its
decisions, the Harmonized System Committee "also us ually decides whether the decision merits an
amendment to the Explanatory Not es, the issuance of a classification opinion to be added to the
Compendium, or to merely report the decision in th e report of the session. If the decision results in
amendments of the Explanatory Note or goes into the Compendium, then it should receive
considerable weight ... Decisions of the Harmonized System Committee that are merely given in the
report should be given little weight." See Treasury Decision (T.D.) 89-80, which sets forth the US
position as to the proper guidance on the use of certain documents for interpretation of the
Harmonized System. (Ex. US-4) Since its implementation of the Harmonized System in 1989, the

US Customs administration has cited this Treasury Decision routinely in administrative rulings on
tariff classification matters.
318. There were two "decisions" taken by the WCO as reflected in Annex IJ/7 to Doc. 39.600
(HSC/16- Report). The first decision taken was to remove the reference to "simple assembly" from
the Explanatory Note to General Interpretative Rule 2(a). With regard to the first "decision," US
Customs authorities give this decision considerable we ight and have classified in accordance with the
WCO's decision to remove the reference of "simple assembly."
319. The second "decision" described in paragraph 10 of Annex IJ/7 to Doc. 39.600 merely
indicated that neither the status of split consi gnments nor the classification of goods assembled from
imported goods of various origins is within the jurisdiction of the HS Convention or the HS
Committee. The original comment was by the Nomenclature Committee. The Nomenclature
Committee was responsible for the interpretation of the Customs Cooperation Council Nomenclature
(CCCN), which was predecessor to the Harmonized Sy stem. As the "decision" was only reflected in
the report of the Committee and no amendments we re made to the Explanatory Notes, nor was a
Classification Opinion adopted, we find that paragraph 10 has little weight as it is not an enforceable
decision of the Harmonized System Committee. Rath er, the second "decision" is merely stating that
guidance/action is not affirmatively stated by the WCO decision, and accordingly customs
administrations have the responsibility to interpret their obligations under the Convention. This does
not mean that a member administration can abroga te the requirements of the General Interpretative
Rules by regulation at the domestic level.
320. It is not surprising that the WCO Secretariat has not received notification that a Contracting
Party has not been able to implement the second "d ecision." The HS Committee "decision" is not one
that could be implemented by the Contracting Parties as it was not a decision but a statement that
matters were not within the purview of the Harmonize d System. As such, the lack of any notification
does not create any legal inference.
Response of Canada (WT/DS342)

321. First, Canada notes that this WCO decision was concluded in November 1995, yet the WCO
only issued the Recommendation of the Customs Co-operation Council on the Application of the
Harmonized Committee Decisions on 30 June 2001.
81 Therefore, any application of the "deemed
acceptance" principle could only appl y to WCO decisions after this date. There is no mention that it
should be applied retroactively. For this reason, the WCO Decision is outside the purview of the
deemed acceptance principle.
322. Second, WCO decisions are non-binding, so ev en a "deemed acceptance" principle cannot
render them binding. This would contravene the Harmonized System Convention . While Article 8 of
the Convention provides for acceptance of WCO decisions, th is does not change the fact that such
decisions, even if accepted, are merely "advisory" and only constitute "guidance" under Article 7. The
WCO itself confirmed this in response to Question 5 when it stated "the nature of the commitments
posed by explanatory notes, classification opinion s and other advice rendered by the Committee, even
when specifically approved by the Council pursuant to Article 8 of the HS Convention, is in the nature
of advisory rather than conventional" [emphasis added].

81 Customs Co-operation Council, Recommendation on the Application of the Harmonized System
Committee Decisions, 30 June 2001 (Exhibit CDA-40).

323. Third, as previously noted to the Panel, this WCO decision has been taken out of context by
China. Its focus is with respect to assembly operations; a decision subsequently reflected in
Explanatory Note VII. The split shipment issue was peripheral and never incorporated into an
explanatory note. Further, as noted in Question 21 0(b), above, the reference to split or multiple
shipments in the Committee Decision in question did not require a particular classification practice. It
simply referred to previous consideration of this matter, which, as Canada demonstrated in its second
written submission,
82 was based upon practice relating to the ability of importers to classify certain
products (notably machinery, and not motor vehicles) imported in separate shipments as one
product.83 Motor vehicles were excluded from the list of products in the original Combined Customs
Nomenclature decision.
324. Last, Canada would point out that the situation might be different in the case of HS
Committee decisions that require a certain practice to be followed. Those decisions are not binding,
but are usually followed by WCO members in order to maintain consistent trade and classification
practices. The obligation to inform the Committee is independent from the non-binding nature of the
decision.
Comments by the European Communities on China's response to question 210(c)
325. The only legally relevant decision under GIR 2 (a) taken by the HS committee was to amend
Explanatory Note VII to GIR 2 (a) with respect to relevant assembly operations. The European
Communities refers to its reply to question 210 (c).
Comments by the United States on China's response to question 210(c)
326. In its response to Panel question No. 210(c), China interprets the WC O "decision" as dealing
with the "finding that the application of GIR 2(a) to multiple shipments is a matter to be resolved
under national laws and regulations, the WCO has ne cessarily interpreted GIR 2(a) as containing no
prohibition on this particular application of the rule , and has found that this application of the rule is
not otherwise inconsistent with the Harmonized System." However, the HS Committee did not
address the question of "multiple shipments". In stead, the HS Committee discussed the question of
"split consignments" and the determin ation of "origin" of goods from different countries. See First
Response of WCO Secretariat, page 1, para. 4, and US Responses to Panel question No. 210(c), which
explains this point in greater detail.
211. ( European Communities ) The European Communities states in paragraph 78 of its
second written submission that "in this case, the cl assification of auto parts can be determined
on the basis of the terms of the headings" and in paragraph 93 that "GIR 2(a) is of extremely
limited relevance for the present case."
 Can the classification of auto parts under China's Schedule be determined on the basis
of the terms of the headings only? If yes, what would be the relevance of the General
Explanatory Note to Chapter 87, which explicitly refers to GIR 2(a), to the interpretation of the
products falling under Chapter 87?

83 This practice is discussed in more detail in response to Panel Question 224.

Response of the European Communities (WT/DS339)

327. As the European Communities has pointed out inter alia in paragraph 94 of its second written
submission (see also paragraphs 251 to 253 of its fi rst written submission), recourse to GIR 2(a) can
only be relevant in very specific individual cases as presented to customs and not at the level of
China's tariff schedules generally as China insists. Chapter 87 of Ch ina's tariff schedules contains no
additional condition. As the European Communities has stated inter alia in its reply to question 139,
GIR 2 (a) is not relevant in interpreting a Member's schedule generally unless one assumes a very
specific product or a combination of products that are presented to customs at the same time. General
Explanatory note to Chapter 87, which is a particul ar application of GIR 2 (a) in the context of
Chapter 87, provides for a tool in exceptional borde rline situations to be applied on a case by case
basis. Therefore, and as stated inter alia in paragraph 91 of the European Communities' second
written submission, in the overwhelming majority of cases it is a simple task to interpret the notions
of 'motor vehicle' and 'parts' of such motor vehi cles. Therefore, the General Explanatory Note to
Chapter 87 is relevant in the exceptional individual situations foreseen by the examples of that note.
328. To put the question in context, the classification of a brake cylinder, or of a product fulfilling
the conditions of heading 87.06 "chassis fitted wi th engines" would not necessitate recourse to
GIR 2 (a) and the General Explanatory note to Ch apter 87 because the classification of the product
would be clear on the basis of the heading.
212. ( All parties ) Do "split consignment" and "eleme nts originating in or arriving from
different countries" mentioned in paragraph 10 of the HS Committee Decision refer to the same
situation or two different situations?
Response of China

329. As China discussed in response to question 138 from the Panel, paragraph 10 of the HS
Committee Decision refers to two different circumst ances. This is evident from the sentence itself,
which refers to the " questions of split consignments and the classification of goods assembled from
elements originating in or arriving from different countries." The sentence concludes that these are
"matters to be settled by each country in accordance with its own national regulations." The plural
structure of the sentence clearly indicates that the paragraph refers to two different circumstances.
Response of the European Communities (WT/DS339)

330. The European Communities refers to its reply to question 138, where it stated that these are
inter-related issues that concern trade facilitation. In the context of some very large or complex
machinery that are difficult to transport in one si ngle consignment, the importer may wish to declare
the product as a single product irrespective of the fact that the elements of the product are split into
different consignments for transportation purposes. The latter part of the sentence referring to
"elements originating in or arriving from different count ries" refers in this context to rules of origin as
clarified by the secretariat of the WCO.
Response of the United States (WT/DS340)

331. The terms "split consignments" and "elements or iginating in or arriving from different
countries" as mentioned in paragraph 10 of the Harmonized System Committee decision (CHI-29)
refer to two separate situations.

332. First, with respect to "split consignments," a "consignment" consists of a set of goods handed
over to the custody of a carrier for delivery, whether those goods are packed in one container or in
multiple containers. A consignment is "split" when the carrier breaks the consignment into multiple
deliveries (e.g., it ships the containers making up the consignment on different vessels).
333. Second, with respect to "elements originating in or arriving from different countries," the
United States believes that this is a reference to th e determination of the country of origin of imported
goods that consist of parts originating from more than one country. The United States does not agree
with China's manipulation of the definition of "g oods assembled from elements originating in or
arriving from different countries, "as explained in Un ited States' rebuttal to Ch ina's response to Panel
question No. 138. China has asserted that this phrase means "the classification of goods assembled
from imported parts and components (or 'elements') th at arrive in the customs territory in multiple
shipments." China's self-serving definition is mere conjecture given that the decision identified in
paragraph 10 does not include a definition of th is phrase and China has not identified any other
documents promulgated by the HS Committee that would support its interpretation.
334. Furthermore, China's interpretation also disregards the HS Committee's reference to "different
countries," as China asserts that this reference " cannot mean that the decision of the HS Committee
applies only in the case of goods assembled from more than one exporting country" because this issue
would be relevant only in the context of the applic ation of the Rules of Origin. The United States'
interpretation is supported by the letter dated 20 June 2007 from the Secretary General of the WCO in
response to the Panel's request for technical advice.
84 In that letter, the Secretary General states that
"[t]he phrase 'elements originating in or arriving from different countries' encompasses the possibility
of goods being of (preferential o[r] non-preferential) origin from the country of shipment or from
another country." (emphasis in original).
Response of Canada (WT/DS342)

335. Canada believes that the reference is to two diffe rent concepts. The first, as discussed in more
detail in response to Question 224, refers to practices relating to allowing importers to classify certain
separate shipments of a single product as one item. The second refers to the situation where a
particular shipment may have elements of differe nt origin, in accordance with particular rules of
origin.
Comments by the European Communities on China's response to question 212
336. As explained by the European Communities in paragraph 106 of its second written
submission, China's position on this issue has evolve d throughout these Panel proceedings. This in
itself demonstrates that China has entirely invented the "multiple shipments th eory". The secretariat
of the WCO was very clear in its reply when stat ing that "the phrase 'elements originating in or
arriving from different countries' encompasses the possi bility of goods being of (preferential or non-
preferential) origin from the country of shipment or from another country" (emphasis in the original).
The textual arguments provided in China's reply to question 212 ignore the fact that paragraph 10 of

84 As the United States noted at the second substantive meeting, the WCO Secretariat has no legal
mandate under the HS Convention to issue authoritative interpretations of the HS Convention. Accordingly,
statements from the WCO Secretariat are only informative to the extent that such statements provide reasoning ,
documents, or information that the Panel might find help ful in interpreting the HS Convention. Thus, in each
and every case in this submission where the United States refers to a response of the WCO Secretariat, it is only
because the United States views that particular response as being helpfu l in understanding the HS Convention,
and not because the United States views the WCO Secretariat statements as being authoritative interpretations of
the Convention.

the decision makes a passing reference to these 'matte rs' in one single sentence. Had there been two
genuinely separate issues at stake, the text of the decision would have made that very clear.
213. ( China) Where does China consider a multiple shipment situation encompassed by
China's measures falls under, "split consignments" or "elements originating in or arriving from
different countries" in paragraph 10 of the HS Committee Decision? Please explain your
response in detail with supporting evidence.
Response of China

337. In practice, Decree 125 could apply to either circumstance, although it will generally apply to
the second circumstance referred to in paragra ph 10 of the HS Committee Decision. An auto
manufacturer could, for example, import parts and components for a registered model as part of a
single consignment, but split that single consignm ent into multiple shipments. Decree 125 would
apply to this circumstance in th e same manner as it applies to parts and components for a registered
vehicle model that enter China under multiple consignments. Decree 125 does not distinguish
between these two circumstances, and thus China cannot provide the Panel with a specific estimate of
the prevalence of these two circumstances. Howeve r, China expects that most auto parts and
components for registered vehicle models enter China under multiple consignments.
Comments by the European Communities on China's response to question 213
338. As explained by the European Communities in paragraph 106 of its second written
submission, China's position on this issue has evolved throughout these Panel proceedings. As China's
reply demonstrates, its position is still not entirely clear. Reply to question 213 provides for another
attempt by China to establish its position. The European Communities notes that China does not
provide any evidence despite the question explicitly requiring so.
214. ( All parties ) Regarding the meaning of "element s originating in or arriving from
different countries" mentioned in paragraph 10 of the HS Committee Decision, the WCO
responded that "it encompasses the possibility of goods being of (preferential or non-
preferential) origin from the country of shipme nt or from another country." What are the
parties' views on the WCO's response?
Response of China

339. China does not fully understand the basis for the WCO's statement, as it is well established
that the classification of an article is unrelated to the determination of its origin.
85 The HS Committee
has no responsibility for matters pertaining to Rules of Origin; this is the responsibility of the WCO
Technical Committee on Rules of Origin. While there is some discussion in the HS Committee
Decision concerning the relationship between GIR 2(a) and Rules of Origin, the decision notes the
views of several delegates "who felt that the Rule s of Origin had nothing to do with the General
Interpretative Rules which provide solely for the classification of goods in the Harmonized System."86
340. The lack of any relationship between GIR 2(a) and Rules of Origin may explain why the
WCO Secretariat stated only th at the second circumstance descri bed in paragraph 10 of the HS
Committee Decision "encompasses the possibility of goods being of (prefere ntial or non-preferential)
origin from the country of shipment or from another country." The WCO Secretariat did not state that

85 See, e.g., CDA-18 at p. 4 ("The origin never affects classification.").
86 CHI-29.

this was the exclusive circumstance or concern underlying the HS Committee's reference to "goods
assembled from elements originating in or arriving from different countries."
Response of the European Communities (WT/DS339)

341. The European Communities agrees with the repl y of the WCO secretariat. This notion refers
to rules of origin in the context of a split shipment.
Response of the United States (WT/DS340)

342. According to the WCO Secretariat, the phrase "elements originating in or arriving from
different countries" as set forth in paragraph 10 of the HS Committee's Report in CHI-29
encompasses the possibility of goods being of (pre ferential o[r] non-preferential) origin from the
country of shipment or from anothe r country." (emphasis in original). The United States agrees with
this statement. In this context, the United Stat es believes that the issue of determining origin is
beyond the scope of GIR 2(a) and is a matter to be resolved by national la ws in accordance with any
other appropriate international standards.
343. The United States is also of the view that the WCO Secretariat's response undermines China's
interpretation of the phrase "elements originating in or arriving from different countries" as "the
WCO's official interpretation of GIR 2(a) as applied to the classification of articles that are assembled
from multiple shipments of parts and components." (See China's response to Panel question No. 111.)
China has not identified any evidence that would s upport its interpretation th at multiple importations
of parts and components from a single exporting country are involved in this scenario. (See China's
response to Panel question No. 138.) China's inte rpretation also disregards the Committee's specific
reference to "different countries" in paragraph 10 an d argues that this reference "cannot mean that the
decision of the HS Committee applies only in the case of goods assembled from more than one
exporting country" because this issue would be relevant only in the context of the application of the
Rules of Origin. However, the WCO Secretariat' s response (as cited above) helps demonstrate that
the issue is only relevant to the determination of origin.
Response of Canada (WT/DS342)

344. As noted in response to Question 212, above, Ca nada agrees with the WCO that the reference
is to elements of a shipment that may be of different origin.
Comments by the European Communities on China's response to question 214
345. The European Communities understands the reply of China as disagreeing with the reply of
the WCO secretariat. The last sentence of Chin a's reply amounts to stating that since the WCO
secretariat did not explicitly state that its reply is exhaustive, there must be something more to the
'decision' and that 'something more' must be China's position in this dispute. It goes without saying
that the European Communities respectfully disagrees.
Comments by the United States on China's response to question 214
346. The crux of China's view on the WCO Secretar iat's response is that the Committee did not
state that the Rules of Origin were "the ex clusive circumstance or concern underlying the HS
Committee's reference to 'goods assembled from elemen ts originating in or arriving from different
countries.'" As the United States has explained in its response to Panel question No. 214, however, the
phrase "elements originating in or arriving from diffe rent countries" mentioned in paragraph 10 of the

HS "decision" is intended to convey that "the i ssue of determining origin is beyond the scope of
GIR 2(a) and is a matter to be resolved by natio nal laws in accordance with any other appropriate
international standards." The United States also notes that the WCO Secretariat did not identify any
other circumstances or concerns in this context.
347. The United States notes the WCO Secretariat's response to Panel question No. 11, wherein the
WCO Secretariat indicated its belief that the phrase "the classification of goods assembled from
elements originating in or arriving from different co untries" is a reflection of "the Committee's view
that the determination whether multiplicity of origin shall affect applicability of GIR 2(a) is a matter
left to each CP [Contracting Party to the HS Convention]."
87 Because GIR 2(a) only applies to goods
in their condition when imported, the implication of this position is that when an importation contains
goods of various origins that could be classi fied together as incomplete/unfinished or
unassembled/disassembled under GIR 2(a), it is at the discretion of the national customs authorities as
to whether that classification is permissible. This understanding is c onsistent with the WCO
Secretariat's statement (in response to Panel qu estion No. 11) that "[t]he HS does not direct
[Contracting Parties] to classify entries differently or alike at the HS level on the basis of single origin
as opposed to multiple origin."
215. Paragraph 10 of the HS Committee Decision refers to, inter alia, "classification of goods
assembled from elements originating in or arriving from different countries."
(a) ( Complainants) Does "goods assembled" in paragraph 10 refer to "goods that arrive
already assembled or goods that are to be assembl ed in the importing country"? What is the
legal basis for your position?
Response of the European Communities (WT/DS339)

348. The European Communities does not believe that this aspect was considered by the HS
committee in the decision. However, in view of th e fact that requests for treating split consignments
as a single entry (see last sentence under point 2 of the reply of the WCO secretariat) are normally
made in the interest of facilitating transport of complex and large machinery, it is reasonable to expect
that the good has been disassembled for the purposes of transportation.
Response of the United States (WT/DS340)

349. The United States believes that the phrase "goods assembled" refers to both situations, i.e.
goods that arrive already assembled and goods that ar e to be assembled. The basis for this conclusion
is the ordinary meaning of the text.
Response of Canada (WT/DS342)

350. Canada's understanding is that the term refers to goods that are to be assembled in the
importing country. This understanding is based up on consultation with Canadian representatives on
the HS Committee. However, a plain reading of the phrase might suggest that it refers to goods
already assembled when they arrive . In any event, as Canada notes in response to Question 210(c),
what is significant is that the reference does not provide evidence of practice consistent with the
measures.

87 The WCO bases its belief upon a very limited context, that being only the "sole guidance" of the
Summary Record. In this particular instance, then, the WCO Secretariat's response to Question 11 is conjecture
rather than an official interpretation.

(b) ( China) In this connection, China states in its response to Panel question No. 110 that
"the term 'as presented' must be interpreted to allow national customs authorities to apply the
principles of GIR 2(a) to goods that are assembled domestically from multiple shipments of
imported parts and components." Could China please provide any evidence supporting its
position that "goods assembled" in paragraph 10 of this Decision refers to "goods assembled
domestically".
Response of China

351. The decision of the HS Committee would not make sense if it referred to "goods that arrive
already assembled." The HS Committee Decision at issue is an interpretation of GIR 2(a). As the
references to split consignments and "goods assemble d from elements originating in or arriving from
different countries" make clear, paragraph 10 of the HS Committee Decision relates to the second
sentence of GIR 2(a), concerni ng goods that are presented unassembled or disassembled. GIR 2(a) is
not relevant to the classification of goods that arrive already assembled, and thus there would be no
reason for the HS Committee to adopt an interpretation of GIR 2(a) as it relates to the classification of
such goods.
352. More generally, GIR 2(a), by its very nature, concerns the classification of goods that are
assembled domestically. When customs authorities a pply the second sentence of GIR 2(a) to classify
unassembled or disassembled goods that have the ess ential character of the complete article, the
presumption is that those goods will be assembled do mestically after importation. GIR 2(a) directs
customs authorities to classify unassembled or di sassembled parts and components as the complete
article precisely because those parts and components are susceptible to assemb ly into the complete
article after importation. In this context, it is not surprising that the HS Committee is discussing
goods that will be assembled domestically from multiple shipments of parts and components, as this is
consistent with the general subject matter of GIR 2(a).
Comments by the European Communities on China's response to question 215(b)
353. Contrary to China's position in the reply, th e European Communities is of the view that
paragraph 10 of the 'decision' did not consider the notion of "as presented" in GIR 2 (a).
Comments by the United States on China's response to question 215(b)
354. China asserts that, as GIR 2(a) refers to goods that arrived unassembled or disassembled, the
"decision" of the HS Committee would not make sen se if it referred to goods that arrive already
assembled. China's CKD kit example in its response to Panel question No. 175, however, provides an
example of how an entry covered by GIR 2(a) could be assembled before it arrives at the border. The
example involved a CKD kit that, as China puts it, was "assembled" in Germany from parts produced
in Germany and in other countries. Thus in that circumstance there would be a CKD kit assembled in
Germany which, if the kit were sufficientl y developed, could be classified as an unassembled "whole
vehicle" upon its arrival in China.
355. More importantly, China bases its response to this question on the premise that the "HS
Committee Decision at issue is an interpretation of GIR 2(a)." However, this is not an accurate
description of the text cited by China, as that portion of the discussion by the HS Committee was not
about the interpretation or application of GIR 2(a) , but the treatment of split consignments and the
treatment of goods for origin purposes . A fuller explanation of the proper interpretation of the HS
Committee discussion can be found in the US Response to Panel question No. 212. The United States
would note that this interpretation is supporte d by the WCO Secretariat's response to Panel

question 11 in which the WCO Secretariat confirms that the passage cited is referring to origin and
not classification and that the determination of origin being affected by application of GIR 2(a) is a
matter left to each Contracting Party.
216. In response to Panel question No. 121, th e complainants have expressed, in essence, a
view that China's illustration in paragraph 97 of its first written submission is overly simplified
and alien to reality.
(a) ( Complainants) In particular, the European Communities states that "different auto
parts are manufactured in different parts of the world and are genuinely shipped to the
customers in separate shipments," and Canada st ates that "in normal manufacturing, parts are
shipped at different times from different suppliers and undergo complex manufacturing
processes at different plants in China or abroad be fore they are ready to be incorporated into a
motor vehicle." Could the complainants please point to any evidence that can support this
commercial reality of automobile manufacturers in the parties' exhibits submitted so far to the
Panel or otherwise, please provide such evidence.
Response of the European Communities (WT/DS339)

356. The European Communities refers in particular to Exhibits EC - 3 and EC - 4 that provide
examples of different parts manufacturers in different parts of the world in supplying the parts of a
given vehicle. Further illustrations of the global stra tegy for the supply of auto parts are submitted in
Exhibits EC – 27 to 33
88.
Response of the United States (WT/DS340)

357. Please refer to the United States' response to Pa nel question No. 176. In addition, Exhibit
US- 8 provides examples of the number and variet y of different parts and component manufacturers
supplying parts to a particular vehicle. JE-4 (pages 19-22) and JE-5 (pages 30-34) include lists of a
number a major component suppliers operating in China.
Response of Canada (WT/DS342)

358. Canada has presented evidence relating to the co mmercial reality to which Canada refers,
both in the existing evidence and in additional references, in response to Question 176(b), above.
(b) ( European Communities) The European Communities also states in its response that "to
suggest that the manufacturer orders all of th e parts from one company, then separates the
parts into different containers in order to benefit from the lower duty rates in China for parts is
completely alien to reality. However, even if such practices would exist, they would not
circumvent the rules on customs classification." Could the European Communities elaborate on
this statement, including the basis for its posi tion that such practices would not circumvent the
rules on customs classifications.

Response of the European Communities (WT/DS339)

88 See for e.g ., in "DaimlerChrysler AG Recognises Winners of the 2006 Global Supplier Award"
(Exhibit EC-32, downloaded at www.ai- online.com): "Reflecting the trend of an automotive industry that still
continues to become more global and interconnected ev ery year, the 2006 award recipients truly earn the
description "globe trotter." With headquarters either in Asia, Europe or North America, each of the supplier
companies represent the growing global presence of the auto industry's supply base."

359. Even in an entirely hypothetical situation where a vehicle is built, then disassembled,
transported into China in several shipments a nd assembled again into a complete vehicle, the
objective characteristics of the products presented for classification at the border consist of those
entries that are presented to customs on a shipme nt by shipment basis. Unless all the parts are
presented to customs at the same time and place, the goods would be classified as parts or, depending
on the state of assembly, possibly as an intermediary category such as "chassis fitted with engines"
(heading 87.06) or "body without a cab" (headi ng 87.07). This is normal under the Harmonized
System and entirely normal and legal under Article II of the GATT 1994. Tariff differences and the
risk of circumvention are irrelevant.
360. In the real world of the automotive industry such operations would in any event be far too
costly as the disassembly and reassembly together with the costs involved in multiple and overlapping
transport operations and complex logistics woul d very quickly outweigh any tariff differential
between complete vehicles and parts.
(c) ( Other parties) Do the other parties agree with the European Communities' statement
quoted above in (b)?

Response of China

361. For the reasons that China has previously e xplained, China does not agree with the EC
statement quoted in part (b) of this question. Ch ina considers that the EC position allows form to
prevail over substance in the classification of parts and components. China further considers that the
EC position is antithetical to the function that GI R 2(a) serves within the Harmonized System to
distinguish between complete articles and parts of t hose articles. If this delineation were entirely at
the discretion of the importer through the manner in which it structures and documents its imports,
there would be no purpose in defining the circ umstances under which customs authorities may
classify unassembled or disassembled parts and components as equivalent to the complete article.
362. Under the EC's apparent interpretation, an im porter could enter the same collection of parts
and components on the same ship, at the same port, and on the same day, and yet obtain a different
customs classification merely by separating the part s and components into "different containers."
This position would leave customs authorities utterl y without recourse to define and enforce the
boundaries between complete articles and parts of t hose articles. Any set of tariff provisions that
established different rates for a complete article and the parts and components of that article would be
inherently unenforceable, because any rational importer would simply organize its containers so as to
benefit from whichever tariff rate was lower. The ta riff provision with the higher rate of duty would
be automatically inutile.
363. The EC's extreme form-over-substance position sharply highlights the complainants' failure to
articulate and substantiate an interpretation of GI R 2(a) and the term "as presented." The EC has
repeatedly advanced extreme (and, in China's view, absurd) positions on key terms in this dispute,
such as the term "as presented," without offering the slightest substantiation for these positions based
on customary rules of public international law. As China discusses in response to question 228, the
complainants' failure to present evidence and le gal arguments to support these positions means that
they have failed to meet their burden of proof in bringing as such claims against the challenged
measures.

Response of the United States (WT/DS340)

364. If a manufacturer were to order all of the part s from one company and then, in order to obtain
a lower duty, separate the parts into different cont ainers and make separate entry of each shipment,
the United States would not find it to circumvent th e rules on customs classification. See Exhibits
US-9 and US-10 for examples of such a determination.
Response of Canada (WT/DS342)

365. Canada agrees with the European Communities' statement.
Comments by the United States on China's response to question 216(c)
366. In response to Panel question 216(c), China asserts that: "[u]nder the EC's apparent
interpretation, an importer could enter the same collection of parts and components on the same ship,
at the same port, and on the same day, and yet obtain a different customs classification merely by
separating the parts and components into 'different containers.' This position would leave customs
authorities utterly without recourse to define and enforce the boundaries between complete articles
and parts of those articles." China's interpretation that customs authorities are utterly without recourse
is incorrect. As more fully explained in th e US Responses to Panel question Nos. 221 and 223,
customs authorities must classify a good in its condition as imported.
367. Further in its response to Panel question No. 216(c), China asserts that: "The EC's extreme
form-over-substance position sharply highlights the complainants' failure to articulate and substantiate
an interpretation of GIR 2(a) and the term 'as pr esented.'" The US has submitted in response to
several questions (See, e.g., US responses to Panel question Nos. 210, 216(c), 218, 233, 236, 237) that
the term "as presented" is clearly and uniformly understood by different customs authorities as
meaning the condition of the good at the time of impor tation. This view was also expressed by the
WCO Secretariat's first response to questions posed by the Panel on page 1, 5
th paragraph.
Comments by China on Complainants' responses to question 216(c)
368. In response to question 216(c), Canada agrees with the EC's statement that it "would not
circumvent the rules on customs classification" for an importer to order a coll ection of parts from one
company, and then separate the part s into separate shipments in order to obtain a lower rate of duty.
China notes that Canada's agreement with the EC cannot be reconciled with the CBSA determination
concerning disassembled furniture. If importers are entitled to break a collection of parts into separate
shipments in order to benefit from lower duty rates that apply to parts, then the CBSA determination
is inconsistent with this principle. The CBSA dete rmination is plainly applied against the interests of
the importer and contrary to the manner in which the importer chose to structure its importation of
parts. The CBSA determination does this in order to ensure the collection of the higher duty rate that
applies to complete furniture.
(d) ( United States ) Does the United States believe that it would be proper for customs
authorities to investigate whether a manufacturer is splitting a CKD shipment into two or more
separate boxes, thereby evading the higher duty rate that would apply to the complete article?
Should an identical CKD kit be classified differently if it arrives in multiple shipments?

Response of the United States (WT/DS340)

369. Under both the WTO Agreement and the Harmonized System, a good should be classified in
its condition as imported. Assuming that an impor ted CKD is a complete vehicle unassembled, it
would be classified differently than the auto parts incl uded in such kits if such auto parts were to be
imported separately. Consistent with GIR 1,
89 when an imported auto part is specifically described by
a heading of the tariff schedule, it is classifiable under that heading notwithstanding that, post
importation, the auto part may be used in the assemb ly of a complete automobile. Any measure that
compels an auto manufacturer to provide proof of the post-importation assembly of many different
imported parts, in their entirety, into a complete automobile does not retroactively confer to those
parts at the time of importation the "essential character" of an automobile. The United States does not
investigate whether a manufacturer may be arranging multiple shipments in order to obtain lower duty
payments, and does not consider such practice to constitute "circumvention."
217. ( European Communities ) In response to Panel question No. 8, the European
Communities stated that 30 per cent to 35 per cent of parts are common to different models:
(a) ( European Communities ) Please provide documentary evidence to support this
assertion.
Response of the European Communities (WT/DS339)
370. This question is closely linked to question 176 b). As stated in the reply to that question, the
economic reality of the automotive industry is we ll illustrated by the notion of an "automobile
platform", which is a shared set of components common to a number of different automobiles.
371. The figure used by the European Communities in response to question 8 is a very cautious
one as depending on the vehicle category and the use of the "platform" the figure may be considerably
higher. Of course a very specific model in the upper end of the price range ("the Ferrari range") may
also have clearly less than 30 % of common part s but the average given by confidential industry
sources is in the range of 30 to 35 %. This is c onfirmed by information found on the internet stressing
that for Honda "commonality between different models built on a platform is only
 20 – 40 %
(30-40 % between cars and 20 % between cars and SUVs" 90. Exhibits EC – 12 to 25 demonstrate how
the industry is increasingly using such platforms common to many vehicle models in order to cut
costs.
(b) ( China) If a particular part is used in the manufacturing of a registered vehicle model
that is a "deemed whole vehicle" and is also u sed in the manufacturing of a registered vehicle
model that is not a "deemed whole vehicle," when a shipment of those parts is presented to
China's customs authorities, how is it classified?

Response of China

372. As stated in Article 15 of Decree 125, "[t]he automobile parts of each vehicle model shall be
declared on a separate form." Thus, if a part is common to a registered vehicle model and a non-

89 For an explanation of GIR 1, see the United States' rebuttal to China's response to Panel
question 13(b).
90 Platform politics: Japanese automakers vary on their definitions of what constitutes a vehicle
platform, Automotive Industries, January 2004 in Exhibit EC - 23, emphasis added.

registered vehicle model, the importer will file separate declarations for imports of that part that are
for use in a registered vehicle model.
Comments by the European Communities on China's response to question 217(b)
373. China's reply demonstrates very concretely th at the classification of a product depends on its
internal use in China.
Comments by the United States on China's response to question 217(b)
374. China's response provides another example of how its measures, if they are viewed as
imposing customs duties, classify parts with complete disregard of their physical characteristics. The
parts in this example are imported together and ar e physically identical and yet will be charged at
different rates based solely on their purported end use. The United States notes that the division of
parts into separate declarations will be totally arbitrary, as the parts are the same and thus
interchangeable. Indeed, it is likely that once entered into China the parts will be treated
interchangeably by the manufacturer, as maintaining the artificial division would create logistical
difficulties.
218. ( All parties) Does the term "presented" referred to in "as presented" and "presented
unassembled or disassembled" respectively in the first and second sentences of GIR 2(a) have
the same meaning? If not, why not? Does the term "presented" referred to in the first sentence
of GIR 2(a) (as in "as presented") mean "as presented assembled"?
Response of China

375. China does not perceive any reason why the meaning of "presented" would differ between the
first and second sentence of GIR 2(a). By implic ation, the first sentence of GIR 2(a) concerns
incomplete or unfinished articles that are presented assembled and that have the essential character of
the complete article.
Response of the European Communities (WT/DS339)

376. The European Communities is of the view th at these notions denote the same meaning in
time. In this respect reference is made to the reply to question 210 (b).
377. The first sentence of GIR 2(a) lays down the general rule without considering whether the
good has been assembled. The second sentence addresses the question of assembly. These two
sentences have separate Explanatory Notes that gui de their interpretation. However, chapter 87
contains a " lex specialis " in the form of an Explanatory note under GIR 2 (a). Under this " lex
specialis" the conditions of GIR 2 (a) are clearly more likely fulfilled in an individual case if the
goods are presented in an advanced stage of assembl y since the notion of "fitting" is used in the
examples.
Response of the United States (WT/DS340)

378. The term "presented" has the same meaning in the first and second sentences of GIR 2(a).
The term "presented" refers to the condition of the me rchandise at the time of importation. It is at the
time of importation that merchandise is presen ted to national Customs authorities for tariff
classification and the assessment of duties, which are necessary prerequisites to clear Customs.

379. The first sentence of GIR 2(a) provides that "[a]ny reference in a heading to an article shall be
taken to include a reference to that article incomp lete, or unfinished, provided that, as presented, the
incomplete or unfinished article has the essential charact er of the complete or finished article." The
usage of the term "as presented" in this sentence refers to the condition of an incomplete or unfinished
article at the time of importation. This sentence do es not suggest that the article must be "assembled"
at the time of importation in order to be classified in accordance with its having the essential character
of the complete or finished article.
Response of Canada (WT/DS342)

380. Yes, they have the same meaning and refer to a point in time when the product is "presented"
to customs. The first reference to "as presented" allo ws consideration of the article if it arrives at the
border assembled, unassembled or disassembled, as long as it is incomplete or unfinished (and meets
the essential character criterion). In the second sentence, "as presented" refers to the same point in
time but to an article having different char acteristics than in the first sentence, i.e ., being complete or
finished and "arriving at the border" unassembled or disassembled. Obviously in the case that a
product is both complete or finished and assembled, GIR 2(a) is not applicable – the product would
simply be classified in accordance with GIR 1.
219. ( China) China contends that part of the condi tion of the auto parts "as presented" at
the border is the importer's decl aration that the parts will be a ssembled, with other imported
auto parts, into a complete vehicle. How do es China respond to Canada's contention at
paragraph 32 of its oral statement that the importers do not voluntarily submit this
documentation, but are required to do so as a means to obtain an import licence?
Response of China

381. China does not understand the relevance of this assertion. There is nothing in the
Harmonized System, or international customs prac tice generally, that prohibits customs authorities
from requiring importers to submit certain documentation to ensure the correct classification of an
import entry. Underlying Canada's statement in pa ragraph 32 of its oral statement is the presumption
that GIR 2(a) exists solely to benefit the im porter, a presumption for which it has provided no
interpretive basis.
382. As for Canada's assertion that the importer provides the customs declaration in order to obtain
an import licence, this is incorrect. The import licen ce is obtained prior to the entry of the goods at
issue, and is presented together with the customs declaration when the goods are entered. In any
event, as China pointed out at the second substantive meeting of the Panel, Article 2:2(a)(i) of the
Agreement on Import Licensing Procedures plainly contemplates that customs authorities can require
compliance with national customs laws as a condition to the issuance of an automatic import licence.
This would include laws that are necessary to ensure the proper classification of entries.
Comments by the United States on China's response to question 219
383. Underlying China's response to the Panel's ques tion is the presumption that its requirement
that importers make a declaration regarding the post-importation usage of their imported merchandise
is a law that is "necessary to ensure the proper classi fication of entries." The United States disagrees.
As explained in the US rebuttal to China's res ponse to Panel question No. 134, China's process of
"establish[ing] the relationship among multiple shipments of parts and components for assessing
duties that apply to the completed article" is impermissible for purposes of classification under
GIR 2(a). In this context, the identity of the good that is imported must be demonstrable by the good

in its condition "as presented" for entry into the custom s territory, that is, at the time of importation.
Separate importations of other parts and components (including by other importers) with which the
good will be assembled in the importing country cannot be considered in the classification of the
good.
Comments by Canada on China's response to question 219
384. China confuses the clear message of paragraphs 31 and 32 of Canada's second oral statement.
In paragraph 31, Canada made the point that Ch ina only looks to the cust oms declaration at the
border. Further, Canada was referring to two ty pes of documentation – the customs declaration and
the documentation necessary to obtain the import licence its elf – that work together to ensure that any
import licence is conditional on a prior determinati on of future liability under the measures. An
importer cannot import auto parts until it has satisfied the requirement of the measures to account for
imported content; any self-declaration that concludes that imported auto parts are not "Deemed Whole
Vehicles" leads to a customs audit.
220. ( China) In paragraph 11 of its oral statement, China claims that the crucial issue is the
interpretation of the term "as presented" that de fines the extent to which China can classify a
shipment of auto parts and components based on the evidence that it is one of a series of
shipments of parts and components that are susceptible to being assembled into a complete
vehicle. Is being susceptible to being assembled into a complete vehicle different than
comprising the essential character of a complete vehicle? If so, how? If not, why not?
Response of China

385. The WCO noted in its response to the first set of questions from the Panel that GIR 2(a)
"call[s] for an analysis of th e susceptibility of the subject collection of parts to be assembled in
accordance with the guidelines set forth in paragraph (VII) of the Explanatory Notes," i.e., in
accordance with the types of assemb ly operations specified therein. The methods of assembly
specified by GIR 2(a) are distinct from the question of whether a collection of parts (whether
assembled or unassembled) has the essential character of the complete article. Thus, they are not the
same inquiry, although they are both necessary inqu iries under the second sentence of GIR 2(a) – the
parts and components must be capable of assembly ("susceptible" to assembly ) within the assembly
parameters of GIR 2(a), and must have the essential character of the complete article.
Comments by the European Communities on China's response to question 220
386. The European Communities points out to the E xplanatory Note to chapter 87 of the HS
nomenclature. The examples provided therein demonstrate that "fitting" is an important element in
deciding whether a given collection of auto parts presented to customs at the same time have the
essential character of the complete vehicle. China's cl aim in its reply to the question that the methods
of assembly are distinct from the question whether a collection of parts has the essential character of
the complete vehicle is therefore incorrect.
Comments by the United States on China's response to question 220
387. China asserts that: "[t]he methods of assembly specified by GIR 2(a) are distinct from the
question of whether a collection of parts (whether assembled or unassembled) has the essential
character of the complete article. Thus, they are not the same inquiry, although they are both
necessary inquiries under the second sentence of GIR 2(a) – the parts and components must be
capable of assembly ('susceptible' to assembly) within the assembly pa rameters of GIR 2(a), and must

have the essential character of the complete article." China's response is based on the faulty premise
that GIR 2(a) covers the aggregation of multiple shipments from multiple destinations. As the United
States has previously indicated, GIR 2(a) cannot be utilized by the methods described by China which
ignore fundamental classification principles as set fo rth in the Harmonized System. By its very
nature, the Harmonized System is divided into cate gories or product headings beginning with crude
and natural products and continuing in further degrees of complexity through advanced manufactured
goods. Furthermore, China's proposed interpretation of GIR 2(a) is completely incompatible with the
HS Convention's object and purpose of ensuring the consistency of import and export statistics
maintained by parties to the Convention.
388. Contracting parties to the Convention of the Harmonized System are obligated to apply GIR 1
and the relevant section and chapter notes. Unde r GIR 1, "classification shall be determined
according to the terms of the headings and any rela tive Section or Chapter Notes and, provided such
headings do not otherwise require, according to the [other GIRs]." Contracting Parties cannot ignore
the physical condition of the merchandise and consider what processes the importation will
subsequently undergo to determine the classification. This is what China claims it has a right to do
and it is, therefore, in breach of its obligations unde r Article 3 of the Harmonized System Convention.
For further details about the proper scope and meaning of GIR 2(a) as it relates to "as presented" and
"multiple shipments", we refer the Panel to the US Responses to Panel question Nos. 210(b) and 223.
221. ( United States) Please comment on China's argument in paragraph 24 (citing 19 CFR §
141.51) of its second oral statement that any goods arriving on the same ship and destined for
the same consignee will ordinarily be classified on a combined basis. Please explain what the
phrase "on one entry" means.
Response of the United States (WT/DS340)

389. China's argument in paragraph 24 of its second oral statement mischaracterizes the United
States regulation. According to China, the Unite d States "takes the position that any goods arriving
on the same ship, and destined for the same consi gnee, will ordinarily be classified on a combined
basis." The legal basis for this assertion is 19 C.F. R. § 141.51, which provides, in relevant part, that
"[a]ll merchandise arriving on one conveyance and cons igned to one consignee must be included on
one entry." (emphasis added) (Exhibit US-11) The inclusion of merchandise on one entry, however,
is not the same as what China ambiguously describes as "classifi[cation] on a combined basis."
390. The phrase "on one entry" refers how the importer must present its customs documents. An
"entry" is "that documentation required by § 142.3 of this chapter [Chapter 19 of the Code of Federal
Regulations] to be filed with the appropriate Cu stoms officer to secure the release of imported
merchandise from Customs custody." That documenta tion includes certain Customs forms, evidence
of the right to make entry, commercial invoices, p acking lists, etc. 19 C.F.R. § 142.3. (Exhibit US-
12) The requirement that merchandise imported by the same importer on the same conveyance must
be included "on one entry" means only
 that all of this documentati on must be included together.
Contrary to China's argument, section 141.51 does not require that every article included in the
documentation must be classified under a single heading . Instead, the relevant Customs entry form
would contain a listing of each and every type of merchandise imported on the conveyance and their
separate corresponding tariff classifications . Thus, the United States regulation 19 C.F.R. § 141.51
does not (as China argues) draw the line between th e "form and substance" of an importation. This
regulation is merely a requirement involving the paperwork submitted by an importer.

Comments by China on Complainants' responses to question 221
391. In responding to this question, the United States has misstated the relevance of its "one entry"
regulation, found at 19 C.F.R. § 141.51. China neve r argued that this regulation "require[s] that every
article included in the documentation must be classified under a single heading. "
91 Clearly, if the
importer imports tennis shoes and circuit breaker s on the same ship, those articles will never be
classified under a "single heading." China's point was that if the importer enters parts and
components that have the essential character of the complete article on the same ship, it must
"present" those parts and components as a single entry. The necessary consequence, which the United
States does not deny, is that those parts and compone nts will be classified as the complete article in
accordance with GIR 2(a). In other words, the importer does not have the option of declaring those
parts and components as "separate" entries and obtaining a preferable classification and tariff result on
that basis.
392. In the context of the present dispute, the releva nce of the US regulation is that the application
of GIR 2(a) to parts and components is not at the discretion of the importer. As the United States
itself explains, the regulation concerns the manner in which the importer "must present" articles that
arrive on the same ship.
92 Contrary to the US denial, this regulation does, in fact, draw a line between
the form and substance of what the importer imports – whatever arrives on the same ship, on the same
day, is classified as if it were "presented" t ogether, no matter how the importer might otherwise
choose to declare and "present" the various contai ners that it has placed on that ship. As China
explained in its oral statement to the Panel, this is simply where the United States has chosen to draw
the line between form and substance, but it is not a result that is prescribed either by the ordinary
meaning of the term "as presented" or by the rul es of the Harmonized System, as the WCO itself has
made clear.93
222. ( All parties ) We note that the General Explanatory Notes to Chapter 87 refer to
GIR 2(a). Please point to any other chapters in the Harmonized System where a reference is
made to GIR 2(a).
Response of China

393. GIR 2(a) is also referred to in the General E xplanatory Notes to Section XVI, and also in the
Explanatory Notes to Chapter 90.
Response of the European Communities (WT/DS339)

394. In accordance with Explanatory Notes IV and VIII to GIR 2 (a), cases covered by the Rule (or
different aspects thereof) are cited at least in th e General Explanatory Notes to Section XVI and
chapters 44, 61, 62, 86, 89 and 90.
Response of the United States (WT/DS340)

395. Reference to General Interpretative Rule 2(a) can also be found in General Explanatory
Notes (III), (IV) and (V) to Section XVI which cove rs chapters 84 and 85 of the Harmonized System
and in General Explanatory Note (II) to Chapter 90.

91 US answers after second meeting at para. 69 (emphasis added).
92 US answers after second meeting at para. 69.
93 China oral statement at second substantive meeting at para. 25.

Response of Canada (WT/DS342)

396. Other areas of the Nomenclature that have refe rences to GIR 2(a) in their Explanatory Notes
are Section XVI generally (Machinery and Mechanical Appliances, etc.),
94 and in Chapter 44 (Wood
and Articles of Wood) 95 in Section IX. Within Section XVII (Vehicles, Aircraft, Vessels and
Associated Transport Equipment), Chapters 86 (Railway or Tramway Locomotives, etc.), 96 87 and 89
(Ships, boats and floating structures) all refer to GIR 2(a).97
Comments by the European Communities on China's response to question 222
397. The European Communities refers to its reply to question 222, which is more complete than
the reply of China.
223. ( Complainants) China stated at the second substantive meeting that "the complainants
appear to believe that the term 'as presented' means that importers can 'present' parts and
components of an article in whatever form they wish. In their view, the manner in which the
importer 'presents' a collection of parts and components determines their customs classification.
Thus, for example, if an importer declares a collection of parts and components as 'separate'
shipments, customs authorities must give effect to this declaration even if the parts and
components arrive at the same port, on the same day, and have the essential character of the
complete article." (paragraph 21 of China's second oral statement) Do you agree with China's
description of the complainants' position above? If so, what is the basis for such an
interpretation?
Response of the European Communities (WT/DS339)

398. There is a very important difference between China's measures and the very specific example
it refers to. The example of separate customs declarations concerning a collection of parts and
components that arrive at the same port and on the same day and which would, if assembled together,
have the essential character of the complete artic le has nothing to do with the Chinese measures. The
measures impose a 25 % charge after parts that have arrived at different times, at different places,
from different origins and which do not have the essen tial character of a complete vehicle even when

94 See Note (IV) ("Incomplete Machines") and (V) ("Unassembled Machines").
95 See Headings 44.15 and 44.16.
96 The relevant text is as follows:
Incomplete or unfinished vehicles are classified with the corresponding complete or finished vehicles,
provided they have the essential character thereof. Such vehicles may include:
(1)Locomotives or motorised railway or tramway coaches, not fitted with a power unit, measuring
instruments, safety apparatus or service equipment.
(2)Passenger coaches not fitted with seats.
(3)Truck underframes complete with suspension and wheels.
On the other hand, bodies of motorised railway or tramway coaches, of vans, wagons or trucks or of
tenders, not mounted on underframes, are classified as parts of railway or tramway locomotives or rolling-stock
(heading 86.07).
97 The relevant text is as follows:
The Chapter also includes:
(A)Unfinished or incomplete vessels (e.g., those not equipped with their propelling machinery,
navigational instruments, lifting or handling machinery or interior furnishings).
(B)Hulls of any material.
Complete vessels presented unassembled or disassemb led, and hulls, unfinished or incomplete vessels
(whether assembled or not), are classified as vessels of a particular kind, if they have the essential character of
that kind of vessel. In other cases, such goods are classified under heading 89.06.

fitted together just because the final vehicle does not have a sufficient proportion of domestic parts.
China is simply using examples that are entirely alien to its measures.
399. As a matter of principle customs have to classify the product according to its objective
characteristics when presented for classification at the border. However, the customs authorities have
the right and obligation to verify whether the d eclaration is correct. Under some circumstances the
example provided by China could amount to a false customs declaration.
400. The European Communities does not agree with the presentation of the problem by China,
which is giving the impression that importers are infringing the rules by changing the presentation of
the parts. There is nothing illegal in importing the parts separately. As illustrated by the European
Court of Justice in Case C-35/93 (Dr. Eisbein), the second sentence of Rule 2(a) must be interpreted
as meaning that an article is to be considered to be imported unassembled or disassembled where the
component parts, that is the parts which may be identified as components intended to make up the
finished product, are all presented for customs clearance at the same time (Exhibit EC – 34,
paragraph 19).
Response of the United States (WT/DS340)

401. It is not the position of the United States that the usage of the term "a s presented" means that
customs authorities must give effect to every decl aration made by an importer. Rather, customs
authorities classify goods based upon their condition upon importation. GIR Rule 2(a) requires that
customs officials make a determination as to whether components presented together impart the
essential character of a complete or finished article. If not, then the components are to be individually
classified. This view is supported by the stru cture of the Harmonized System itself, which
specifically names certain parts in their own headi ngs (e.g., spark-ignition reciprocating or rotary
internal combustion piston engines of heading 84. 07, transmission shafts of heading 84.83, chassis
fitted with engines of heading 87.06, bodies (includi ng cabs) of heading 87.07) and contains headings
for parts suitable for use solely or principally w ith motor vehicles (e.g., heading 87.08 which provides
for parts and accessories of the motor vehicles of headings 87.01 to 87.05). To classify all parts
eventually incorporated into complete motor ve hicles as finished motor vehicles, per China's
Decree 125, would empty many headings and subheadings of the goods specified therein.
Response of Canada (WT/DS342)

402. Canada does not agree with China's descripti on of the complainants' position. As Canada
noted in its second written submission at paragra phs 18-26, the principal term at issue for the
application of ordinary customs duties is "on their importation", which refers to the physical point at
which products enter the customs territory of a Member. Nevertheless, as Canada set out in
paragraph 23 of its second written submission, the term "as presented" refers to the same concept of
the state of a good at the point at which a Member's customs authority receives it (rather than its state
at any point so long as "customs procedures" still apply to the good, as China suggests), since those
words were introduced "to make it quite clear that th e provisions of the [GIRs] concerned applied to a
given article in the state in which it is presented for Customs clearance ." Canada again refers to the
response of the WCO Secretariat to Question 1, regarding the meaning of "as presented".
Comments by China on Complainants' responses to question 223
403. What is most revealing about the complainants' responses to this question is their failure to
answer it. The complainants simply do not explai n whether parts and components that arrive at the
same port, on the same day, and that have the essential character of the complete article, must

nonetheless be classified as "parts" if this is how the importer chooses to "present" them. Having
failed to take a position on this issue, they necessarily fail to provide any basis for such an
interpretation of the term "as presented".
404. The EC comes closest to answering the questi on, asserting that "[t]he example of separate
customs declarations concerning a collection of part s and components that arrive at the same port and
on the same day and which would, if assembled togeth er, have the essential character of the complete
has nothing to do with the Chinese measures."
98 The EC nonetheless offers that "[u]nder some
circumstances the example provided by China could amount to a false customs declaration."99
405. The EC does not explain why the example posed by this question "has nothing to do with" the
challenged measures. The challenged measures do, in fact, apply to the circumstance in which parts
and components arrive at the same port, on the sam e day, and have the essential character of a motor
vehicle. The EC's answer appears to suggest that, as applied to this circumstance , the challenged
measures would be based on a proper understanding of the term "as presented." Moreover, the EC's
answer appears to suggest that the challenged me asures respond to a circumstance that "could amount
to a false customs declaration" if the parts and components were not declared as a single entry.
406. Once again, the complainants' answers highlight their inability to articulate and substantiate
an interpretation of the term "as presented," and to define the circumstances under which the
challenged measures are necessarily inconsistent with a proper unde rstanding of this term. We now
have (1) the United States with its "same ship, same day" regulation; (2) the EC's possible support for
a "same port, same day" rule; and (3) Canada's view th at the application of GIR 2(a) to multiple
shipments is a matter for the WCO to resolve. Wh at the complainants have failed to provide is a
consistent interpretation of the term "as presented," supported by customary principles of international
law, with which the challenged measures are necessar ily inconsistent. For the reasons that China has
explained, this means that the complainants have failed to meet their burden of proof.
224. ( Complainants) Is it the complainants' view that GIR 2(a) exists solely to benefit the
importer? If not, are there circumstances in whic h customs authorities, not importers, should
or can determine the manner in which goods are presented in accordance with the principle of
GIR 2(a)? Please explain in detail.
Response of the European Communities (WT/DS339)

407. No, GIR 2 (a) is a general rule for the interp retation of the Harmonized System although as
Explanatory Note V to GIR 2 (a) points out, the second part of the rule relating to unassembled or
disassembled articles covers particularly situations where the unassembled state is due to reasons such
as requirements or convenience of packing, handling or transport. The question of the classification of
split consignments is in the view of the European Communities a matter to be considered exclusively
on the basis of a request from the importer. This position is shared by the secretariat of the WCO (see
point 2, last sentence of the reply of the WCO secretariat).
Response of the United States (WT/DS340)

408. It is not the United States' view that GIR 2(a) exis ts solely to benefit the importer. It is likely
that this characterization stems from a previous discussion wherein the United States explained that
19 C.F.R. § 141.57 is a regulation for the benefit of importers who intended their goods to have been

98 EC answers after second meeting at para. 62.
99 EC answers after second meeting at para. 63.

accommodated on a single conveyance for arrival in the United States as a single shipment, but which
were split after consignment to the carrier. Unde r the regulation, single entry treatment for split
shipments is limited to very narrow circumstances, at the election of the importer, and certification
that the entry was split at the election of the impor ter must be made when the goods are imported.
This single entry treatment permits the classification of the split ships as a single importation.
409. This aforementioned regulation is consistent with paragraph 10 of the HS Committee's
inclusion of a prior decision of the Nomenclature Committee in its Report (CHI-29), which indicates
that questions of "split consignments … [are] to be settled by each country in accordance with its own
national regulations."
410. Under the Harmonized System, consistent with Article 3 of the HS Convention, classification
is based on the Contracting Party's obligation to use all of the headings and subheadings of the
Harmonized System without addition or modification, together with their related numerical codes; and
to apply the General Rules for the interpretation of the Harmonized System and all the Section,
Chapter, and Subheading Notes. Article 3 specifica lly provides that the Contracting Parties shall not
modify the scope of the Sections, Chapters, head ings or subheadings of the Harmonized System.
Accordingly, both importers and Customs authorities are legally obligated to classify imported
merchandise pursuant to GIR 2(a) when applicable to importations of incomplete, unfinished,
unassembled, or disassembled articles.
Response of Canada (WT/DS342)

411. Canada does not believe that GIR 2(a) exists so lely to benefit the importer. Canada has only
argued, and shown, that the reference in the WCO Decision to separate shipments that China treats as
paramount was intended for the benefit of importers , not GIR 2(a) itself, despite China's repeated
efforts to stretch the complainants' arguments on this point to GIR 2(a).
412. GIR 2(a) permits customs authorities to determ ine whether a good, based upon its state as it
arrives at the border, has the essential character of a finished pr oduct. This involves elements such as
visual inspection, reference to documents, and if necessary further testing or analysis (based upon the
state of the good as it passed the border). Discretion fo r the importer mostly exists in the case of split
shipments, where a single item is ordered but deliver ed in separate shipments because of the nature of
the product (such as the "Functional Units" concept in Canada's customs practice, to which Canada
referred in the second oral hearing ; the EC law cited in China's first written submission, at para. 125
(Exhibit CHI-24) and Japan's customs practice with respect to machinery cite d by Japan in response
to Question 2) . As Canada noted in footnote 69 to its second written submission, these sorts of
practices formed the basis of the comment relati ng to split shipments in 1963, to which the 1995 HS
Committee Decision referred.
225. ( Canada) Canada states in paragraph 13 of its second oral statement that "China even
ignores the fact reflected in paragraph 11 of the WCO's reply to this Panel's questions, that
GIR 2(a) has nothing to do with customs duties – that, in effect, China is standing the correct
assessment of duties under Article II on its head ." Is it Canada's view that GIR 2(a) has
nothing with do with customs duties? If so, what is the relevance of GIR 2(a) to the
interpretation of China's tariff Schedule?
Response of Canada (WT/DS342)

413. The reference in Canada's second oral statemen t to GIR 2(a) having "nothing to do with"
customs duties refers to the fact that GIR 2(a) is a rule for the classification of goods. China attempts

to turn a WTO dispute into a WC O dispute, and also ignores proper classification, starting with GIR
1. Canada has pointed out (see paragraph 44 of its second written submission) that classification is a
prerequisite for assessment of duties, but, as the WCO points out in response to Questions 5 and 11,
"[t]he application of customs duties is outside the legal purview of the WCO". This connects with the
point that Canada makes in Section II.E of its second written submission that China is required by
paragraph 93 of the Working Pa rty Report on its accession to provide a 10% rate of duty on CKDs
and SKDs regardless of classification.
D. A
RTICLE II OF THE GATT 1994
226. ( United States) Should the assembly of "separately organized and shipped 'knock down
kits'" be in any manner distinguished from ot her regular bulk shipments of parts for assembly
purposes?
Response of the United States (WT/DS340)

414. The United States is not clear on what is enco mpassed by the phrase "separately organized
and shipped knock down kits." Nonetheless, the genera l rule for importations of auto parts is that
unless they are presented as unassembled or disassembled vehicles under GIR 2(a), they would not be
treated any differently than bulk importation of parts for assembly purposes.
227. ( Canada) Please elaborate on your response to Panel question No. 13(a), in particular
your statement that "in the context of Article II, charges must be internal in order for this
concept of 'circumvention' to apply."
Response of Canada (WT/DS342)

415. As Canada has argued, ordinary customs duti es must be imposed based upon the state of
goods as they arrive at the border. China's measur es do not do that. Instead, China imposes charges
based upon the state of the good at a point in time we ll after they arrive at the border – when those
goods are later aggregated with other parts in a manufactured vehicle. Thus, for the concept of
circumvention even to exist, it must apply to behaviour after the border once the goods are in the
hands of manufacturers in the internal market.
416. China's theory of circumvention is illustrated in Slide 1 of Canada's second oral statement.
There is no evidence that such a simplistic scenario would ever occur, but let us assume that it does
for the sake of illustration. If China imposed a charge on the vehicle manufacturer that had imported a
set of parts in two shipments on the basis that it had "circumvented" appropriate tariff duties, this
would not be an ordinary customs duty, as the charge would not be imposed on the parts "on their
importation". It would be an internal charge, as it is imposed within China, and is neither an ordinary
customs duty nor any other "border" charge permitt ed by GATT Article II. That internal charge
might, in principle, be justified under Article XX(d) as necessary to enforce customs duties – an issue
discussed further in response to Question 284 – but it could not properly be characterized as the
imposition of an ordinary customs duty.
228. ( China) In order for a certain measure to be found "as such" inconsistent with the
WTO Agreement, does the measure have to be proved to always violate the WTO Agreement?
Please provide legal support for your answer.

Response of China

417. As noted in response to question 206, the Appellate Body has found that "[b]y definition, an
'as such' claim challenges laws, regulations, or othe r instruments of a Member that have general and
prospective application, asserting that a Member's c onduct—not only in a particular instance that has
occurred, but in future situations as well—will necessarily be inconsistent with that Member's WTO
obligations."
100 It is not clear from this statement, or from the jurisprudence concerning "as such"
claims more generally, whether the measure must be shown to always violate the WTO Agreement.
But it is clear that, at a minimum, a party bringing an as such claim against a measure must identify
and prove the specific circumstances in which the me asure "will necessarily be inconsistent" with the
responding Member's WTO obligations.
418. The complainants' burden of proof, in this respect , is directly related to the function of the
Panel under Article 19.1 of the DSU. When a panel concludes that a measure is inconsistent with a
covered agreement, "it shall recommend that the Member concerned bring the measure into
conformity with that agreement." The measures at issue in the present disput e apply to a wide array
of factual circumstances, including, for example, with respect to the application of the essential
character test under GIR 2(a) and the manner in which specific collections of auto parts and
components are presented to Chinese customs authorities. In the absence of a clear delineation of the
circumstances in which the challenged measures will necessarily be inconsistent with China's WTO
obligations, the Panel would have no basis to identif y the specific respects in which China must bring
the measures into conformity with its WTO obligati ons. It is for this reason that the complainants
bear the burden of identifying and proving the sp ecific circumstances in which the measures will
necessarily violate China's WTO obligations.
419. As China explained in its oral statement to the Panel at the second substantive meeting, the
complainants' failure to meet their burden of proof in respect of their claims against the challenged
measures is endemic to their entire case. The comp lainants have alleged, for example, that any
charges collected as a result of the application of Decree 125 are not ordinary customs duties because
they are not based on the condition or status of goods "as presented" at the border. Yet the
complainants have failed to provide a specific in terpretation of the term "as presented" and to
substantiate that interpretation in accordance with cu stomary principles of international law. At the
second substantive meeting, China repeatedly challenge d the complainants to define and substantiate
their understanding of this term. The Panel will recall that their response, in effect, was that whatever
the term "as presented" might mean, and whatever am biguity might exist in the understanding of this
term, the challenged measures "go beyond" what the complainants believe to be proper understanding
of this term.
420. This is a perfect illustration of the basic flaw underlying the complainants' as such claims
against the challenged measures. As shown above, the complainants bear the burden of proving the
specific circumstances in which the challenged meas ures will necessarily be inconsistent with China's
WTO obligations. What, then, are the specific circumstances in which the challenged measures will
not be based on the condition or status of goods "as pr esented" at the border? Is there a distinction,
for example, between parts and components that arrive on the same ship but under different
consignments, as compared to parts and components th at arrive on different ships but under the same
consignment? Is there a distinction between part s and components that a manufacturer imports from
its own affiliates in multiple shipments, as compar ed to parts and components that a manufacturer
imports from unaffiliated suppliers in multiple shipme nts? The challenged measures apply to all of
these circumstances, and others. Yet the complainan ts have offered nothing that would allow the

100 US – Oil Country Tubular Goods Sunset Reviews at para. 172.

Panel the distinguish among these or other circumstances, and to identify the specific circumstances in
which the challenged measures would necessarily be inconsistent with a pr oper understanding of the
term "as presented."
421. It is not China's obligation to identify and prove the circumstances in which the challenged
measures would necessarily be consistent with its WTO obligations. It is the complainants who opted
to bring an as such case against the challenged measures, including, inter alia, their claim that the
measures are necessarily inconsistent with China's ta riff commitments under Artic le II. In so doing,
the complainants plainly recognized that this dispute implicated the proper classification and tariff
treatment of motor vehicles and pa rts and components of motor vehicles. For the reasons that China
has explained, the complainants must demonstrate that the charges that Ch ina collects pursuant to
Decree 125 are not the ordinary customs duties that China is allowed to collect under its Schedule of
Concessions. But they have failed to meet their burden of demonstrating the specific circumstances in
which the challenged measures will necessarily result in the collection of charges that China is not
allowed to collect under its Schedule of Concessions, wh ether it is as a result of a misapplication of
the essential character test, an improper understanding of the term "as presented", or otherwise. For
these reasons, China considers that the complainants have failed to meet their burden of proof.
Comments by the European Communities on China's response to question 228
422. The European Communities and its co-complai nants have established in detail why the
measures are "as such" in violation of Article 2 of the TRIMs Agreement and Article III, paragraphs 2,
4 and 5 of the GATT together with a number of co mmitments relating to these agreements in China's
Accession Protocol to the WTO. China has not even attempted to rebut the prima facie case brought
against it under the TRIMs Agreement and Article III of the GATT 1994.
423. Were the Panel to examine the measur es only under Article II of the GATT 1994 ( quod non),
the European Communities has established that the measures are as such necessarily inconsistent with
Article II as under all the criteria used under Artic les 21 and 22 of Decree 125, the measures require

imported auto parts to be characterised (i.e. 'cla ssified' if examined under Article II) as complete
vehicles, which triggers customs duties in excess of the ones applying to parts. Furthermore, the mere
fact that Articles 21 and 22 of D ecree 125 consider 'multiple shipments' of parts originating from
different countries, and arriving to China at different times and at different places necessarily means
that the measures are as such inconsistent with Ar ticle II. This is because the classification of the
product subject to ordinary customs duties on importation is not based on "the objective
characteristics of the product in question when prese nted for classification at the border" (Appellate
Body in EC – Chicken Cuts, paragraph 246).
424. Even if the relevant parts are presented to cu stoms at the same time and place in accordance
with the standard principles of customs administration, the criteria under Articles 21 and 22 of
Decree 125 would still necessarily lead to incorrect classification as set out more in detail in
paragraphs 112 to 117 and 130 to 135 of the European Co mmunities' second written submission and
replies to questions 117 and 233 of the Panel. The me re fact that in some exceptional circumstances
the deeming or classification of a large collection of auto parts as the complete vehicle under the
substantive criteria of Article 21(1) and 21(2) of D ecree 125 would be consistent with the rules of the
Harmonised System is irrelevant for a finding of an "as such" inconsistenc y under Article II of the
GATT 1994.
425. Furthermore, it is China that has pleaded GIR 2 (a) in its defence. As a matter of principle, it
is China's burden of proof to demonstrate that the various assertions and theories it has developed
around GIR 2 (a) are in any way relevant to the case. As the European Communities has demonstrated

in particular in its second written submission (parag raphs 92 to 132), China's arguments relating to
GIR 2 (a) are entirely without merit.
Comments by Canada on China's response to question 228
426. The burden of proof in respect of China's GI R 2(a) defence rests with China, not the
complainants. Canada has shown that the measures, on their face, prescribe violations of Article III of
the GATT. Canada does not need to show "specific circumstances" of the application of the measures
being inconsistent with China's WTO obligations, although it has done so. In all cases, the measures
establish domestic-content requirements in violation of Article III. Even if aspects of this dispute
were found to be subject to the disciplines under Article II, the measures "as such" violate Article II
by always subjecting auto parts to the motor vehicle ra te if the thresholds are exceeded. It is irrelevant
to the analysis of Article II that, in rare inst ances, a collection of assembled parts large enough to
constitute an assembled vehicle under Article 21 of Decree 125 may properly be classified as whole
vehicles under the Harmonized System.
229. ( All parties ) During the course of this proceedin g, the parties have referred to the
notions of "tariff arbitrage", "tariff evasion" or "tariff circumvention". Please explain where
such notions can be found in the WTO Agreement and how it is relevant to the present dispute.
Response of China

427. As China explained in response to questions 9 and 13 from the Panel, China considers that the
issue of circumvention in this case, or what one might otherwise call tariff arbitrage or tariff evasion,
concerns the proper tariff classification of parts and components that have the essential character of a
motor vehicle. The need to ensure the proper classi fication of imports is inherent in every Member's
Schedule of Concessions, which is incorporated into the WTO Agreement. As China explained in
response to question 68 from the Panel, the Appellate Body has repeatedly affirmed the importance of
the Harmonized System in interpreting a Member's Schedule of Concessions. Thus, the question of
ensuring the proper classification of imports, and th ereby preventing the circumvention or evasion of
the importer's obligation to pay duties, is governed by the classification rules of the Harmonized
System.
Response of the European Communities (WT/DS339)

428. The European Communities does not believe that it has used these notions in this dispute
except when countering China's arguments relating to "tariff circumvention". These notions are not
used under EC law or in the WTO Agreements. "Tariff arbitrage" is generally a more neutral concept,
whereas "tariff evasion" and "tariff circumvention" are notions with a more negative connotation. The
concepts relate to the allegation made by China that vehicle manufacturers are shipping parts in
multiple shipments in order to avoid paying the duty on complete vehicles.
Response of the United States (WT/DS340)

429. Such notions are not found in the WTO Agreement.
430. The prima facie case presented by the United States is based on China's obligations under the
WTO Agreement, as applied to the measures that China has actually adopted. Nothing in the
evaluation of the prima facie case presented by the United States involves any such notions of "tariff
arbitrage", "tariff evasion" or "tariff circumvention".

431. China in its defense has raised "tariff evasion" or "tariff circumvention" as the justification for
its measures, and it is therefore China's burden to explain precisely what China means, and to explain
how the concepts defined by China are relevant to any possible defense to the breaches of China's
WTO obligations that the United States has shown to exist. China has failed to do so.
432. As the United States set out in its opening statemen t at the second meeting, China in fact uses
these phrases to represent two very different concepts . Neither of those concepts could serve as a
defense to China's breaches of its WTO obligations.
433. First, China uses this language of "circumven tion" to mean that under its domestic tariff
schedule, China is to charge a whole-vehicle rate of duty on any imported part, regardless of any
actual intent on behalf of the manufacturer to "circumv ent" or "evade" tariffs, 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 explaine d, there is no possible interpretation of China's
WTO obligations that would allow for China to im pose a 25 per cent tax on bulk shipments of parts
imported for manufacturing purposes.
434. Second, China uses the same notions of "evasi on" and "circumvention" to mean that China
must be able to address certain limited, though still hypothetical, examples, such as the case of a CKD
split into two separate shipments. Chin a, however, has failed to show a single instance
 where any
importer ever engaged in the specific practices id entified by China. Moreover, China's asserted
rationale does not match the scope of China's meas ures. To the contrary, China's measures sweep
broadly to cover all imports of bulk parts for manufacturing purposes, not just instances of CKDs split
into two separate shipments.
Response of Canada (WT/DS342)

435. Those notions are not found in the WTO Agreement . As discussed in response to
Question 227, above, China's unsupported assertion is that vehicle manufact urers are shipping all
parts necessary to assemble a vehicle in two or more shipments in order to avoid paying the whole-
vehicle rate of duty (although, as Canada argues, even if those parts were shipped together the proper
rate of duty would be 10% – see response to Qu estion 205). If this ever happened, it could be
characterized neutrally as "tariff arbitrage" or "tari ff avoidance", or characterized more negatively as
"tariff evasion" or "tariff circumvention". If there we re evidence that this were happening, and if the
measures were targeted to address this practice, th en the legal issue for the present dispute would be
whether Article XX(d) is available to counter such a practice.
230. ( United States ) China submits that the United States concedes that "there might be a
few combinations" of auto parts under Decree 125 th at could conceivably properly be classified
under the HS as whole vehicles. Do you agree with this statement? If not, why? If yes, please
explain such combinations of auto parts.
Response of the United States (WT/DS340)

436. As the United States has explained, a CKD or S KD kit containing all of the parts necessary to
assemble a complete vehicle could conceivably be classified as a complete vehicle, assuming all the
requirements of GIR 2(a) had been met. (Under Paragraph 93 of the Working Party Report, however,
the kit would nonetheless have to receive a tariff treat ment of no greater than 10 per cent.) Other than
this, the United States is not aware of what Chin a is referring to with respect to this alleged
"concession."

231. China submits that as a matter of tariff cl assification, there is n ecessarily a continuum
between the parts of an article and the complete article in its finished form:
(a) ( Complainants) Do you agree with China?
Response of the European Communities (WT/DS339)

437. No, the European Communities is of the view that at the level of China's tariff schedules there
are clear distinctions between motor vehicles (headi ngs 87.01 to 87.05), parts thereof (in particular
heading 87.08) and the intermediary categories be tween motor vehicles and parts (headings 87.06 and
87.07).
438. The fact that there are instances where a give n consignment as presented to customs that is
not a complete or finished motor vehicle but might have the essential character of a complete or
finished vehicle does not suggest a continuum in Ch ina's schedule. It refers to an instance where
China's schedule must be applied to a given borderline situation.
Response of the United States (WT/DS340)

439. In paragraph 12 of its rebuttal Submission, Chin a asserts that "GIR 2(a) necessarily gives rise
to a continuum of circumstances under which custom s authorities will classify parts and components
as equivalent to complete articles, regardless of their state of assembly or disassembly." China is
attempting to blur the distinction between complete vehicles and auto parts by relying on a condition
of goods that will not be achieved until after the goods have been imported into China (where they
undergo assembly with other separately imported parts).
440. Per the United States' response to Panel qu estion No. 145, we disagree with China's
characterization of a "continuum" for the classification of motor vehicles. This characterization is
contrary to the structure of the Harmonized Syst em. The Harmonized System is made up of 96
chapters grouped into 21 sections consisting of a pproximately 5,000 article descriptions in the
headings and subheadings. The Ha rmonized System is divided into categories or product headings
beginning with crude and natural products and continuing in furt her degrees of complexity through
advanced manufactured goods.
441. Consistent with GIR 1, when an imported motor vehicle part is specifically described by a
heading of the tariff schedule, it must be classified under that heading. GIR 2(a) requires that customs
officials make a determination as to whether mo tor vehicle parts imported together impart the
essential character of a complete or finished article . If not, then the motor vehicle parts are to be
individually classified. These GIRs do not create a "continuum" for the classification of automotive
parts. The determination of the "essential character" must be based upon the condition of the goods at
the time of importation.
442. This view is supported by the structure of th e Harmonized System, which names certain parts
in their own headings (e.g., spark-ignition reciproca ting or rotary internal combustion piston engines
of heading 84.07, transmission shafts of heading 84.83, chassis fitted with e ngines of heading 87.06,
bodies (including cabs) of heading 87.07) or the creation of parts headings (e.g., heading 87.08 which
provides for parts and accessories of the motor vehicles of headings 87.01 to 87.05). Under China's
"continuum" characterization, the classification of all imported motor vehicle parts eventually
incorporated into complete motor vehicles (in the domestic market) as motor vehicles would empty
many headings and subheadings of the goods specified therein.

Response of Canada (WT/DS342)

443. No. See reply to paragraph (b), below.
(b) ( All parties ) Assuming that there is such continuum, where should the line be drawn
between complete vehicles and parts and components of complete vehicles?

Response of China

444. Consistent with GIR 2(a), the line between co mplete vehicles and parts and components of
motor vehicles must be drawn in accordance with the essential character test.
Response of the European Communities (WT/DS339)

445. In an individual case of classification, the Ge neral Explanatory Note to Chapter 87 provides
for clear and specific guidance. Reference is also made to the reply to question 211. Chapter 87
contains also very important intermediary cat egories between complete vehicles and parts and
components of complete vehicles. In particular, heading 87.06 demonstrates clearly that a motor
vehicle without its body is to be classified as a "chassis fitted with engines", not as a motor vehicle.
Response of the United States (WT/DS340)

446. The line must be drawn based upon the condition of the goods when they are imported. To
permit classification based on any other condition woul d destroy the predictability of the application
of the Harmonized System and preclude its stated purposes of tracking the identity of goods that are
crossing international borders and promoting as close a correlation as possible between import and
export trade statistics and production statistics. See Preamble to the International Convention on the
Harmonized Commodity Description and Coding System.
Response of Canada (WT/DS342)

447. Canada, in its second written submission at pa ragraphs 41-52 (including the chart), sets out
the appropriate lines to be drawn between various headings in Chap ter 87 of the Harmonized System.
The emphasis on headings covering intermediate cate gories (notably 87.06 – chassis with engine) is
supported by the WCO Secretariat, which in its res ponse to the Panel's questions highlighted the need
to consider such categories for classification.
101
Comments by the European Communities on China's response to question 231(b)
448. China's mere reference to the " essential character" test in GIR 2 (a) ignores entirely the fact
that in the context of chapter 87 of the HS system the overwhelming majority of situations can be
decided on the basis of GIR 1, wh ich means that there is no continuum in which a line should be
drawn. In those exceptional cases where GIR 1 does not provide the answer and a line must therefore
be drawn because of a large collection of parts being presented to customs at the same time,
Chapter 87 of the HS nomenclature provides for very specific examples that guide classification. In
this respect the European Communities refers inter alia to its second written submission under
paragraphs 75 to 98 and 112 to 117.

101 See, e.g ., the response to Question 3, noting that Chapter 87 "also provides a separate heading for
motor vehicle chassis fitted with engines (heading 87.06) and a heading for motor vehicle bodies (including
cabs) (heading 87.07)".

232. ( China) China submits that the complainants acknowledge that customs authorities can
undertake "investigations," and consider "evidenc e," to determine whether multiple shipments
of parts and components have the essential char acter of the complete article. Could China
please explain where and how the complainants acknowledge this.
Response of China

449. China discussed this point in detail in pa ragraphs 53 through 64 of its second written
submission. To summarize:
450. Canada first referred to "investig ations" and "evidence" in its oral statement to the Panel at
the first substantive meeting.
102 One of the factors that Canada cited in support of its claim that the
challenged measures are inconsistent with Article III was its assertion that the measures "are not
based on an earlier investigation."103 Canada further asserted that China had "offer[ed] no evidence
concerning the timing of shipments, or their frequency, or anything else that relates to the core issue
of the condition of goods on presentation at the border."104
451. In response to question 82(b) from the Panel, th e United States stated that "nothing in China's
measures is limited to, or targeted at, some hypothetical manufacturer who is splitting a CKD
shipment into two or more separate boxes."
105 The United States stated that "if a Customs authority
were involved in an investigation as to whether an importer was engaged in such a practice," it might
examine the factors to which Canada had referred in it s oral statement at the first substantive meeting,
and which the Panel had summarized in question 82( b), i.e., the origin of imported parts, who
purchases the parts, whether there was an earlier inv estigation, and the timing of shipments or their
frequency.
452. In response to question 124 from the Panel, concerning Canada's classification of
unassembled or disassembled furniture, Canada asser ted that, under this measure, "[t]here is no
assumption of a violation: if an importer declares th at it is importing furniture parts, in the absence of
contrary evidence obtained by Canadian customs of ficials, they are charged at the parts rate." 106 As
China noted in paragraph 59 of its second written s ubmission, Canada did not explain how Canadian
customs officials would "obtain contrary evidence," but presumably it would be through the results of
an investigation.
453. For the reasons that China set forth in paragraph 64 of its second written submission, the
necessary implication of these statements by the United States and Canada is that there are
circumstances under which customs authorities can apply GIR 2(a) to multiple shipments of parts and
components to prevent the evasion of duties that apply to the complete article. Thus, the issue is when
and how customs authorities may do this, and, in partic ular, what sorts of factors and evidence the
customs authorities may take into account in making these determinations.
Comments by the European Communities on China's response to question 232
454. China's reply does not identify any instances where the European Communities would have
"acknowledged that customs authorities can undertake 'investigations' and cons ider 'evidence', to

102 Canada oral statement at first substantive meeting at paras. 24, 34.
103 Canada oral statement at first substantive meeting at para. 24 (emphasis added).
104 Canada oral statement at first substantive meeting at para. 34 (emphasis added).
105 US answers at para. 49.
106 Canada answers at p. 32.

determine whether multiple shipments of parts a nd components have the essential character of the
complete article". The European Communities has not acknowledged anything of the kind.
Comments by the United States on China's response to question 232
455. China alleges that there are three instan ces where the complainants acknowledge that
investigations may be conducted to determine wh ether multiple shipments of parts and components
have the essential character of the complete artic le. The first instance involves Canada's oral
statement at the first substantive meeting. The United States has already addressed the context of
Canada's comments in its response to Panel questi on No. 82(b), and for the reasons set forth in its
response, the United States does not believe that Ca nada's comments in any way provide support for
the Chinese measures at issue.
456. The second instance also involves the United States' response to Panel question No. 82(b). In
that response, the United States is merely hypoth esizing about an investigation involving the splitting
of a CKD shipment into two or more boxes." The response does not indicate that the United States
believes such an investigation would be appropriate . The United States is rather pointing out that if
the intent of China's measures was to address such practices, then the measures would look quite
different than they do. China's investigations involve evidence of domestic assembly, and such
assembly is not a basis for classification under the Harmonized System. See, e.g., US response to
Panel question No. 116.
457. The third instance involves a Canadian classification decision on unassembled or
disassembled furniture. The contex t of that decision is clearly distinguishable from the Chinese
measures at issue in this case. For a more detailed explanation, see the US rebuttal to China's answer
to Panel question No. 238(b).
233. ( Complainants) Do you agree with China's submission in paragraph 25 of its second
written submission that the complainants have failed to make a prima facie case showing that
China has misapplied the essential character test under GIR 2(a).
Response of the European Communities (WT/DS339)

458. No. The European Communities has demonstrated under its alternative Article II GATT 1994
claim that in all cases foreseen under Article 21 of Decree 125, the measures require to classify auto
parts as complete vehicles in violation of the HS nomenclature and, as a result, to impose on auto
parts the higher 25 % duty on complete vehicles in stead of the bound duty rate of 10 % or less for
auto parts. Reference is also made to para graphs 112 to 117 and 130 to 135 of the European
Communities' second written submission and reply to question 117 of the Panel. Furthermore, the
mere fact that China is applying its measures under the premise of combining the entries from
multiple shipments is in itself sufficient to make an as such finding of inc onsistency under Article II
of the GATT because such a rule departs from the fundamental premise of tariff classification as
confirmed by the Appellate Body in paragraph 246 of EC – Chicken Cuts and leads necessarily and
systematically to erroneous tariff classification.
Response of the United States (WT/DS340)

459. No, the United States does not agree with China.
460. As an initial matter, the United States does not agree that it is the complainants' burden to
make such a prima facie case. In the event that China's measures were found to impose ordinary

customs duties instead of internal charges, the United States has shown that China's measures – which
impose a 25 per cent duty on auto parts imported fo r manufacturing purposes – are inconsistent on
their face with China's commitmen t to impose a maximum of a 10 per cent duty on auto parts.
GIR 2(a) is not an element of the prima facie case of the breach of China's tariff commitment on auto
parts. Rather, it is China that has introduced this language from outside the WTO Agreement in an
attempt to argue that its WTO commitments allows for such tariff treatment.
461. Furthermore, regardless of any question of bur den of proof, the United States has in fact
shown that China's measures are not consistent with any possible reading of GIR 2(a). As the United
States has explained, the HS Convention and the Ha rmonized System of tariff nomenclature must be
read in its entirety. GIR 1 requires that articles be classified in accordance with their headings. When
an auto part has its own heading under the HS, it may not – consistent with the HS – be considered as
an incomplete automobile having the essential charac ter of a complete automobile. Because China's
measures classify bulk shipments of parts as having the essential character of a complete vehicle, the
measures ignore the specific headings for such part s set out in the HS, and thus cannot be considered
as having the essential character of a complete vehicle.
462. Although China talks about a "prima facie" case, what China has demanded is something
different: namely, that the complainants must define the line between the collections of parts that do
and do not have the "essential character" of a comple te vehicle. Such line drawing, however, would
amount to advisory opinions on measures that are not at issue in this dispute. Rather, the function of
dispute settlement is to determine whether the meas ure in dispute – that is, the measure China has
actually adopted – is consistent with China's WTO obligations. And, regardless of the exact
demarcation between collections of parts having th e essential character of a complete vehicle and
collections of parts not having such character, Chin a's measures in this dispute are far outside any
possible interpretation of GIR 2(a).
Response of Canada (WT/DS342)

463. No, Canada does not agree. First, Canada's claim is that China's measures violate GATT
Article III and the TRIMs Agreement. That claim does not require a consideration of GIR 2(a). China
has presented a defence that the measures only impo se ordinary customs duties (as repeatedly noted
by Canada, and not refuted by China, a defence wh ich they effectively concede applies only to parts
imported directly by vehicle manufacturers). The inapp licability of that defence, in light of the proper
interpretation of the wording of Article II of GATT is set out in Section II.B of Canada's second
written submission.
464. As context for interpreting Article II, the Ha rmonized System as it was used in negotiating
China's Schedule is relevant, but as Canada demons trated in Section II.C and D of its second written
submission China has not properly applied that sy stem, and has presented no common and consistent
subsequent practice demonstrating that the GATT obligations at issue in this dispute (notably
Articles II and III) have been accepted by WTO Members to allow measures of the sort that China has
imposed. In contrast, Canada has shown the GATT, WTO jurisprudence and WCO documents cannot
support China's misapplication. In addition, Ca nada has shown subseque nt practice that all
complainants, third parties and other WTO Member s classify based on the state of a product at the
border in a single shipment.
Comments by China on Complainants' responses to question 233
465. The EC asserts that it "has demonstrated under its alternative Article II GATT 1994 claim that
in all cases foreseen under Ar ticle 21 of Decree 125,
the measures require to classify [ sic] auto parts

as complete vehicles in violation of the HS nomenclature …"
107 The EC has demonstrated no such
thing. The criteria set forth in Article 21 encompass collections of parts and components that
unquestionably have the essential character of a moto r vehicle; even the United States concedes that
"there might be a few combinations" of auto part s under Decree 125 "that could conceivably properly
be classified under the Harmonized System as whole vehicles."
108 The EC simply has no basis to
assert that Decree 125 is inconsistent with the essential character test in all ci rcumstances to which it
might be applied.
466. The United States, for its part, claims that "GIR 2(a) is not an element of the prima facie case
of the breach of China's tariff commitment on auto parts." 109 China does not understand the basis for
this claim. In order for the United States to dem onstrate that the challenged measures are inconsistent
with China's Schedule of Concessions, the United States must demonstrate that the measures are not
based on a proper interpretation of the terms in China's Schedule of Concessions. Whether it was
China or the complainants that firs t raised the application of GIR 2(a) to the interpretation of China's
Schedule of Concessions is irrelevant; the questi on is whether the complainants have made a prima
facie case that the challenged measures are inconsiste nt with China's tariff provisions for motor
vehicles, as interpreted in the context of the rules of the Harmonized System.
234. ( China) In paragraph 41 of its oral statement, China argues that it has articulated an
understanding of the term "as presented" in GIR 2(a) that supports its position that the
challenged measures are consistent with China's rights and obligations under Article II:
(a) Please explain the legal basis for the argument that being consistent with GIR 2(a)
means being consistent with Article II;
Response of China

467. The interpretive issue under Article II is whether the challenged measures implement and give
effect to a proper understanding of the term "motor vehicles" in China's Schedule of Concessions. As
the Appellate Body has found in EC – Computer Equipment and EC – Chicken Cuts, the Harmonized
System, including the General Interpretative Rules, pr ovide relevant context for the interpretation of a
Member's Schedule of Concessions.
468. As China has explained at length, GIR 2(a) is the rule within the Harmonized System that
addresses the tariff classification relationship between complete articles and the parts and components
of those articles. Under the second sentence of GIR 2(a), customs authorities classify parts and
components of an article as the complete article if they are "presented unassembled or disassembled",
have the essential character of the complete article, and are capable of assembly within the parameters
of assembly operations set forth in Paragraph (VII) of the Explanatory Notes to GIR 2(a).
469. To the extent that the challenged measures correctly classify auto parts and components under
GIR 2(a), including the manner in which the parts and components are "presented", they implement
and give effect to a proper interpretation of th e term "motor vehicles" in China's Schedule of
Concessions. As China discussed in response to question 186, if the challenged measures result in a
correct classification of auto parts and component s that have the essential character of a motor
vehicle, the measures collect a valid customs duty on auto parts and components, and are consistent
with China's rights and obligations under Article II. As China also discussed in response to questions

107 EC answers after second meeting at para. 70.
108 US answers after first meeting at para. 89.
109 US answers after second meeting at para. 89.

167 and 203, a charge is imposed on goods "on their importation" into the customs territory if the
Member imposes the charge by reason of, or in rela tion to, the importation of goods into its customs
territory.
470. The challenged measures are consistent with Ch ina's rights and obligations under Article II
because they classify parts and components based on the manner in which the parts and components
are presented to Chinese customs authorities – i.e ., as one of a series of shipments that are related to
each other through their common assembly into a single article, as evidenced by the customs
declaration – and because they result in the collect ion of a duty liab ility that arose by reason of the
importation of auto parts and components that have the essential character of a motor vehicle. This
duty liability is set forth in China's Schedule of Concessions, and the measur es properly interpret and
implement the relevant provisions of China's Sche dule of Concessions in accordance with the rules of
Harmonized System.
(b) Please explain whether your understanding of the term "as presented" also means that
China's measures are consistent with Articles III and XI of GATT 1994 as well as Article 2 of
the TRIMs Agreement and the relevant provisions of the SCM Agreement.

Response of China

471. China has previously discussed the legal basis for its position that Article II and Article III are
binary in nature, most recently in response to question 167(a) and question 203. As China has
explained, an ordinary customs dut y that a Member is allowed to co llect in accordance with its rights
and obligations under Article II cannot be analysed as an internal charge under Article III. This
conclusion is strongly reinforced by the jurisprudence referred to in question 203. Thus, to the extent
that the challenged measures collect an ordinary cu stoms duty that China is allowed to collect under
its Schedule of Concessions, as interpreted in accord ance with GIR 2(a) and the term "as presented",
these are not measures or charges that can be analyz ed under Article III. For the same reason, to the
extent that the measures collect an ordinary customs duty in accordance with Article II, they cannot be
analyzed within the scope of Article XI, which relates only to "prohibitions or restrictions other than
duties, taxes or other charges."
472. In respect of the TRIMs Agreement, China explained in paragra phs 132 to 137 of its second
written submission that the collection of an ordina ry customs duty does not fall within the scope of
Article 2 of the TRIMs Agreement, as an ordinary customs duty is not "inconsistent with the
provisions of Article III or Article XI of GATT 1994" for the reasons just explained. Moreover, as
China discussed in footnote 97, however one char acterizes the purpose of the Illustrative List in
relation to Article III and Article XI of the GATT, it is evident that the Illustrative List concerns the
types of measures that fall within the scope of these provisions, i.e ., internal measures and import
restrictions. An ordinary customs duty is not of either type.
473. Finally, in respect of the SCM Agreement, China has explained in paragraphs 156 to 160 of its
second written submission that the proper classificati on of imports, and the collection of the ordinary
customs duties that arise under a Member's Schedule of Concessions, cannot result in revenue
foregone within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.
Comments by the United States on China's response to question 234
474. China's analysis is essentially b ackwards: It starts with a purported interpretation of China's
Schedule then moves to an analysis of Article II stat ing that if there is any "relation to importation,"
then Article II applies to the exclusion of Article III. As the United States noted in its comments to

China's response to Panel question No. 179, this mode of argumentation is based on the false premise
that Article II (and a Member's schedule) "allo ws" departures from other obligations under the WTO
Agreement, and essentially renders Article III meaningless.
475. The US position on these issues is discussed in, inter alia, its first written submission, and in
its responses to Panel question Nos. 37 and 187.
235. ( Complainants) Do you agree with China's argument that the complainants' claim
against the challenged measures must be that China has drawn the line between parts and
wholes in the wrong place rather than whether China can classify multiple shipments of parts
and components on the basis of their common assembly?
Response of the European Communities (WT/DS339)

476. As set out in detail in all of its submissions, th e European Communities is of the view that the
measures are inconsistent with Article 2 of the TRIMs Agreement and Article III, paragraphs 2, 4 and
5 of the GATT 1994.
477. In respect of its alternat ive claim under Article II of the GATT 1994, the European
Communities has demonstrated that the measures and in particular Articles 21 and 22 of Decree 125
require the classification of auto parts as complete vehicles in blatant violation of its tariff schedules.
This is further aggravated by the application of these criteria under the "multiple shipments" theory by
China which has no basis in law and leads to tariff classification at will.
478. China's argument referred to in the question is not hing but an attempt to blur the issues before
the Panel in order to draw attention away from the main claims of the complainants.
Response of the United States (WT/DS340)

479. No, the United States does not agree.
480. In the event that China's measures were found to impose ordinary customs duties instead of
internal charges, China's duties would be inconsiste nt with its obligations und er its schedule of tariff
commitments because China imposes a 25 per cent duty on bulk shipments of auto parts. As the
United States has explained, there is no issue of "line drawing" under the HS Convention when an
auto part or an auto assembly or subassembly has its own tariff heading. In those cases, as required
under a plain reading of China's WTO Schedule of tariff commitments (and as confirmed by GIR 1 of
the HS Convention) the heading must be used. The issue of line drawing raised by China – that is,
between incomplete vehicles having or not having th e essential character of a complete vehicle – only

applies to incomplete vehicles or such incomp lete vehicles presented unassembled or disassembled .
Bulk shipments of manufacturing parts, however, are not "incomplete vehicles presented unassembled
or disassembled."
481. In other words, China only gets to its issue of "line drawing" by creating a fictitious article
consisting of bulk shipments of auto parts from diffe rent sources, by different importers, at different
times, and in different quantities. Furthermore, be cause of the realities of automobile production, one
cannot determine what parts will actually be used in any particular vehicle until the vehicle is actually
manufactured. Such measures are inconsistent with China's WTO obligations because China –
instead of basing its charges (be they internal charge s or customs duties) on the article that is actually
imported – in fact bases the level of its charges on the article as manufactured within China.

Response of Canada (WT/DS342)

482. No. As discussed in response to Questions 180 and 181, China does not impose ordinary
customs duties on products "on their importation" . Instead, China says it can classify "multiple
shipments" together for the purposes of imposing grea ter duties. As Canada demonstrated in response
to Question 210 and in Section II.D of its second wr itten submission, China has no support in law or
practice for this position.
483. It is, however, true that Canada also takes issue with where Chin a has "drawn the line", even
assuming all the parts in question arrive together at the border in one shipment. See Canada's response
to Question 209 and 231(b).
236. ( Complainants) Do the complainants agree with China that the specific issue presented
in this dispute in relation to the application of GIR 2(a) to multiple shipments is the meaning of
the term "as presented" in GIR 2(a)?
Response of the European Communities (WT/DS339)

484. To the extent that GIR 2 (a) is relevant at a ll to the dispute in these Panel proceedings, there
are two general elements of GIR 2 (a) on which the European Communities entirely disagrees with
China: the interpretation of the notions "essential character" and "as presented". The arguments of the
European Communities in relation to GIR 2 (a) have been set out in detail in paragraphs 92 to 132 of
its second written submission.
Response of the United States (WT/DS340)

485. No, the United States does not agree. While th e phrase "as presented" or "presented", as used
in GIR 2(a) is relevant – the la nguage helps confirm that China's interpretation is untenable – the
ordinary meaning of "as presented" is not the only co nsideration. Rather, the term "as presented" has
to be considered in context of the rest of GIR 2( a) and the entire HS Convention, and in light of the
object and purpose of that international agreement.
486. Furthermore, in evaluating China's argument, it is important to precisely define what is meant
by a "multiple shipment." If China is referring to China's hypothetical scenario of a CKD kit split into
two separate boxes, so that each box contains multiple parts of a single unassembled vehicle, then the
question is rather narrow, and that question more likely may turn on the precise meaning of "as
presented."
487. As the United States has explained, howev er, China's measures go far beyond China's
example of a split CKD kit. Rather, China's meas ures create fictitious combinations of separate
importations of bulk manufacturing pa rts, and apply increased charges to those parts if and only if
they are used in the manufacture within China of a vehicle that exceeds China's thresholds for foreign
content. If this is what China means by "multiple shipments," then much more
 than the definition of
"as presented" is involved.
488. The specific language of GIR 2(a) is:
"Any reference in a heading to an article sha ll 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."
110
In China's example of a CKD kit entered in a single box, the factual scenario falls within the
realm of 2(a) (though all of the specific requirement s may or may not be met, such as the requirement
that only "assembly" is allowed) because the kit woul d contain all of the parts used in the assembly of
a single article.
489. However, in the scenario actually covered by China's measures – which includes bulk
shipments of parts to be used for manufacturing and other purposes – there is not in fact the
importation of an article unassembled or disassembled. That article – the fictitious "kit" artificially
created by China's measures – does not actually exist until after all of the various parts from different
sources are actually used on the assembly line to cr eate a complete vehicle. Thus, in the scenario
involving the normal importation of bulk parts from different sources, the language of GIR 2(a) does
not fit — regardless of the precise meaning of "as imported."
490. Put another way, China would read GIR 2(a) not to cover unassembled "articles," but instead
to cover parts used in the assembly of articles. Thus , China would read the second sentence of
GIR 2(a) to mean: "[Any reference in a heading to an article'] shall also include a reference to parts
of an article used after importation to produce that article complete or finished (or falling to be
classified as complete or finished by virtue of th is rule), presented in kits or in separate bulk
shipments." But this is a very different rule from the actual GIR 2(a), and there is no way to interpret
the actual language of GIR 2(a) in this manner.
491. Moreover, in accordance with the principles of in terpretation reflected in Article 31(1) of the
Vienna Convention, China's argument must be evaluate d not on the text of GIR 2(a) in isolation, but
also taking into account the other GIRs, the HS Conve ntion – including the specific headings for auto
parts, assemblies, and subassemblies – and the obj ect and purpose of the HS Convention. As the
United States has explained, China's interpretation of GIR 2(a) is untenable for a number of reasons,
including that it does not fit with GIR 1's requirement to use the headings set out in the HS, and the
fact that China's interpretation of GIR 2(a) is comp letely inconsistent with the object and purpose of
the HS Convention to promote uniformity and consistency of import, export and production statistics.
492. For these reasons, China's argument about the classification under the HS Convention of
"multiple shipments" involves a consideration of much more than just the meaning of "as presented"
under GIR 2(a).
Response of Canada (WT/DS342)

493. No. As set forth in a number of questions above, and in Canada's second written submission
in Section II generally, the issue in this dispute is whether China's measures violate GATT Article III
and Article 2 of the TRIMs Agreement, and whether China can defend such a violation on the basis
that the measures are imposing ordinary customs duti es within the meaning of Article II:1(b), first
sentence. In the context of interpreting a Member's Schedule under Article II:1(b), as Canada notes in
paragraph 42 of its second written submission a nd in response to Question 187, the Harmonized
System is to be taken into account as context to determine the concessions at the time they were
negotiated, not for re-classificati on at a later date as China now attempts to do. However, that
interpretation requires a consideration of the Harmoni zed System as a whole, starting with GIR 1 and
the Explanatory Note to 87.06.

110 Exhibit CHI-15.

237. ( Complainants) Do the complainants agree with China that importers are not
necessarily entitled to obtain a lower rate of dut y merely by restructuring their imports of parts
and components, or documenting these imports as "separate" shipments. Please, explain.
Response of the European Communities (WT/DS339)

494. China has not provided any evidence that importers even try to restructure their imports in
order to benefit from a lower duty rate. However, ev en if there would be such evidence the Appellate
Body has stated that "in characterizing a product for purposes of tariff classification, it is necessary to
look exclusively at the 'objective characteristics ' of the product in question when presented for
classification at the border" ( EC – Chicken Cuts , paragraph 246). In the absence of any conditions in
the applicable tariff schedules, importers are entitl ed to structure their im ports according to their
preferences and the priorities of their manufacturing pl ans. Even in the hypoth etical situation where a
product is genuinely split into different shipments for the mere purpose of benefiting a lower tariff
rate, the classification of the product for the purposes of Article II of the GATT 1994 must be made in
accordance with the 'objective ch aracteristics' of the product in question when presented for
classification at the border.
Response of the United States (WT/DS340)

495. The United States is of the position that the condition of the goods as imported controls
classification. Accordingly, an importer is not entitled to misrepresent the condition of the goods
when imported in order to obtain a lower rate of duty. China presents two scenarios in which it
believes that importers are not entitled to obtain the lower duty rates for auto parts in lieu of paying
the higher rate of duty for complete motor vehicles.
496. The first scenario involves the "restructuring" of the importations of parts and components. It
is not apparent in what way the transactions are be ing restructured in the context of this scenario.
However, the presumed context is that parts that were previously imported together on the same
conveyance are now shipped in multiple conveyan ces on multiple dates to multiple ports. Presuming
that, alone, none of the parts has th e essential character of a complete motor vehicle, then an importer
would be entitled to obtain the rate of duty applicab le to the parts (and not complete motor vehicles)
when the parts are separately imported. Please see the US response to Panel question No. 216(c).
497. In its rebuttal to China's response to Panel qu estion No. 134, the United States' explained that
manufacturing a relationship among multiple importations of parts and components for the purpose of
assessing duties that apply to the completed article is impermissible for purposes of classification
under GIR 2(a). In this context, the identity of the good that is imported must be demonstrable by the
good in its condition "as presented" for entry into the customs territory, that is, at the time of
importation. Separate importations of other parts and com ponents with which the good will be
assembled in the importing country's internal market cannot be considered in the classification of the
good because there is no assembly of the good and th e other parts and components at the time that the
good is imported. Activities occurring after the impo rted goods have entered the country's customs
territory are not a basis for classification under the Harmonized System.
498. The second scenario involves an importer's submission of paperwork claiming that parts
imported together are "separate shipments." The contents of the paperwork does not turn such a
collection of parts into multiple importations. As noted above, an importer is not entitled to
misrepresent the condition of the goods when imported in order to obtain a lower rate of duty. For
these reasons, the United States disagrees with para graph 40 of China's rebuttal Submission in which

China asserts that "evading the boundary between parts and wholes under GIR 2(a) would be a simple
matter of paperwork" unless China's views are accepted.
Response of Canada (WT/DS342)

499. There is no evidence to suggest that any companies are or ever have sought to obtain a lower
rate of duty merely by documenting their imports as "separate" shipments. As set out in response to
Question 224, above, customs authorities determine appropriate classification of goods based upon
their state as they arrive at the border, which in cludes (but is not limited to) the declaration. As
Canada discussed in response to Question 229, even if China's theory of "tariff circumvention" were
supported by evidence, the measures impose internal charges that would have to be justified under
GATT Article XX(d) as taken to enforce customs duties.
Comments by China on Complainants' responses to question 237
500. In response to the question of whether an importer could submit separate customs
documentation for parts and components that have the essential character of the complete article, and
thereby obtain a different classification and tariff result, the United States responds that "the contents
of the paperwork does [ sic] not turn such a collection of parts into multiple importations."
111 T h e
United States further states that "an importer is not entitled to misrepresent the condition of the goods
when imported in order to obtain a lower rate of duty." 112 The United States does not explain how
these conclusions follow from its understanding of th e term "as presented." These assertions by the
United States may reflect its "same ship, same day" ru le, as set forth in 19 C.F.R. 141.51. That is, the
US statements may reflect its understanding that the manner in which the importer documents a group
of parts and components is irrelevant, provided that they arrive on the same ship, on the same day.
However, as discussed in reference to question 221 above, the United States has not explained why
this result is prescribed by its interpretation of the term "as presented" or by the rules of the
Harmonized System.
238. The United Statement submits that if China is right in arguing that GIR 2(a) provides
for the classification of bulk auto parts used in manufacturing as the complete, manufactured
product, and that the application of the GRI is obligatory, then the obligation to classify parts in
this manner would apply to each and every party to the Convention.
(a) ( China) Please comment on the United States' view.
Response of China

501. This is incorrect. The WCO stated in response to the Panel's first set of questions that the HS
Committee has not adopted a specific interpretation of the term "as presented" in GIR 2(a). As it
notes, the Harmonized System is "silent on this point." 113 The potential range of the application of
GIR 2(a) to multiple shipments of parts and component s is embodied in the term "as presented". In
the absence of a specific interpretation of this term by the WCO, there is necessarily some amount of
discretion among WCO members in deciding whethe r and how to apply GIR 2(a) to multiple
shipments, including multiple shipments of what the Un ited States refers to as "bulk auto parts." This
conclusion is supported by the HS Committee Decision at CHI-29, which states that the application of

111 US answers after second meeting at para. 106.
112 US answers after second meeting at para. 106.
113 WCO Response at para. 1.

GIR 2(a) to "goods assembled from elements originati ng in or arriving from different countries" is a
matter "to be settled by each country in accordance with its own national regulations."
Comments by the European Communities on China's response to question 238(a)
502. As the European Communities has argued in detail, the "multiple shipments theory" presented
by China goes against the very basis principles of th e Harmonised System. In this respect reference is
made in particular to paragr aphs 100 to 111 of the second writte n submission of the European
Communities.
Comments by the United States on China's response to question 238(a)
503. China's interpretation of the Harmonized System and the purported "decision" taken by the
HS Committee is limited by the very terms of th e Harmonized System Convention itself. While the
WCO Secretariat is correct to point out that the HS Committee has not adopted a specific
interpretation of the term "as presented" in GIR 2(a) , it does not give a Contracting Party the right to
develop an interpretation that is incompatible with the object and purpose of the Convention, and that
abrogates its obligations under the Convention to ap ply GIR 1 and the terms of the headings and the
relevant section and chapter notes.
504. China's interpretation of GIR 2(a) exceeds the discretion a Contracting Party has to interpret
the GIRs as it eliminates from consideration sever al headings within the Harmonized System such as
headings 87.06 and 87.07, which deal with s ub-assemblies as well as specific headings that name
particular goods such as headings 84.07 and 84.08. This view is supported by the WCO Secretariat's
response to Question 6 submitted by the Panel, whic h states in relevant part, that: "a heading
providing specifically for a collection of unassembled parts or an incomplete article would prevail by
application of GIR 1 because GIR 2 would not appl y (that is, because such headings or Notes ...
otherwise require.) Examples of such are headings 87.06 and 87.07". For further discussion on the
discretion a Contracting Party has under the Harmoni zed System Convention, we refer the Panel to
the US Responses to Panel question Nos. 209, 210, and 224.
(b) ( China) Could China provide any evidence that any other party to the Convention has
adopted measures comparable to China's measures at issue in this case. Please do not repeat
the individual customs cases that China has cited as comparable to its own measures in its
written submissions and responses to the Panel questions so far.

Response of China

505. Other than the customs decisions, regulations , and practices to which China has already
referred in its submissions, China is not aware of any measure adopted by another party to the
Harmonized System Convention that is directly compar able to the measures at issue in this dispute.
There are two important points to note, in this regard.
506. First, as China has explained, the need for this type of measure only arises where there is (1) a
significant difference in duty rates between an article and the parts of that article; and (2) the article at
issue is capable of assembly within the parameters set forth in GIR 2(a). China does not consider that
this is a common circumstance. This conclusion is supported by the response of the WCO to the
Panel's first set of questions, which observed that Chapter 87 of the Harmonized System presents
"unique classification challenges" in light of its complex array of provisions for motor vehicles and

for parts and components of motor vehicles.
114 Seen in this light, the need for a measure of this type
would principally arise where a country maintains a significant difference in duty rates between motor
vehicles and parts and components of motor vehicles.
507. Secondly, it is important to note that there are 124 Contracting Parties to the Harmonized
System Convention, representing over 200 countries a nd customs unions. It is not possible for China
to undertake a comprehensive review of all the na tional laws and regulations of these countries that
are comparable to the measures at issue in this disput e. In addition to the scale of such an exercise,
the national customs laws and decisions of many countries are not readily available for research
purposes (even if one were able to overcome the barrier presented by the fact that they appear in many
different languages). China notes, in this connect ion, that it was able to identify a very recent
Canadian customs determination – the CBSA determination on furniture that appears at CHI-15 – that
it considers to be directly comparable to the measures at issue in this dispute. Canada is a developed
country with a highly sophisticated system for ma king customs laws and regul ations available on the
Internet. It is entirely possible that there are ot her countries that have a dopted similar measures to
deal with the same basic problem of the tariff relationship between complete articles and parts of
those articles, in the presence of a significant difference in duty rates.
Comments by the European Communities on China's response to question 238(b)
508. The European Communities notes that China is not able to present any evidence of
comparable measures in other countries, as it was not able to point to any evidence of comparable
measures in China applied in other sectors (see China' s reply to question 57 of the Panel). This is not
surprising in view of the unprecedented position of China on customs classi fication. The necessary
implication therefore must be that China recognises that it is not able to provide any evidence of
international customs practice that could sustain its position.
509. It should also be noted that China once again confuses the interpretation of a general rule with
the fiscal consequences of a tariff difference between parts and complete products. A rule cannot be
applied differently just because the consequences of its application may be more significant.
Comments by the United States on China's response to question 238(b)
510. China attempts to justify its measure based on what the WCO Secretariat identified as the
"unique classification challenges" in the structure of Chapter 87 of the nomenclature. This is a non
sequitur. Those "unique classification challenges" relate to the classification of certain assemblies –
as presented at the border – and not
 to the classification of bulk shipments of parts for manufacturing.
Indeed, the classification of such parts is a simple matter – a radiator falls under the heading for
radiators, a brake falls under the heading for brakes, and so on.
(c) ( China) If not, does China think that every pa rty to the Convention (and China itself
with respect to all goods except auto parts) is ac ting inconsistently with the obligations under
the Convention to apply GRI 2(a)?

Response of China

511. No. See China's response to question 238(a) above.

114 WCO response at para. 3.

239. ( China) In relation to China's position that the measures at issue are border measures,
could China please answer the following:
(a) In China's tariff Schedule, are there any conditions attached to the importation of
automobiles or parts thereof?
Response of China

512. No. As China explained in response to ques tions 27 and 54 from the Panel, China was not
required to inscribe any condition in its Schedule of Concessions in order to interpret and enforce its
Schedule of Concessions in accordance with the rules of the Harmonized System.
Comments by the European Communities on China's response to question 239(a)
513. In the light of the previous submissions, it is clear that the European Communities
fundamentally disagrees with China. However, it shoul d be noted that even if China had included the
general conditions that form its de fence in this case into its sche dules, such conditions would still
violate Article 2 of the TRIMs Agreement and Article III of the GATT 1994 in accordance with the
jurisprudence of the Appellate Body in EC – Export Subsidies on Sugar , paragraphs 211 – 223, and
Article 3 of the SCM Agreement.
(b) At the time of China's accession to the WTO, was there any understanding between
negotiating Members that there should be any condition attached to that part of the Schedule?

Response of China

514. No.
Comments by the European Communities on China's response to question 239(b)
515. There was no such understanding between the negotiating Members at the time of China's
accession to the WTO.
(c) When a shipment of parts and components of complete vehicles is presented to China's
customs authorities, what do China's customs au thorities do if an automatic licence for such
importation is not presented?

Response of China

516. If the imported auto parts are subject to an automatic import license requirement, the Customs
will not accept the import declaration if it is not accompanied by the import license. It is highly
uncommon for entries to be presented without a re quired automatic import license, because (1) the
importer can obtain the automatic import license with essentially no administrative burden or delay;
and (2) the importer would have to pay warehousing fees to hold the goods at the point of entry while
it obtained the necessary import license.
Comments by the European Communities on China's response to question 239(c)
517. Before the "automatic" import licence can be granted allegedly "with essentially no
administrative burden and delay", the automobile manufacturer is obliged to carry out the self-
verification foreseen in Article 7 of Decree 125 and Article 6 of Announcement 4. If the conclusion of

the self-verification is that the model contains suffi cient local content, the manufacturer is obliged to
provide also the review report from customs.
518. China's reply makes it clear that the import li cence is far from automatic as the manufacturer
is obliged to go through cumbersome and lengthy procedures before the licence is granted.
519. Reference is also made to the observations made above to China's reply to question 173 (a).
Comments by the United States on China's response to question 239(c)
520. In its response to part (c) of this question, China asserts that an importer "can obtain the
automatic import license with essentially no administ rative burden or delay." To the contrary, under
Article 7 of Decree 125, a manufacturer must comple te a self-assessment before obtaining an import
license. To complete the self-assessment, a manufacturer must (1) catalogue all the parts of each
model it manufacturers, (2) determine whether, under the measures, the parts are foreign or domestic,
and (3) calculate the thresholds for each assembly system and the overall price percentage of imported
parts in the model. The determination of the so urce of the parts extends to secondary suppliers and
may involve an analysis of whether the parts have undergone a "substantial processing" in China
within the meaning of Article 24 of Decree 125 and Article 18 or Order No. 4. Then there are the
filing requirements of Article 9 of Decree 125, s hould a filing be required. These requirements can
hardly be described as "essentially no administrative burden or delay."
240. ( Canada) With respect to the CBSA's decision on disassembled furniture imports,
(a) Please elaborate on why because a finished product was "purchased at the retail level",
that decision should be distinguished from the measures at issue?
Response of Canada (WT/DS342)

521. Canada emphasizes that the Memorandum is not the subject of the present dispute. As such,
the Memorandum is relevant only for purposes of determining whether there is common and
consistent practice accepted by WTO Members relate d to the interpretation of Members' Schedules.
On that point, as it did in paragraph 3 of its r esponse to Question 116, Canada emphasizes that China
has not shown any other such examples in the pract ice of WTO Members that is even similar to the
Memorandum.
522. In any event, Canada has shown that the Memo randum applies only where finished furniture
is purchased at the retail level but shipped separately so as to be classified as parts. This is analogous
to the practice of allowing importers to classify as one product split shipments of a single product (see
response to Question 224, above). It is not analogous to the measures. Further, unlike the measures,
the Memorandum does not require importers to declare parts as a finished product in order to obtain
an import licence. Last, Canadian customs has discr etion whether to investigate individual instances
where it suspects whole furniture is being imported, whereas, under the measures, all parts that exceed
the thresholds under Article 21 of Decree 125 are presumed to evade auto part duties.
(b) Following on Canada's response to Panel question No. 124 and as pointed out by China
in paragraph 59 of its second written submission, could Canada please elaborate on what
"contrary evidence obtained by the Canadian customs officials" means and what documents
were examined by the Canadian customs officials;

Response of Canada (WT/DS342)

523. Based on historical compliance records, Cana dian customs authorities have found that the
overwhelming majority of importers are honest and comply with all import requirements. This would
include those importers specified in the Me morandum. Consequently, the documentation and
classification provided by the importer at the time of importation are accepted at face value.
524. However, Canada from time to time does conduc t routine compliance verification audits on
importers. Such audits include reviewing whether importers properly declared origin, value and
classification of imported goods. Customs officials review documents such as the purchase order,
sales contract, confirmation order, purchase agreement and correspondence files. If, in the course of
such an audit of a furniture retailer, a customs offi cial determines that the Memorandum applies, then
the retailer makes an amendment to the original importation documents that would include a change
in tariff classification.
(c) Canada mentions that Canadian customs officials are not required to classify furniture
parts as finished furniture but, instead, are afforded discretion to determine whether such a
classification is warranted. Please elaborate on this statement. Also, please comment on
whether, and if so, how the fact that such discretion is afforded to customs officials is relevant to
distinguishing this decision from China's measures;
Response of Canada (WT/DS342)

525. China's measures presume that any time the volume or value thresholds for imported parts in
those measures are exceeded the imported parts shoul d be classified as whole vehicles. This is on the
presumption that any time such parts are imported, and by whomever they are imported, the purpose
is to "circumvent" tariffs. Further, vehicle manuf acturers are forced to call parts "Deemed Whole
Vehicles" to obtain an import licence. There is no discretion for China's customs authorities to
consider the commercial reality (discussed in respon se to Question 176) that most parts would have
been imported by independent third parties for th eir own commercial purposes – in other words, there
is no discretion in customs authorities to apply th e measures only for the purposes that China says the
measures are required – to prevent tariff "cir cumvention" (see response to Question 229 for a
discussion of the relevance of this concept more generally).
526. In contrast, the Canadian practice relating to classification of furniture is directed at the
discrete situation of when an item of furniture (not parts for the furniture) is purchased by a retailer
but shipped separately as parts. At the time of importation, customs officials do not generally check if
the imported furniture parts are classified as finished furniture. Any verification generally takes place
later, as noted in response to paragraph (b), above, as part of a routine compliance verification audit.
Further there is no requirement for importers to ma intain and report to Canadian authorities on a parts
audit trail, which is required under the measures, nor is there a system to require pre-determination of
the destination of imported furniture parts, as contemplated for auto parts in the measures.
527. The importance of discretion can be illustrated by an example. Suppose there is a situation
where a furniture retailer imports 100 table tops an d 400 table legs from the same exporter, and those
shipments occur separately but clo se in time. Based on those facts it might appear that the importer
had purchased 100 tables from the exporter, and the Memorandum would apply. However, an
examination of the documentation by a customs offi cial might confirm that the table tops were
purchased and invoiced separately from the table legs a nd that the table legs were of a different style
than the table top. The customs official would then have the discretion, under Canada's practice, to
make a determination that the Memorandum did not apply and classify the goods as parts. This aspect

of the Memorandum is one of many elements th at distinguish the Canadian practice from the
measures. Also, an importer has the right to appeal this decision at the Canadian International Trade
Tribunal ("CITT").
(d) Does Canada believe, as China contends in paragraph 61 of its second written
submission, that if the accompanying documentation (or other "evidence") supports the
conclusion that [a] shipment of parts and components is one of a series of related shipments that
it is proper to classify that shipment as the complete article in accordance with GIR 2(a)?
Response of Canada (WT/DS342)

528. Canada does not agree with China. "Documen tation" is only one element of assessing the
objective characteristics of the product. This is ma de clear in Answer 1 from the WCO to questions
from the panel in EC – Chicken Cuts, where it stated "the determination of the essential character of a
product can be done in several ways. The most obvious is through a visual inspection of the product…
Reference can also be made to accompanying documents". The use of documentation in the
Memorandum is based on a presumption of honesty among importers who have voluntarily declared
they are ordering complete furniture. This is in contrast to the presumed dishonesty of importers under
the measures, who are not truly ordering complete vehicles but must declare so on documentation, or
they are otherwise barred from obtaining an import licence necessary to import the parts.
529. Further, Canada has described its position on China's theory of classification of "multiple
shipments", for example in response to Question 23 7, above. The Canadian practice of classification
of furniture in the Memorandum, which is not be ing challenged in this dispute, and which as
discussed above is very different from the measures, does not establish subsequent practice for the
general rule contended by China in paragraph 61 of its second written submission.
(e) Is it Canada's position that the essential character test under GIR 2(a) should be based
only on the objective characteristics of the good and any information provided by the importer
with respect to that good? If so, should it be understood that Canada's customs authorities do
give consideration to other shipments with wh ich the product later may be incorporated as
argued by China in its second written submission paragraph 60?
Response of Canada (WT/DS342)

530. Canada's position is that ordinary customs duties under Article II:1(b), first sentence, can only
be imposed on products "on their im portation". Canada, in response to Question 187, has provided its
position on the relevance of GIR 2(a) to this disp ute, and in response to Question 210 has discussed
the limited extent to which the meaning of GIR 2(a) needs to be interpreted for the purposes of this
dispute. With respect to the Memorandum, see the response to paragraph (a) and (c), above.
241. ( Canada) The CBSA's decision in Exhibit CHI- 17 on tariff classification of kit cars
states in paragraph 3 that "[i]t should be noted th at the tariff classification of the third type of
kit is based on the decision rendered on June 11, 1990 by the Canadian International Trade
Tribunal in Appeal AP-89-228."
(a) In light of this statement and given that th e tariff headings that were at issue in that
decision are the same as those in this case, could Canada please elaborate on how the CBSA
decision in Exhibit CHI-17 should be distinguished from the measures at issue to the extent that
they affect the tariff classification of CKD or SKD kits.

Response of Canada (WT/DS342)

531. Canada does not seek to distinguish the memorandum in Exhibit CHI-17 from tariff
classification generally, although as Canada noted in response to Question 60, that memorandum
deals with a different type of product than is at issue in this case. As Canada has repeatedly noted
(most recently in paragraph 17 of its second oral st atement), it has always ac cepted that parts that
have the essential character of a finished vehi cle may be classified as such, so long as they are
contained in a single shipment.
532. Canada does say that there should be an assessment of what exactly is in a kit (which Exhibit
CHI-17 does) rather than an assumption that what is described as a CKD or SKD has the essential
character of a whole vehicle. For example, as illustrated in the CITT decision discussed in
paragraph (b), below, it is quite possible that a "kit" could properly be cl assified as a body and parts
rather than a whole vehicle. And, of course, Canada repeats that even if a CKD or SKD contains parts
with the essential character of a whole vehicle, China is obliged by paragraph 93 of the Working Party
Report to charge no more than 10%.
(b) Please explain the relevance and/or significance of "the decision rendered on
June 11, 1990 by the Canadian International Tr ade Tribunal in Appeal AP-89-228" in relation
to tariff classification decisions to be made by the Canadian customs authorities concerning the
third type of kits referred in that decision. Please also provide a copy of this decision.
Response of Canada (WT/DS342)

533. That decision related to a determination of whether an imported Mercedes replica assembly
kit (which included most parts, but not the power train, suspension or engine) qualified for duty
exemption on the basis that it was either a motor vehicles manufactured more than 25 years earlier or
parts to be used on such a vehicle.
115 The CITT concluded that while the kit replicated an older
Mercedes, the parts were designed to be mounted on a power train, suspension and engine less than 15
years old, and that therefore the parts did not qua lify for the duty exemption. The CITT also accepted
that GIR 2(a) applied such that the parts had the essential character of a vehicle body, with some other
parts that were not part of the body, and that therefore the kit was properly classified as a body
(8707.10.90) and parts (8708.70.90, 8708.92.90, 8708.94.90 and 8708.99.99).
(c) Is that decision binding on Canadian customs authorities?
Response of Canada (WT/DS342)

534. In this case, as in most appeals to th e CITT, the appeal was transaction-based ( i.e., based on a
particular import) and the decision only applied to the goods under appeal (and not to all similar
goods imported by all importers). The CBSA then implemented the particular decision by re-
determining the tariff classification of the particular goods subject to the appeal.
535. However, while a CITT decision is only binding with respect to the goods that are the subject
of review, the CBSA applies the finding of the CITT to similar goods as a matter of policy. This
explains the reference in Exhibit CHI-17 to the CITT decision, which reflects CBSA's policy
generally to refuse to grant replica assembly kits the duty exemption available for parts for vehicles
older than 25 years.

115 Bradley v. The Deputy Minister of National Revenue for Customs and Excise , 1990, CITT, Appeal
No. AP-89-228 (Exhibit CDA-41).

242. ( Canada) In paragraph 26 of its second oral statement, Canada states that there is
nothing in the text of Article II to justify Chin a's argument that a brake cylinder once in China
may be classified as a motor vehicle by virtue of how it is used in a domestic production process.
Is there anything in Article II that precludes it?
Response of Canada (WT/DS342)

536. Yes. As set out in Section II.B of Canada's second written submission, ordinary customs
duties may be no greater than the amounts set out in a Member's Schedule for products "on their
importation", meaning their physical state as they arri ve at the border. A Member is obliged to apply
ordinary customs duty within the rates set out in its Schedule. Imposing an ordinary customs duty
greater than that amount is a violation of Article II: 1(b), first sentence. While Canada submits that the
measures impose internal charges, and thus Artic le II is not engaged, even if the measures are
ordinary customs duties, the bound rate for brake cy linders in China's Schedule is 10%, while China
imposes a charge of 25%.
243. ( China) Please comment on the United States' argument in paragraph 19 of its second
oral statement that if China's position were adopted "a Member could avoid its Article III
disciplines by the simple ruse of structuring its customs laws so that no product is actually
"imported" until after discriminatory internal charges and other discriminatory measure had
been applied." The Panel is not asking China to comment on whether its measures actually do
this, but rather on the interpretative question presented by the United States in the general
sense.
Response of China

537. China has responded to this assertion on multiple occasions.
116 The United States apparently
believes that, through the constant repetition of the same point, it can avoid the fact that China has
already addressed this concern in detail.
538. As China has most recently explained in r esponse to questions 189 and 199 above, it is not
China's position that a Member can structure its cust oms laws to defer the point at which goods are
considered imported, and thereby impose whatever discriminatory charges or measures it wishes. The
question in relation to a particular customs process is whether it gives effect to a measure or charge
that a Member is allowed to maintain or collect by reason of, or in relation to, the entry of goods into
its customs territory. Thus, a Member may not, under the guise of a customs process, maintain a
measure or collect a charge in respect of goods from another Member that it is not allowed to
maintain or collect under its WTO commitments.
539. To be perfectly clear, the Member's character ization under its municipal law of when a good
has been "imported" does not define the scope of its rights and obligations in respect of Article II and
Article III. As China explained in response to qu estion 37 from the Panel, China considers that goods
have been imported "once the national customs authorities have completed the administrative
processes that are necessary for th e imposition and assessment of the specific border charges that the
Member is allowed to impose in respect of the imports at is sue, and the imports are no longer subject
to customs control."
117 Whatever those administrative processe s entail, they canno t involve forms of
discrimination that are not specifically countenanced by the Member's rights and obligations under

116 See, e.g., China rebuttal submission at para. 119; China answers at 31; China answers at p. 35;
China answers at p. 105.
117 China answers at p. 31.

Article II. Therefore, these customs processes ca nnot provide a "ruse" for discriminating against
goods from another Member in respects that are inconsis tent with the disciplines of Article III. This
is an objective standard, not a standard that l eaves the boundaries between a Member's Article II and
Article III obligations subject to its own discretion and national laws.
Comments by the European Communities on China's response to question 243
540. China's reply is circular. On the one hand Ch ina considers that Members cannot defer the
point at which goods are considered imported throug h the structuring of their customs laws. On the
other hand China is of the view that goods have been imported "once the national customs authorities
have completed the administrative processes that are necessary for the imposition and assessment of
the specific border charges that the Member is allowe d to impose in respect of the imports at issue,
and the import are no longer subject to customs cont rol". This test suggested by China provides that
through the structuring of customs laws a Member can in fact defer the point at which goods are
considered imported. The European Communities f undamentally disagrees with this position, which
was also specifically addressed by the panel in EEC – Parts and Components . For analysis, the
European Communities refers inter alia to paragraphs 48 and 49 of its second written submission.
Comments by the United States on China's response to question 243
541. China's response is entirely b ased on the false premise that Article II and China's schedule
give China the "right" to define a "customs dut y" however China sees fit and to adopt measures
inconsistent with Article III in order to collect such supposed "customs duties". To the contrary,
Article II imposes obligations on Members that choos e to impose customs duties. Article II does not
provide that Members may choose to define "customs duties" however they see fit, and Article II does
not give Members any "right" to breach Article III (or other WTO obligations) by adopted measures
addressed to the collection of such self-defined "custo ms duties." If China were correct that Article II
provided such "rights" to WTO Members, then, ind eed, as the United States has explained, Article III
could be rendered a nullity through the ruse of defining internal charges as "customs duties".
244. ( United States) The United States, in paragraph 19 of its second oral statement, states
that the only sensible way to view "imported" in th is context is with its normal meaning, that is
"the time when the product enters the Member's customs territory." Could the United States
please explain how they determined that th is was the ordinary meaning of the word
"imported".
Response of the United States (WT/DS340)

542. Please see the United States response to Panel question No. 191. The United States also notes
that the act of importation should not be confused with subsequent customs procedures and clearance
processes. Indeed, the finalization of the collec tion of duties may not occur until some time after
importation. See e.g. the United States response to Panel question No. 32.
245. ( All parties) The United States mentioned at the second substantive meeting that the HS
Committee Decision referred to by China canno t be used as context for the meaning of
Article II of the GATT because it postdates that agreement, i.e, a decision from 1995 cannot be
used as context for an agreement concluded in 1994. Could the other parties please comment on
whether they share this view and why.

Response of China

543. The US position is incorrect, for four reasons. First, as China noted in response to
question 186, the meaning of GIR 2(a) is principally relevant to the interpretation of China's Schedule
of Concessions, which took effect on 11 December 2001 – six years after the HS Committee
Decision. Even if the relative timing of these two events had some bearing upon the significance of
the HS Committee Decision, the HS Committee Deci sion clearly preceded the conclusion of China's
Schedule of Concessions.
544. Second, as China explained in response to qu estion 112 from the Panel, the Appellate Body
specifically referred in EC – Chicken Cuts to the relevance of any interp retations of the GIRs adopted
by the WCO and the HS Committee. Nothing in th e Appellate Body's statem ent suggests that this
would be limited to interpretati ons of the GIRs that existed prior to the conclusion of the GATT in
1994.
545. Third, as China has previously pointed out, the 1995 HS Committee Decision merely
reaffirmed an interpretation of GIR 2(a) that has existed for at least 40 years. When the GATT was
concluded in 1994, this interpretation of GIR 2(a) had long been established. Because the
interpretation that the HS Committee reaffirmed in 1995 existed in 1994, it provides relevant context
for the interpretation of Article II and China's Sc hedule of Concessions in the same respect as other
elements of the Harmonized System.
546. Finally, even if the 1995 decision of the HS Committee did not provi de relevant context
within the scope of Article 31(2) of the Vienna Convention, it would nonetheless constitute a "relevant
rule of international law applicable in the rela tions between the parties" within the meaning of
Article 31(3)(c) of the Vienna Convention , regardless of when the HS Committee Decision was
adopted. It could also constitute a "subseque nt agreement among the parties regarding the
interpretation of the treaty or the application of its provisions" within the meaning of Article 31(3)(a)
of the Vienna Convention.
547. For these reasons, the 1995 HS Committee Decision is clearly relevant to the interpretation of
China's commitments under Article II and its Schedule of Concessions.
Response of the European Communities (WT/DS339)

548. As pointed out in the European Communities' re ply to question 114, the Appellate Body has
considered in paragraph 199 of EC – Chicken Cuts that "the above circumstances confirm that, prior
to, during, as well as after the Uruguay Round nego tiations, there was broad consensus among the
GATT Contracting Parties to use the Harmonized System as the basis for their WTO Schedules,
notably with respect to agricultural products. In our view, this consensus constitutes an "agreement"
between WTO Members "relating to" the WTO Agreement that was "made in connection with the
conclusion of" that Agreement, within the meaning of Article 31(2)(a) of the Vienna Convention. As
such, this agreement is "context" under Article 31(2)(a) for the purpose of interpreting the WTO
agreements, of which the EC Schedule is an integr al part. In this light, we consider that the
Harmonized System is relevant for purposes of interpreting tariff commitments in the WTO Members'
Schedules."
549. In general, the decision of the HS committee referr ed to in by China can at most be relevant
as context for the determination of whether the assembly operations involved in the assembly of a
CKD or SKD kit are "further working operations" w ithin the meaning of Explanatory Note VII to

GIR 2 (a). This is the only legally relevant decisi on taken by HS committee in the context of the 1995
decision.
Response of the United States (WT/DS340)

550. As the question notes, during the second substa ntive meeting the United States made the
above point regarding the time of the 1995 HS Committee Decision as compared to the earlier
completion of the Uruguay Round.
551. The United States would also note that this issue of timing is not the only reason that the
United States believes that the HS Convention (and a fortiori any decisions under the HS Convention)
are not context for the purpose of interpreting the WTO Agreement. The United States has also made
the more general point that the HS Convention is not context for interpreting the HS Convention
because it does not meet the requirements for "cont ext" under customary rules of interpretation of
public international law, as reflected in Article 31(2) of the Vienna Convention on the Law of
Treaties.
118
552. The United States also submits that there is a substantial distinction between using the HS
Convention as a tool for interpreting the WTO Agreement (including the GATT 1994) as a whole
versus using the HS Convention as a tool for inte rpreting a Member's schedule that was explicitly
based on the HS nomenclature. In the latter case, the United States is of the view that the HS
Convention may be used as a supplementary means of interpretation of that Member's schedule under
the principles reflected in Article 32 of the Vienna Convention.
Response of Canada (WT/DS342)

553. Canada agrees that the Harmonized System, as it was used for negotiating China's Schedule,
may be relevant as context for interpreting GATT Ar ticle II. For the reasons set out in detail in
paragraph 59 of Canada's second written submissi on, the HS Committee discussion referred to by
China is not relevant for interpreting that Schedule. China has also presented no practice either before
or after accession similar to the measures. Last, Ch ina has offered no evidence that a peripheral issue,
taken out of context by China, and contained in a non-binding WCO decision was at all relevant to
negotiating China's Schedule.
Comments by the United States on China's response to question 245
554. As stated in its response to this question, th e United States is of the view the HS Convention
may be used as a supplementary means of interpretation of that Member's schedule (if based on HS
nomenclature) under the principles of interpretation reflected in Article 32 of the Vienna Convention.

118 In particular: (1) the HS Convention is not an "agreement relating to the treaty which was made
between all the parties in connexion with the conclusion of the treaty," because not all Contracting Parties
during the Uruguay Round were parties to the HS Convention and because the HS Convention is not an
agreement "relating to the conclu sion" of the WTO Agreement"; and (2) the HS Convention is not an
"instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted
by the other parties as an instrument related to th e treaty" because the HS C onvention was not made in
connection with the conclusion of the WTO Agreement, nor was it "accepted by other parties as an instrument
related" to the WTO Agreement. The United States re fers the Panel to its Second Submission, wherein the
United States noted the limited finding in Chicken Cuts regarding the HS Convention as context for agricultural
products, and the fact that in the Gambling dispute, the Appellate Body disagreed with and overturned a panel
finding that the UN nomenclature was to be used as context for interpreting Members' GATS schedules.

555. Contrary to China's assertions, the 1995 decision of the HS Committee is not legally binding
and therefore does not establish a "rule of interna tional law" or constitute an "agreement" between
parties to the HS Convention.
246. ( All parties) China argues that because its charg es relate to a valid customs duty, they
fall within the purview of Article II. Could Chin a please explain the legal basis from the text of
Article II or other sources, for its understanding that Article II applies to anything that
"relates" to a valid customs duty? Could the co mplainants please indicate whether they agree
with China's interpretation of Article II and pr ovide the legal basis for their agreement or
disagreement.
Response of China

556. China's responses to question 179 and 203 discuss the legal basis for this conclusion. As
explained therein, and in China's other submis sions to the Panel, the textual issue within
Article II:1(b), first sentence, is the meaning of the term "on their importation." There are two
principal sources of interpretation which support th e conclusion that charges are imposed on goods
"on their importation" into a Member's customs territory if the charges fulfil a valid customs duty, i.e.,
a customs duty that the Member is allowed to collect in accordance with its Schedule of Concessions.
557. First, as discussed in response to question 17 9, the term "on their importation" must be
interpreted in the light of the consistent a nd widespread practice among Members of imposing
customs-related measures, and collecting customs duties, after goods have crossed the frontier. In the
absence of a temporal or geographic limitation on th e scope of the term "on their importation," there
must be some other principle by which the scope of this term is defined. As China documented in
paragraph 103 of its second written s ubmission, the interpretations offered by the parties to this
dispute (including the third parties) all point to the reason or event that triggered the imposition of the
charge as the determinative consideration in eval uating whether the charge is within the scope of
Article II:1(b).
119 This understanding is consistent w ith the practice among WTO Members of
collecting ordinary customs duties after goods have physically crossed the frontier, provided that the
charges relate to a liability that arose by reason of the entry of those goods into its customs territory.
558. The second basis of interpretation is the ordinary meaning of the term "on" in the context of
Article II:1(b), first sentence. As discussed in response to question 203, the Panel in India – Autos
found that "[a]n ordinary meaning of the term ' on', relevant to a description of the relationship which
should exist between the measure and the importation of the product, includes 'with respect to', 'in
connection, association or activity with or with regard to.'." 120 This meaning of the term "on" has
been adopted by the panels in EC – Export Subsidies on Sugar and Dominican Republic – Import and
Sale of Cigarettes.121 As the latter panel noted, "the ordinary meaning of the word 'on' suggests that it
is a preposition denoting a relation. In that sense, the expression 'on the importation' would be akin to
'with respect to the importation'." 122 This ordinary meaning of the word "on" supports the conclusion
that a charge is imposed "on their importation" if the charge relates to, or is in respect of, the
importation of the good into the customs territory of the Member imposing the charge.

120 India – Autos at para. 7.257.
121 EC – Export Subsidies on Sugar (Panel Report) at para. 7.274; Dominican Republic – Import and
Sale of Cigarettes (Panel Report) at para. 7.258.
122 Dominican Republic – Import and Sale of Cigarettes at para. 7.258 (citing The New Shorter Oxford
English Dictionary at 1,995-1,996).

Response of the European Communities (WT/DS339)

559. The European Communities does not agree with China. Under Article II:1 (b), first sentence
of the GATT 1994, ordinary customs duties can only be imposed on the importation of the product.
Other duties or charges may be imposed in connec tion with importation under Article II:1 (b), second
sentence. However, according to paragraph 1 of the Understanding on the Interpretation of
Article II:1(b) of the GATT 1994, "[i]n order to ensure transparency of the legal rights and obligations
deriving from paragraph 1(b) of Article II, the nature and level or 'other duties or charges' levied on
bound items, as referred to in that provision, shal l be recorded in the Schedules of concessions
annexed to GATT 1994 against the tariff item to wh ich they apply". Furthermore, the broad purpose
of Article III of the GATT 1994 of avoiding protectioni sm must be remembered when considering the
relationship between Article III and other provisi ons of the WTO Agreement including Article II
(Appellate Body Report in Japan – Alcoholic Beverages II, p.16).
560. The interpretation by China referred to in th e question is one of many different vague
formulations that China uses in its attempt to wide n the scope of Article II to the detriment of the
scope of Article III. There is nothing in law that supports China's position that Article II applies to
anything that "relates" to a valid customs duty.
Response of Canada (WT/DS342)

561. Canada has set out in Section II.B of its second written submission its understanding of
Article II as it applies to this dispute.
Comments by the European Communities on China's response to question 246
562. Further to its reply to question 246, the Eu ropean Communities emphasises that China is
erroneously using the panel report in India – Autos where the panel interpreted the words "on
importation" in Article XI of the GATT 1994 and not under Article II:1(b). As pointed out by the
European Communities in its reply to question 203 of the Panel, the notion of "on importation" under
the latter provision is narrower because Article II: 1(b) distinguishes between the notions of "on
importation" and "in connection with importation".
Comments by the United States on China's response to question 246
563. China's response conflates the distinct concepts of "imposing" and "collecting" a charge, as
discussed in the comments the United States on China's responses to Panel question No. 179.
564. As discussed in its responses to Panel questi on Nos. 84 and 203, the United States disagrees
with China's interpretation of "on their importation."
Comments by China on Complainants' responses to question 246
565. The EC states that "[t]here is nothing in la w that supports China's position that Article II
applies to anything that 'rel ates' to a valid customs duty."
123 This is incorrect. Among the other
interpretive bases that China has di scussed in respect of the interpretation of Article II:1(b), first
sentence, China notes that three prior panels have re ferred to the ordinary meaning of the word "on"

123 EC answers after second meeting at para. 79.

as including "'with respect to', 'in connection, asso ciation or activity with or with regard to'."
124 This
interpretation directly supports China's interpre tation of the term "on their importation" in
Article II:1(b), first sentence, as encompassing charg es that a Member collects "in relation to," or
"with respect to," the importation of a product, with out regard to the exact point in time or space at
which the charge is collected.
247. ( Complainants) Please explain how the complainants classify and treat imported auto
parts and automobiles under their respective schedules.
Response of the European Communities (WT/DS339)

566. Classification of goods in the EC nomenclature is guided by the principles set up by the
General Interpretative Rules.
567. GIR 1 states that the classification shall be dete rmined according to the terms of the headings
and any relative section and chapter notes. In a case of incomplete or unfinished articles, or articles
presented unassembled or disassembled (if they are complete or finished articles or are falling to be
classified as complete or finished articles by virtue of GIR 2 (a)), provided that they, as presented

have the essential character of the complete or finished article.
568. The headings and the corresponding duty rates th at merit consideration for the classification
of the vehicles and parts of the vehicles are the following:
Complete vehicles
Heading 87.01 Tractors (various duty rates - duty rate: 3% for pedestrian-controlled tractors,
duty rate: 16 % for road tractors for semi-trailers , duty rate: "free" for track-laying tractors,
duty rate: "free" for other agricultural tractors, duty rate: 7% for other tractors)
Heading 87.02 Motor vehicles for the transport of ten or more persons, including the driver
(duty rate 10% or 16% depending on a type of engine and cylinder capacity)
Heading 87.03 Motor vehicles for the transport of persons (other than those of heading 8702)
(generally - duty rate 10%, with the exemption of certain types of vehicles specially designed
for travelling on snow, golf cars and similar vehicles with duty rate: 5%)
Heading 87.04 Motor vehicles for the transport of goods (generally duty rates 10% or 16%
depending on a gross vehicle weight, type of e ngine and cylinder capacity, then duty rate free
for dumpers designed for off-highway use, duty rate: 3,5% for vehicles specially designed for
the transport of highly radioactive materials)
Heading 87.05 Special purpose motor vehicles (duty rate: 3,7%)
Intermediate products
 (a combination of vehicle elements and/or parts fitted and/or equipped
together without being complete vehicles)

124 India – Autos at para. 7.257. This interpretation was adopted by the panels in EC – Export Subsidies
on Sugar at para. 7.274 and Dominican Republic – Import and Sale of Cigarettes at para. 7.258.

Heading 87.06 Chassis fitted with engines fo r motor vehicles of headings 8701 to 8705
(various duty rates, namely 4,5 %, 6%, 10% an d 19% - depending on what type of vehicle it
is intended for)
Heading 87.07 Bodies (including cabs) for motor vehicles for motor vehicles of headings
8701 to 8705 (duty rate: 4,5%)
Parts and accessories
 of Chapter 87 (heading 87.08) (var ious duty rates, namely 3%, 3,5%,
4,5% for various parts)
Parts and accessories of motor vehicles classified elsewhere than Chapter 87 (tyres, engines,
accumulators). (various duty rates, e.g. heading 4011 New pneumatic tyres, of rubber – duty
rate: 4,5%, Engines for motor vehicles – headings 8407 and 8408, duty rate: 2,7 % or 4,2%
depending on type and cylinder capacity)
569. The HS Explanatory Notes provide guidance for the classification in order to ensure uniform
classification. Classification is done on the basis of the objective characteristics of the product at
issue as presented at the border. In essence, the EC classifies the relevant products in the way it argues
that China ought to classify the same products since both China and the EC use the HS nomenclature.
Response of the United States (WT/DS340)

570. The United States classifies auto parts and au tomobiles in their condition as imported under
the terms of the Harmonized System. Most auto pa rts and auto accessories are classified outside of
chapter 87 by applying General Interpretative Rule 1 and the relevant Section and Chapter Notes that
direct auto parts and auto accessories to headings out side of chapter 87. (For example, see Note 2 to
Section XVII which directs parts and accessories to other chapters or sections within the Harmonized
System.) Automobiles are classified in chapter 87, specifically under heading 87.03.
Response of Canada (WT/DS342)

571. Assembled vehicles are classified as 87.02-87.0 5, with specific classification within those
headings based on the application of GIR 1, taki ng into account all relevant Section, Chapter and
Explanatory Notes. The MFN tariff rate for all of those headings is 6.1%, except dumpers designed
for off-highway use (8704.10), whose MFN rate is 0%.
572. Auto parts that are imported as assembled intermediate categories ( e.g., body, chassis with
engine, engines) are classified as 84.07, 87.06 or 87. 07 based on the application of GIR 1, taking into
account all relevant Section, Chapter and Explanator y Notes. The MFN tariff rate for chassis with
engines is generally 6.1%, for bodies generally 6%, and for engines generally between 0% and 6%.
573. Auto parts are classified in their appropria te heading (generally 87.08) based on the
application of GIR 1, taking into account all releva nt Section Notes (in particular Notes 2 and 3 to
Section XVII), Chapter Notes and Explanatory Notes (in particular the "parts" Explanatory Notes to
Section XVII). With few exceptions (for example, seat covers 8708.29.60, which have an MFN duty
rate of 8.5%), the MFN duty rate is either 6% or 0%.
574. If a collection of parts with the essential char acter of an intermedia te category (such as a
body, as in the case discussed in the response to Question 241(b), or a chassis with engine) is
imported together, the parts would be classified as that intermediate category, in accordance with
GIR 2(a).

248. ( Complainants) Please provide an estimated value of each combination of auto parts as
shown in Exhibits EC – 1, 2, 5, 6, 7, 8, 9, 10, 11.
Response of the European Communities (WT/DS339)

575. On average, the percentage of the different whole assemblies in value of a complete vehicle is
as follows:
- Body assembly 10%
- Engine assembly 17%
- Transmission assembly 8%
- Drive & non-drive axle assemblies 5%
- Chassis assembly 1%
- Steering system 4%
- Brake system 3%
- Other components 52%
576. These percentages in value of the complete ve hicle are generally in line with the data
provided by China at paragraph 19 of its first written submission.
577. Using the above percentages and those subm itted by China under examples in which whole
assemblies would be imported (Exhibits EC-5 to EC-7), the imported parts would represent:
- 27% (using the above percentages) or 29,57% (using the percentages submitted by China) of
the value of a complete vehicle for example 3 (Exhibit EC-5);
- 30% (using the above percentages) or 30,67% (using the percentages submitted by China) of
the value of a complete vehicle for example 4 (Exhibit EC-6);
- 20% (using the above percentages) or 20,94% (using the percentages submitted by China) of
the value of a complete vehicle for example 5 (Exhibit EC-7);
578. In Exhibits EC-1, EC 2 and EC-8 to EC-11, the European Communities presented examples
in which key parts of assemblies (and not the whole assemblies) would be imported above the specific
thresholds defined in Annex I of Decree 125, thereby deeming the assembly as imported in
accordance with Article 22(2) of Decree 125 and Ar ticles 14(2) and 19 of Announcement 4. In the
absence of average value for key parts, the Euro pean Communities has based its calculations on the
average value of the relevant whole assembly. As each "imported" assembly would actually contain
domestic parts, the combination of imported key parts would represent necessarily less than:
- 27% (using the above percentages) or 29,57% (using the percentages submitted by China) of
the value of the vehicle for examples 1 and 2 (Exhibits EC-1 and EC-2);
- 29% (using the above percentages) or 22,08% (using the percentages submitted by China) of
the value of the vehicle for example 6 (Exhibit EC-8);
- 20% (using the above percentages) or 20,94% (using the percentages submitted by China) of
the value of the vehicle for examples 7 and 9 (Exhibits EC-9 and EC-11);
- 34% (using the above percentages) or 29,68% (using the percentages submitted by China) of
the value of the vehicle for example 8 (Exhibit EC-10).
579. The European Communities also refers to paragr aphs 66 and 67 of its first oral statement in
which it demonstrated that a combination of parts amounting to 17% of the value of a vehicle would
be sufficient to classify all imported parts in that vehicle as a complete vehicle.

580. It should also be kept in mind that under Article 22(3) of Decree 125, it is sufficient that 60%
of the value of the assembly has been imported in order to deem the assembly imported. And,
imported parts as common as bolts, nuts, screws etc. will be included in the calculation of that 60%
threshold and classification of imported parts as a complete vehicle
125. A combination of imported
parts representing an even lower percentage than above under paragraph 86 in the value of the vehicle
would therefore trigger the classification of importe d parts as complete vehicles and the imposition of
the 25% charge:
- 16,2% (using the above percentages) or 17,74% (using the percentages submitted by China)
of the value of the vehicle for imports of 60% of the value of the engine and the body (Article
22(2)(a) in combination with Article 22(3) of Decree 125);
- 9% (using the above percentages) or 11,05% (using the percentages submitted by China) of
the value of the vehicle for imports of 60% of the value of the body and 3 other assemblies
(Article 22(2)(b) in combination with Article 22(3) of Decree 125);
- 7,8% (using the above percentages) or 10,76% (using the percentages submitted by China)
of the value of the vehicle for imports of 60% of the value of 5 assemblies other than the
engine or the body (Article 22(2)(c) in combination with Article 22(3) of Decree 125).
Details of the above calculations are provided as Exhibits EC – 35 and 36.
Response of the United States (WT/DS340)

581. Calculating the estimated value of the groups of parts shown in the EC's exhibits is dependent
on a number of assumptions including the model and price of the vehicle and the level of trade (i.e.,
wholesale, retail, supplier pricing, etc. ) at which one captures the pricing of the individual parts.
Valuations and ratios will fluctuate from model to model and methodology to methodology. In
preparing its response to this question, the United States selected two vehicle models in different price
brackets for which information is publicly availa ble – a Cadillac Escalade (US retail base price of
$55,000) and a Buick LeSabre (US retail base price of $26,000) – both of which are sold in the
Chinese market.
126 The price of the various combinations of parts compared to the price of the
complete vehicle is provided in Exhibit US- 13. Prices for each part were obtained from
www.GMPartsDirect.com. These estimates are not inte nded to provide the actual cost of these parts
in the assembly process, but rather should provide a general estimate of the value of the parts to the
overall value of the complete vehicle.
Response of Canada (WT/DS342)

582. Canada is not able to provide estimated values for each of the exhibits listed, as it has been
unable to find average pricing for the key parts lis ted in those exhibits. However, with a view to
assisting the Panel, Canada attaches Exhibit C DA-42 (the "Merrill Lynch Report"), which on page 1
reveals information regarding the average pricing for th e parts used in various areas of a vehicle,
including the number of areas that can be Deemed Imported Assemblies under the measures.127

125 Remark 3 in annex 2 of Decree 125: "Connecting parts (such as tube lines, bolts, nuts, screws,
clamps and adhesives), sealing parts and fixing parts that make possible the integrity of an Assembly (excluding
body and chassis assemblies) or key parts are included as part of the assembly."
126 For transparency, the vehicles and model years selected were based on the availability of
independently-obtained information. Where possible, pricing for individual parts has been presented separately.
The Buick LeSabre model is now called the Buick LaCrosse.
127 Merrill Lynch, Global Auto Supplier Review: Who Makes the Car, May 29, 2007 (Exhibit CDA-42).

583. It is possible to use those data directly to calcu late the value of exhibits where all the parts for
the Assembly in question are present ( i.e., where the Assemblies are Deemed Imported under
Article 22(1) of Decree 125, in particular Exhibits EC-5, 6 and 7). For the other exhibits, where the
Assemblies are Deemed Imported under Article 22(2) of Decree 125 on the basis of the number of
key parts, Canada is not able to provide precise information in the absence of pricing for those key
parts. However, Article 22(3) (the 60% value thres hold) provides a useful substitute. While the values
under Article 22(2) may not always be in the same range as the figures cited, Canada suggests that in
a number of cases (for example, Exhibit EC-2), the value using Article 22(2) would be less than under
22(3) because of the very few key parts necessar y for a finding that the Assembly is Deemed
Imported (which could not account for 60% of the valu e of the Assembly). This is also logical, since
Article 22(2) would be unnecessary if it only applied where the Assembly was already Deemed
Imported under Article 22(3). Applying those data in the chart below, and comparing them to the
value of $13,600 for the value of all parts used in a ve hicle, reveals that the percentage value of parts
in a vehicle required to make the parts Deemed Whole Vehicles under Article 22(3) in the EC
examples ranges from 12.6% to 21%, and under Article 22(1) from 21% to 34.7%.

Body &
Structural
Engine
Assembly
Transmission
Assembly
Axles,
Driveshafts,
etc. (i.e., Drive
and Non-Drive
Assemblies)
Braking
System
Steering
System
THRESHOLD
VALUE *
PERCENT OF
TOTAL
VALUE OF
VEHICLE
Value of Assembly $2375 $2350 $1225 $810 $435 $375
Threshold for
Article 22(3) (60%
of above)
$1425 $1410 $735 $486 $261 $225

EC -1 $2835 20.4%
EC-2 $2835 20.4%
EC-5 $4725 34.7%
EC-6 $4385 32.2%
EC-7 $2845 21.0%
EC-8 $2382 17.5%
EC-9 $1707 12.6%
EC-10 $2856 21%
EC-11 $1707 12.6%

 * For Exhibits EC 5, 6 and 7, which describe complete Assemblies, a value of 100% is used,
and the box is shaded. For all others, a value of 60% is used, and the box remains unshaded.
249. ( All parties ) What importation documents are generally required by customs
authorities? Is there a limit to the extent to which customs authorities can request information
from importers?

Response of China

584. According to the Customs Import and Export Declaration Administration Rules , when the
importer declares the imports to the Customs, it shall provide the import declaration form and the
documents required by the import declaration form, including the contract, invoice, packing list, bill
of lading, and the legal authorization for the impor ter's customs agent. Aside from these documents,
if the imported product is subject to a license re quirement, the importer shall provide the import
license.
585. China is not aware of any limit prescribed by international agreement concerning the extent to
which customs authorities can request information from importers.
Response of the European Communities (WT/DS339)

586. In the European Communities the importers need to file a SAD (single administrative
document) that is a document composed of vari ous pages with various boxes to be filled in
concerning information related to the product at i ssue (description, data concerning the importer,
origin, proposed tariff classification, customs value etc.). The importer will of course have to provide
commercial documents such as invoices and bills of tr ansport (manifest) mostly in order to check the
origin and value of the product for customs purposes. Sometimes the product could also be
accompanied by Binding Origin or Tariff Informati on as well as by a certificate of origin. All the
above is to be done when presenting the product at the border.
Response of the United States (WT/DS340)

587. The documents required by Customs authorities vary to some extent in each country. As a
general matter, the United States notes the gene ral requirement for the submission of a "Goods
declaration," which is defined in Chapter 2 of th e General Annex to the Revised Kyoto Convention as
"a statement made in the manner prescribed by th e Customs, by which the persons concerned indicate
the Customs procedure to be applied to the goods and furnish the particulars which the Customs
require[s] for its application."
588. Customs authorities can request information from importers to the extent that it is necessary
for demonstrating compliance with the Customs laws . Such information may include a number of
documents defined in the WCO Glossary of Inte rnational Customs Terms, including the following:
bond, certificate of origin, certified declaration of or igin, customs declaration, declaration of origin,
and the goods declaration. The United States also notes that some other documents that are
commonly provided by importers include the bill of lading, commercial invoice, packing lists, etc.
589. The information that customs authorities can requi re from importers is also limited by other
provisions of the WTO Agreement, including Articles VIII and X of the GATT 1994.
Response of Canada (WT/DS342)

590. At the time of importation the following three documents are required:
• Form B3, Canada Customs Coding Form;
128
• Form CI1 Canada Customs Invoice;129 and

128 Canada Border Services Agency, Canada Customs Coding Form B3-3 (Exhibit CDA-43).

• Commercial invoice.
591. Canadian customs officials can request any ot her additional information from importers that
is required in order to properly classify and value products (with the consequent assessment of duty, if
any).
130 However, such additional requests would gene rally only take place in compliance verification
following importation, and would relate only to in formation required to answer specific questions
(e.g., customs officials might request a diagram of a part to substantiate that it is properly classified as
a bumper).
Comments by the European Communities on China's response to question 249
592. Further to its reply to question 249, the European Communities considers that such
documentation must be proportionate and re quired for the purposes of genuine customs
administration.
250. Canada stated during the second substantive meeting that China does not have the right
to withhold a decision on the classification and assessment of imported goods, but it has the
right to classify parts that have the essential character of a finished vehicle:
(a) ( Canada) Please clarify whether it is your view that the assessment of an imported
product for tariff classification can take place only at the border.
Response of Canada (WT/DS342)

593. Canada confirms that its position is that tari ff classification must be made based upon the
state of the product as it arrives at the border. As Canada has explained, for example in response to
Questions 32 and 87, procedures may be necessary after that point in order to determine proper
classification, such as testing or administrative review procedures, and payment may take place after
that point. A Member is not permitted to look to a collection of imports as they are assembled in
manufacturing in order to assess duty rates.
(b) (European Communities, United State and China) Please comment on Canada's view.
Response of China

594. China believes that the Panel is referring to the following statement in paragraph 18 of
Canada's oral statement: "Let us be very clear: there are parts, and there are parts that have the
essential character of a finished vehicle. China is entitled to classify the latter, as they are presented 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."
595. As China stated at the second substantive meeti ng, China considers that this statement by
Canada is effectively a concession of its claims under Paragraph 93 of the Working Party Report.
Canada has clearly stated that China is entitled to apply GIR 2(a) to classi fy as a motor vehicle any
collection of parts and components that has the esse ntial character of a motor vehicle, provided that
they are "presented" to the Chin ese customs authorities within Canada's understanding of that term
(whatever that might be). Whatever else this might include, it would certainly include a CKD/SKD

129 Canada Border Services Agency, Canada Customs Invoice Form CI1 (Exhibit CDA-44).
130 The statutory authority for customs officials to obtain this information is found in Section 13 of the
Customs Act for actions at the border, and Section 42(2) for post-importation compliance verifications.

kit that arrives as a single entry. Thus, Canada has conceded that China is entitled to classify
CKD/SKD kits as motor vehicles in accordance with the essential character test under GIR 2(a). The
necessary consequence of this concession by Canada is that China is allowed to apply the 25 per cent
duty for motor vehicles to CKD/SKD kits.
596. More generally, China does not "withhold a decision on essential character until it sees fit."
Under Decree 125, the determination of whethe r a vehicle model is comprised of parts and
components that have the essential character of a motor vehicle is made prior to the entry of parts and
components for that vehicle model. It is this dete rmination that gives rise to the importer's obligation
to declare these parts and components accurately when they enter the customs territory of China.
Canada's assertion merely restates the central question of whether this method of customs
classification is based on a proper understanding of the term "as presented."
Response of the European Communities (WT/DS339)

597. The European Communities agrees with Canada that the assessment of an imported product
for tariff classification can take place only at th e border. As referred to in many occasions, the
Appellate Body has considered that "in characterizing a product for purposes of tariff classification, it
is necessary to look exclusively at the 'objective characteristics' of the product in question when
presented for classification at the border" ( EC – Chicken Cuts , paragraph 246). In certain exceptional
instances, Members may classify as a complete vehicl e a combination of parts when presented at the
border at the same time and having the essential character of a complete vehicle. In this respect
reference is made to the replies of the European Communities inter alia to questions 211 and 231.
Response of the United States (WT/DS340)

598. The United States agrees with Canada's views. The United States notes, however, that "parts"
are very unlikely to have the essential character of a finished vehicle. Rather, and the United States
believes that this was what Canada stated, the point is that a collection
of parts (commonly referred to
as a CKD) presented at the border could have the essential character of an unassembled or
disassembled vehicle, if that collection of parts met all the requirements of GIR 2(a).
Comments by the United States on China's response to question 250(b)
599. The United States notes that China's response to this question does not contradict its statement
at the Second Substantive Meeting confirming the accuracy of the United States' description (in
paragraphs 3-5 and 65 of the attachment to th e US Rebuttal Submission) of China's pre-WTO
accession tariff practices. China's response merely identifies one instance in which an auto
manufacturer paid the motor vehicle rate when importing a CKD kit rather than a lower rate
associated with imported parts. As the United States has explained previously (see paragraph 65 of
the attachment to the US Rebuttal Submission), Ch inese authorities would have insisted on applying
the higher motor vehicle tariff rate if they had view ed a particular auto manufacturer as insufficiently
committed to investment in China to justify th e lower rate, although normally the negotiations
between the Chinese authorities and an auto manufactu rer resulted in the application of a lower rate
associated with imported parts.
251. ( United States) As stated in paragraph 10 of its second oral statement, the United States
has maintained a view that "China's charges (w hether internal charges or customs duties) are
straightforward violations of Articles III:4 a nd III:5 of the GATT 1994, as well as the TRIMs
Agreement." In this context, is the United States referring to China's measures as a whole (i.e.

charges and administrative requirements) when it uses the term "China's charges" in its
statement above?
Response of the United States (WT/DS340)

600. Yes, in this context, the United States is refe rring to the measures as a whole. The specific
example given in the oral statement focused on the manner in which the domestic-content
conditionality of the charges (whether or not those charges are internal charges or ordinary customs
duties) affected the internal use, purchase, and sale of imported parts. However, the same logic
applies to the administrative burdens imposed by th e measures. That is, the administrative burdens
associated with applying the domestic-content test s in China's measures se rve as a disincentive for
manufacturers and parts producers to use, purchase, and sell imported auto parts.
If not, is it the United States' position that ev en if the Panel were to find the charges to be
"customs duties" applied in a manner consistent with Article II, such "customs duties" should
still be subject to the disciplines of Articles III:4 and III:5 of the GATT 1994 and the TRIMs
Agreement?
Response of the United States (WT/DS340)

601. As noted, the answer to the first part of this question is "yes," so it appears that the second
part of this question is not applicable. However, the United States again notes that the consistency of
a measure with a Member's tariff bindings is not determinative of whether or not the measure is
consistent with other WTO obligations.
252. ( United States) Could the United States please elaborate on its argument in paragraph 28
of its second oral statement that "[t]he only p ertinence of the HS Convention is to assist in
interpreting China's Schedule of tariff commitments." In the United States' view, what
elements of the HS Convention can be properly considered by the Panel to interpret China's
Schedule of tariff commitments for auto parts?
Response of the United States (WT/DS340)

602. As the question indicates, the United States considers that the HS Convention can be used as a
supplementary means of interpretation for Member's schedules that make use of the HS nomenclature.
The United States is not aware of any limitations on the specific elements of the HS Convention (such
as the Preamble, the nomenclature, general interpreta tive notes, and chapter notes) that might be used
for such purposes.
253. ( United States) Could the United States please provide any evidence that can support its
view that "[i]t is normal business practice fo r a manufacturer to start operations with the
assembly of kits, and then to move to full assem bly operations using separate shipments of parts
and assemblies." (paragraph 33 of the United States' second oral statement)
Response of the United States (WT/DS340)

603. The United States refers the Panel to histori cal analyses which have described a typical
progression of the foreign expansion of auto ma kers beginning with the importation of assembled
autos, then a movement to the importation of CKDs, before progressing to more full assembly

operations.
131 Most international joint ventures in Ch ina also began production with CKD assembly
operations.132
E. CKD AND SKD KITS
254. ( All Parties) Please provide the Panel with any documentary evidence to support your
positions with respect to the way China's cust oms authorities treated CKD/SKD kit imports
prior to its accession to the WTO as well as after its accession but prior to the implementation of
the measures.
 For example, the United States has ma intained its position that up to the
implementation of the measures, China did not apply the tariff rates for motor vehicles to CKD
and SKD kits, but rather applied the tariff rate s that were negotiated between an individual
auto manufacturer in China and the Chinese author ities, based on the amount of the auto
manufacturer's investment in China and the exte nt to which the auto manufacturer used local
content in the assembly of its vehicles. On the other hand, China has argued that it has always
treated CKD and SKD imports as complete vehicles.
Response of China

604. China has classified CKD/SKD kits as motor vehicles and assessed CKD/SKD kits at the
applicable duty rates for motor vehicles both prior an d subsequent to its accession to the WTO. This
is evidenced by the documentation of two specific CKD import entries:
605. In 2001, before China acceded to the WTO, Dongfeng Peugeot Citroe n imported a CKD kit
and declared it as a CKD kit. Afterwards, the impor ter paid the 70% import tariff, which at the time
was China's duty rate for the corresponding motor vehicle.133
606. In 2004, after China had joined the WTO, Sh anghai GM imported and declared a CKD kit.
Afterwards, the importer paid the 34.2% import tariff, which at the time was China's duty rate for the
corresponding motor vehicle.134
Response of the European Communities (WT/DS339)

607. The European Communities does not possess any further specific documentary evidence on
this issue beyond that submitted with its first written submission (see paragraph 25 thereof) and the
evidence submitted by Canada under paragraphs 67 and 68 of its second written submission.
Response of the United States (WT/DS340)

608. In the attachment to its Rebuttal Submission (a t paragraphs 3-5), the United States described
China's tariff practices in the years leadi ng up to its WTO accession, which took place on 11
December 2001. The United States further explained (at paragraph 5 of the attachment to its Rebuttal

131 Ford in the Netherlands, 1903-2003, Global Strategies and National Interests, Ford: The European
History 1903-2003, Ferry de Goey, pages 233-234 (Exhibit US-15).
132 The Past, Present and Future of China's Automo tive Industry: A Value Chain Perspective, Matthias
Holweg, Jianxi Luo, and Nick Oliver (The Cambridge-MIT Institute, August 2005), page 37. (Exhibit US-16).
133 CHI-47.
134 CHI-48.

Submission) that these tariff practices continued af ter China acceded to the WTO "until China began
to implement the measures at issue in this dispute."
609. At the Second Substantive Meeting, when asked if it disputed these factual assertions, China
confirmed that the United States' description of Ch ina's tariff practices is factually accurate for the
years leading up to China's accession to the WTO. China only disputed the United States' description
of China's post-WTO accession tariff practices. Ch ina contended that, since its accession to the
WTO, it has consistently applied the tariff rate fo r motor vehicles to CKD and SKD kits. For further
documentary evidence of China's tariff practices for the years leading up to China's accession to the
WTO, the United States would point the Panel to JE-25 (at page 189).
610. With regard to China's tariff practices duri ng the period from China's accession to the WTO
until the measures at issue went into effect, the United States has been unable to obtain additional
documentary evidence at this point. Nevertheless, fo r the purposes of this dispute, the more relevant
time period covers the years leading up to China's accession to the WTO, not the post-WTO accession
period. In particular, it is China's tariff practices in the pre-WTO accession period that are relevant to
the interpretation of China's commitment in para graph 93 of the Working Party Report accompanying
China's WTO accession protocol. As the United Stat es explained in the attachment to its Rebuttal
Submission (in paragraphs 8 and 9):
China's tariff practices relating to CKDs a nd SKDs (and parts) during the period from 1992
until China's accession to the WTO at the end of 2001 help to explain wh y paragraph 93 of the
Working Party Report accompanying China's Protoc ol of Accession reads the way it does. As
the panel will recall, paragraph 93 provides:
In response to questions about the tariff treatment for kits for motor vehicles, the
representative of China confirmed that China had no tariff lines for completely
knocked-down kits for motor vehicles or se mi-knocked down kits for motor vehicles.
If China created such tariff lines, the tariff rates would be no more than 10 per cent.
When negotiating this provision in the year s leading up to China's WTO accession, WTO
Members, including the United States, knew that China had separate tariff lines for CKDs and
SKDs that scheduled tariff rates that were the same as those for motor vehicles from 1992 to
1995, and that China eliminated these tariff lin es effective January 1, 1996. WTO Members
also knew that the Chinese authorities had neverthe less been applying substantially lower tariff
rates for CKDs and SKDs (and parts) than fo r motor vehicles, both when China had separate
tariff lines for CKDs and SKDs and when it did not. In negotiating paragraph 93, therefore,
WTO Members wanted to ensure that China would continue to treat CKDs and SKDs
essentially as parts for tariff purposes after acced ing to the WTO and that China would be
unable to re-establish separate tariff lines for CKDs and SKDs, at higher rates, if its policy
focus changed as its domestic auto industry evolved.
Response of Canada (WT/DS342)

611. Canada notes that during the second hearing China conceded that CKDs and SKDs that China
allowed specific importers to import prior to accession were not charged at the whole-vehicle rate, but
rather were charged lower duties. Canada has set out in paragraphs 67 and 68 of its second written
submission its evidence regarding China's treatmen t of CKDs and SKDs prior to accession, with
extensive references. In light of China's admissi on during the second hearing, it appears that China
now concedes that the process prior to accession was as described, for example, in Exhibit CDA-28 at
page 5, i.e, that CKDs and SKDs were treated as parts and, in accordance with China's pre-accession

policy, charged tariff rates based upon the domestic content of the vehicle in which the parts were
incorporated.
Comments by the European Communities on China's response to question 254
612. The European Communities refers to its reply to question 254 and to Canada's observations
on the replies of China after the second meeting of the Panel.
Comments by Canada on China's response to question 254
613. In response to this question, China has, for the first time, provided evidence of its
classification and duty assessment of CKDs. That ev idence is extremely helpful as it establishes that
China in fact created separate tariff lines for CKDs and SKDs following its accession to the WTO.
Paragraph 93 of the Working Party Report therefore requires China to apply a 10% duty rate for those
tariff lines.
614. China's own evidence from December 2004 (Exhibit CHI-48) shows that the shipment in
question was classified under a separate tariff lin e (8703.23.34.90) – "CKD for Buick 2800cc cars".
As Canada noted in paragraph 67 of its second wr itten submission, introducing tariff lines at the
"national level" (i.e., beyond the six-digit level) is precisely how WTO Members create separate tariff
lines for unassembled vehicles. China's classificati on is virtually the same as examples provided by
Canada, such as Indonesia (at Exhibit CDA-24). The only difference appears to be that Indonesia's
national tariff generally uses ".11" or ".21" as the last two digits, while China uses ".90".
615. To confirm that China's introduction of tariff lines for CKDs was not limited to 2800cc cars,
Canada has obtained a copy of China's Customs Ta riff for 2005, which shows that 10-digit tariff lines
ending in ".90" are generally for CKDs and SKDs (or "complete sets of assemblies", as they are
described in the tariff).
135
616. China agreed in response to Question 257 that it committed to provide a tariff rate of 10% for
any separate tariff lines for CKDs and SKDs. Ch ina notes in response to Question 258, "tariff
treatment – i.e., the applicable duty rate – is always linked to tariff classification". As Exhibit CHI-48
demonstrates, and Exhibit CDA-48 confirms, China h as established separate tariff lines, with specific
duty rates, for CKDs and SKDs. What China has not done, as China itself admits it is required to do,
is to apply a 10% rate of duty for those separate tariff lines.
617. China's other example, Exhibit CHI-47, from January 2001, illustrates the application of
duties to a particular CKD shipment prior to Ch ina's accession to the WTO. The complainants,
starting with their first written submissions, demonstr ated that the duty rate that China applied to
CKDs prior to its WTO accession varied depending both on the domestic content of the vehicles
manufactured using the CKD and negotiations by in dividual vehicle manufacturers. China conceded
in the second hearing that vehicle manufacturers that were allowed to import CKDs during that period
were charged a duty rate generally lower than th e whole vehicle rate. China has not rebutted the
evidence of the complainants on this point, either generally or specifically (e.g., by showing that
CKDs imported into China in 1999 from Canada, referred to in paragra ph 68 of Canada's second
written submission, were charged duty at the whole vehicl e rate). It is consistent with the evidence of
the complainants that the particular CKD shipme nt in 2001 documented in Exhibit CHI-47 was
charged a rate of duty at or near the whole vehicle rate.

135 Customs Import and Export Tariff of the People's Republic of China, 2005, Economic Science
Publishing House (Exhibit CDA-48).

Comments by China on Complainants' responses to question 254
618. The United States erroneously claims that, at the Second Substantive Meeting, "China
confirmed that the United States' description of Ch ina's tariff practices is factually accurate for the
years leading up to China's accession to the WTO."
136 China explained in response to a question from
the Panel that, prior to its accession to the WTO, China maintained policies that allowed a limited
number of auto manufacturers to obtain temporary reductions in the duty rates for motor vehicles that
would ordinarily apply to the importation of C KD/SKD kits. These reduced rates for a limited
number of auto manufacturers were not the rates for parts, and were not based on a classification of
CKD/SKD kits as parts. After the expiration of these reductions in the applicable duty rate, these
manufacturers would revert to paying the applicable motor vehicle rate for CKD/SKD imports, in
accordance with the ordinary classification of CKD/ SKD kits. China documented its ordinary pre-
accession classification and tariff treatment of CKD/SKD kits in response to question 254 from the
Panel.
619. The complainants have presented no evidence that China classified CKD/SKD kits as parts
prior to its accession to the WTO, or treated them as parts for tariff purposes. The fundamental
premise of their claim – that paragraph 93 committed China to apply the tariff rate for auto parts to
CKD/SKD kits – is therefore entirely without foundation.
137 The United States continues to refer to
JE-25 as "evidence" for this alleged pre-accession pr actice of treating CKD/SKD kits as "parts" (or
"essentially as parts"), even though China has demonstrated that JE-25 uses the term "CKD" and
"SKD" to refer generically to the use of imported parts to assemble motor vehicles – a point that
Canada has explicitly conceded.138 Canada now refers to CDA-28 at page 5, and yet it is evident that
this document, whatever its authority, is using the term "CKD" in the same generic sense – as
evidenced, once again, by the fact th at the tariff rates to which this document refers are the tariff rates
for parts under China's pre-WTO local content policies. 139 There is simply no evidence for the claim
that China ever classified CKD/SKD kits as "parts" and assessed these entries at the applicable duty
rates for parts.
620. For the reasons that China explained in paragraphs 138 to 155 of its second written
submission, the complainants' effort to establis h a pre-accession practice of classifying CKD/SKD
kits as parts and assessing these entries at the tariff rates for parts is fundamentally irrelevant – in no
event is it possible to interpret paragraph 93 as committing China to continue something that it was
already doing, and in no event is it possible to read the express conditionality of the commitment out
of paragraph 93. Irrelevant as it is, the complainants have not, in fact, presented any evidence of this
alleged practice.
255. ( All parties) For auto manufacturers, what are the benefits of importing CKD and/or
SKD kits, as opposed to importing individual auto parts?

136 US answers after second meeting at para. 122.
137 In fact, the United States does not even claim that paragraph 93 required China to treat CKD/SKD
kits as parts for tariff purposes; the most it can muster is its vague assertion that paragraph 93 represented a
commitment by China to treat CKD/SKD kits " essentially as parts for tariff purposes …" US answer after
second meeting at para. 123 (emphasis added).
138 See China second written submission at para. 146.
139 See CDA-28 at page 5. The tariff rates for "CKD parts" discussed in this document are the same as
those described in JE-25, i.e., the tariff rates for parts under China's pre-accession local content policies, not the
applicable tariff rates for CKD/SKD kits.

Response of China

621. China does not consider that it is possible to generalize about the reasons why an auto
manufacturer would import CKD/SKD kits, as compared to importing auto parts and components in
multiple shipments. There are many factors that an auto manufacturer might take into account in
deciding between these two methods of importati on, including quality control considerations,
inventory management, the balance between shipping and assembly costs at different locations, and
the intended volume of production.
Response of the European Communities (WT/DS339)

622. The advantages are limited to very specific circ umstances. It costs much more to ship CKD
and SKD kits than to ship parts in bulks or comp lete vehicles because shipping in kits requires special
costly boxes/containers and time and people to prep are the kits. This requires considerably more
handling of the goods (with associated costs) than shipping parts in bulk or shipping a complete
vehicle that can move by itself. The reason why CKD/ SKD kits are shipped is that sometimes there is
no manufacturing capacity in the country of destinati on. Essentially the necessary investment is yet to
be made for building up cars from bulk shipments of parts.
623. To move to exports of parts in bulk, it is necessary to have in the place of destination the
assembly and manufacturing plants together with a sufficiently developed informatics system and
people able to manage thousands of parts to be used in different models. If that capacity does not
exist, the management of the parts is carried out in another country where that capacity exists before
shipping CKD/SKD kits to the country of destinatio n. However, this is always a temporary solution
pending the development of the needed capacity and a first step in the process of developing the local
automobile industry.
Response of the United States (WT/DS340)

624. Rather than importing CKD or SKD kits, wher e auto manufacturers have no operations or
only limited operations, they generally prefer to import completely-built-up vehicles (CBUs). As
explained in our response to Panel question No. 2 53, manufacturers may decide to enter a market
using imported CKD/SKD kits as part of a longer- term plan to establish production operations in a
country. In addition, when auto manufacturers en counter government-imposed policies restricting the
importation of CBUs (as was the case in China up through the mid-1990s) they may consider
importing CKDs or SKDs.
Response of Canada (WT/DS342)

625. CKDs and SKDs are principally used by auto manufacturers either to start up their production
or for vehicles that are sold in low volumes within a particular country. As noted by Liu (Exhibit
CDA-31) at page 5, it is faster for vehicle manufact urers (both domestic and foreign) to get vehicles
to market by at first importing in CKD or SK D form existing models. CKDs provide vehicle
manufacturers with the commercial opportunity to intr oduce new models into a market quickly, either
to test the market or to supplement existing produc ts to meet market demand. A vehicle manufacturer
does not need a full, dedicated assembly line to assemble CKDs into a complete vehicle. As a result, it
does not have to pay the expensive fixed cost of setting up a full assembly line without knowing if the
demand in the market would warrant such an investment.
626. It also allows vehicle manufacturers adequate tim e to develop local suppliers, if they need to
do so. If the vehicle is in production in one market, the manufacturer has supply chains to provide all

the parts and systems necessary for vehicle production, which helps to ensure quality control at the
outset of production. As the manufacturers devel op commercial relationships with local suppliers,
CKD exports tend to decrease, and eventually cease.
627. Finally, in some cases, vehicle manufacturers may obtain certain tax advantages in the form
of differential tariffs or domestic tax preferenc es linked to providing local employment opportunities.
These advantages will again diminish over time where the parts rate and overall cost structure of
domestic production justify, as in the case of China, changing from a business model where complete
vehicles or CKD/SKD kits are imported to one wher e production of both parts and complete vehicles
is largely domestic.
Comments by the European Communities on China's response to question 255
628. China's reply incorrectly paraphrases the Panel' s question. The issue is not about CKD and
SKD kits vs. multiple shipments of parts. Howe ver, China's reply demonstrates that it actually
recognises that CKD and SKD kits are clearly different from the importation of individual auto parts.
Even China now admits that there are genuine opera tional reasons to import individual auto parts.
This again demonstrates that China has invented its 'anti-circumvention theory'.
256. ( Canada) Could Canada please provide evid ence supporting its statement in its
response to Panel question No. 61(b) that "mos t Members who have separate tariff lines for
CKDs charge lower rate than for fully assembled vehicles." Please indicate the names of such
Members.
Response of Canada (WT/DS342)

629. Canada directs the Panel to tariff lines for count ries listed in footnote 80 to Canada's second
written submission, specifically Malaysia (Exhibit CDA-23), Indonesia (Exhibit CDA-24), Vietnam
(Exhibit CDA-26) and the East African Community (Kenya, Uganda, Tanzania) Common External
Tariff, Chapter 87 (Exhibit CDA-27). The other two c ountries referred to in that footnote (Australia
and the Philippines) have separate lines that would a ffect trade statistics, but the tariff rate treatment
for unassembled vehicles is largely the same as that for assembled vehicles.
257. ( China) In relation to China's commitment under paragraph 93 of China's Working
Party Report, the United States submits in response to Panel question No. 61(b) that
"conversely, it would not be reasonable to read the sentence as allowing China to provide any
tariff treatment it wished, so long as China crea tes no new tariff heading for CKDs and SKDs.
Such a reading would amount to no commitment at all..."
 Could China comment on this view. In ot her words, if China was treating CKDs and
SKDs as complete vehicles at the time of ne gotiations as China argues and the commitment
under paragraph 93 were conditioned upon creation of a new tariff line, would not the
commitment indeed be meaningless since all China has to do is continue to treat CKD and SKD
kit imports as complete vehicles?
Response of China

630. No. As China has explained, paragraph 93 for esaw the possibility that China might choose to
follow the path of several other developing countries in Asia by establishing lower tariff rates for
CKD/SKD kits, in derogation of GIR 2(a). If China were to follow that path by establishing separate

tariff lines for CKD/SKD kits, or if it were to est ablish separate tariff lines for CKD/SKD kits for any
other reason, China committed to establish a tariff rate of 10 per cent for these imports.
631. This is not a meaningless commitment – it binds China to adopt a specific tariff rate, if the
condition set forth in paragraph 93 is met. The fact that this c ondition is under China's control does
not make it a meaningless commitment. There are other instances in various WTO agreements in
which a condition precedent is under the control of the Member against whom the obligation would
be sought, if the condition were satisfied.
140 These are not meaningless commitments. Nor can these
provisions be interpreted to require the Member to cause the condition to be satisfied, as the United
States implicitly suggests.
632. Stated differently, it is not the case that the commitment in paragraph 93 is "meaningless
since all China has to do is continue to treat CKD and SKD kit imports as complete vehicles," as this
question proposes. There are reasons why Chin a might choose to classify CKD/SKD kits as
something other than complete vehicles, and to establish separate tariff lines for this purpose – for
example, to encourage the growth of domestic assembly operations as an alternative to the
importation of CBU vehicles. In that event, Ch ina would assess CKD/CKD kits at a duty rate of
10 per cent.
Comments by the European Communities on China's response to question 257
633. China's reply demonstrates that its interpretation of paragraph 93 of the Working Party Report
must be erroneous. It is hardly credible to asser t that the Members intended to leave it to China to
"control" the commitment. Such a reading deprives the commitment of any value.
Comments by the United States on China's response to question 257
634. China asserts that paragraph 93 of China's Work ing Party Report foresaw the possibility that
China might at some time after its WTO accession c hoose to follow the path of some other Asian
countries and establish lower tariff rates for CKDs, i.e ., lower than the motor vehicle rate. China, like
every other WTO Member, has the right to apply a tariff rate below its bound rate; it doesn't need an
accession commitment to allow it to do so. If that were the "commitment" that China made in
paragraph, it would truly be a meaningless one.
258. ( China) In response to Panel question No. 61(b), the United States submits that the use
of the term "tariff treatment" in paragraph 93 of the Working Party Report highlights that the
working party's concern was the rate of duty ap plied by China, and that the concern was not
the classification of CKDs or SKDs. Does the te rm "tariff treatment" in paragraph 93 of the
Working Party Report refer to the tariff duty applied by China, but not the classification of
CKDs or SKDs? If not, is it China's view that tariff treatment is always linked to tariff
classification? Please explain the legal basis for your answer.

140 See, e.g., Agreement on Government Procurement , Article XII:1 ("If, in tendering procedures, an
entity allows tenders to be submitted in several languages, one of those languages shall be one of the official
languages of the WTO."); General Agreement on Trade in Services, Article XVI, fn. 8 (requiring Member to
allow certain movements of capital, but only if it makes specified market access commitments); General
Agreement on Trade in Services, Annex on Financial Services, Article 1(c) (committing Member to make
certain financial services commitments if its allows th ese services to be provided in competition with public
entities).

Response of China

635. It is axiomatic that the classification of a good precedes the determination of the duty rate that
applies. Within a Schedule of Concessions, it is impossible to determine the correct rate of duty
without first determining the classification of the good. A Schedule of Concessions is a matrix of
articles, specified in rows, and corresponding duty ra tes, specified in columns. One cannot determine
the correct duty rate without first establishing the correct tariff line. In this fundamental respect, tariff
treatment – i.e., the applicable duty rate – is always linked to tariff classification.
636. Aside from overlooking this basic feature of how duties are assessed, th e US attempt to sever
the "tariff treatment" of CKD/SKD kits from the correct classification of CKD/SKD kits ignores the
plain language of the commitment set forth in pa ragraph 93. Paragraph 93 makes no reference
whatsoever to the "tariff treatme nt" of CKD/SKD kits in the abstract, without regard to their
classification. On the contrary, the commitment th at China made is conditioned on the creation of
tariff lines. For the reasons just explained, the determ ination of whether a particular tariff line is
applicable requires an act of classification. If the intention underlying paragraph 93 had been that
China would apply a 10 per cent rate of duty to CKD/SKD kits without regard to their correct
classification in relation to a particular tariff line, the commitment would not have been expressed in
terms of the creation of new tariff lines. Instead, th e paragraph would have stated, quite simply, that
China would unconditionally apply a duty rate of 10 per cent to CKD/SKD kits, in all events. That is
not what paragraph 93 says.
637. The US effort to sever the duty rate from the correct classification is just one more attempt by
the complainants to rewrite the commitment that the parties actually negotiated, and that is set forth in
paragraph 93. That commitment plainly and unamb iguously requires the creation of new tariff lines
as a condition precedent.
Comments by the European Communities on China's response to question 258
638. The classification of the good is assumed in pa ragraph 93 of the Worki ng Party Report. The
commitment is made in respect of the tariff treat ment. As the US has stated under its reply to
question 259 (c), Members were concerned that Ch ina would adopt a new tariff line which resulted in
a change from the parts rates of duty to higher, whole vehicle rates.
Comments by the United States on China's response to question 258
639. In applying its tariff schedule , a Member will make a classification decision. At the same
time, in its agreements with other Members , it need not commit to a particular classification. Rather,
the Member can commit to a particular rate of duty that would apply irrespective of how that Member
classifies a particular item. An example of this can be found in Attachment B of the Ministerial
Declaration on Trade in Info rmation Technology Products (ITA). See also the Certification of
Modifications to Schedule XX - United States (WT/Let/182).
259. China states in its response to Panel quest ion No. 137 that China does not consider that
a Member can create a new tariff line "de facto" and that the process of creating a new tariff
line involves amending the Member's tariff schedule to include the new tariff line.
(a) ( China) What is the exact process of creating a new tariff line? How can a Member
amend its tariff schedule to include a new tariff line?

Response of China

640. As China explained at the second substantive mee ting of the Panel, the Ministry of Finance
issues a revised tariff schedule each year (which, of course, reflects China's Schedule of Concessions).
If China were to introduce a new tariff line, it woul d include the new tariff line in the next tariff
schedule issued by the Ministry of Finance.
(b) (All parties) Assuming that a new tariff lin e can be de facto created, in such case, what
factors should be taken into account to determ ine whether such a tariff line was created? For
example, would it be relevant to examine how Ch ina, in fact, has been treating CKD and SKD
kit imports regardless of what its Schedule indicates?
Response of China

641. As China explained in response to question 137, China does not consider that a new tariff line
can be created "de facto." A tariff line is a specifi c thing – a line in a Member's tariff schedule, with
corresponding duty rates. It either exists or do es not exist. When Members negotiate commitments
that are conditioned on the creation of a new tariff line, they must understand that the tariff line must
come into existence in order for the commitment to arise. By contrast, if it is their common
understanding that the Member assuming the obligation will fulfil that obligation without regard to
the contents of the Member's tariff schedule, they will negotiate the commitment to reflect this
understanding.
Response of the European Communities (WT/DS339)

642. A situation where a member adopts a measure that provides for a tariff treatment of that good
without incorporating formally a new line concerning that good into its Schedule could be described
as the creation of a new de facto tariff line. This is precisely what China has done under Article 2(2)
and 21(1) of Decree 125. China applies the 25 % co mplete vehicle duty rate on such CKD and SKD
kits instead of its commitment to apply a 10 % rate.
Response of the United States (WT/DS340)

643. The United States understands the discussion of a "de facto" tariff line to relate to the
evaluation of the consistency of China's measures wi th the obligations set out in Paragraph 93 of the
Working Party Report. More specifically, this i ssue arises because China argues that it is free from
any obligation under Paragraph 93 to provide a 10 per cent tariff treatment on CKDs/SKDs because of
the introductory clause of the last sentence of paragraph 93. That sentence states "If China created
such tariff lines [for CKDs/SKDs], the tariff rates would be no more than 10 per cent." In other
words, the concept of "de facto" tariff line is helpfu l to evaluate China's argument that it is free of any
obligation with respect to the tariff rates on C KDs/SKDs because, according to China, it has not
created a tariff line for CKDs/SKDs.
644. It is relevant to understanding the meaning of Paragraph 93 to examine how China was
treating SKDs/CKDs at the time of accession. As the United States has explained, and as China
agreed at the second substantive mee ting, prior to accession China did not
 treat CKDs and SKDs the
same as complete vehicles. Instead, they entered not at high whole-vehicle rates, but at rates of duty
at or below the duty rates for parts, nego tiated on a case-by-case basis that depended on the
manufacturer's current use and planned future use of domestic content. In context, the phrase "if
China created such tariff lines" in Paragraph 93 means that if China stops using parts rates of duty for
CKDs/SKDs and instead begins entering CKDs/SKDs as single units under a specific tariff line, the

rate of duty must be no more than 10 per cent. Although the measures do not create a de jure new
tariff line, they achieve the same effect as a new ta riff line by deeming that all CKDs/SKDs must be
entered as whole vehicles at a whole vehicle rate of duty. In other words, contrary to China's
argument, China's measure achieve exactly what Members were concerned about (namely, a new,
higher tariff treatment for CKDs/SKDs instead of the prior ad hoc rates that were at or below parts
rates), and as such, when read in context, Para graph 93 requires China to impose a rate of duty on
CKDs/SKDs that is no greater than 10 per cent.
Response of Canada (WT/DS342)

645. Canada does not believe that there is a le gal concept of creating a new tariff line " de facto".
The issue is rather what paragraph 93 of the Working Party Report requires, and how China has
violated its commitment to maintain the pre-acce ssion and pre-measures preferential treatment for
CKDs and SKDs. See Canada's response to Ques tion 286 and Canada's sec ond written submission at
paragraph 63. As Canada has argue d (for example, in Section II. E of its second written submission,
and in its response to Question 61), paragraph 93 either requires China to classify CKDs or SKDs as
parts in their appropriate individual headings, or to classify them as whole vehicles at the six-digit
level, but to further classify them at a more detailed level (e.g ., at the eight-digit level) as CKDs and
SKDs, or "unassembled" and charge them duty no gr eater than 10%. As set out in paragraphs 68 and
69 of Canada's second written submis sion, this is consistent with China's preferential treatment of
CKDs and SKDs prior to accession. Thus, the enactme nt of the measures violates the treatment China
was obligated to continue to provide for CKDs and SKDs, as, under Article 21(1), it now treats CKDs
and SKDs as subject to the whole-vehicle rate of 25%.
Comments by China on Complainants' responses to question 259(b)
646. Canada now concedes that it "does not believe th at there is a legal concept of creating a new
tariff line ' de facto '."
141 Instead, Canada asserts that "the issue is rather what paragraph 93 of the
Working Party Report requires, and how China has violated its commitment to maintain the pre-
accession and pre-Measures preferential treatment for [CKD/SKD kits]." 142 Thus, notwithstanding
the fact that the commitment that China made in paragraph 93 is expressly conditioned on a specific
event – the creation of new tariff lines for CKD/SKD kits – Canada entirely forsakes the relevance of
this condition, either de jure or de facto. Instead, it purports to find in paragraph 93 a "commitment to
maintain" certain pre-accession practices, even thoug h (a) the paragraph makes no reference to these
alleged practices; (b) the paragraph makes no reference to maintaining anything; and (c) Canada has
provided no evidence of what these alleged practi ces were. This is, as China has explained, a
wholesale re-writing of the commitment that China actually made in paragraph 93.
(c) ( All parties) Does "tariff line" in the context of paragraph 93 of China's Working Party
Report refer to tariff treatment or tariff classification or both?
Response of China

647. Please see the response to question 258 above.

141 Canada answers after second meeting at p. 39.
142 Canada answers after second meeting at p. 39.

Response of the European Communities (WT/DS339)

648. The classification of the good is assumed in paragraph 93. The commitment is made in
respect of the tariff treatment of the specific goods identified i.e. CKD and SKD kits.
Response of the United States (WT/DS340)

649. In context, the phrase "tariff line" in paragraph 93 refers to both tariff classification and tariff
treatment. As the United States has explained, Paragraph 93 as a whole is clear in explaining that
Members were concerned with tariff treatment
 of CKDs/SKDs. Thus, in context, the phrase "tariff
line" indicates that Members were concerned that China would adopt a new tariff line which resulted
in a change from the parts rates of duty to higher, whole vehicle rates.
Response of Canada (WT/DS342)

650. Paragraph 93 is dealing with tariff treatment. Wh en a CKD or SKD is presented at the border,
whether it is classified as parts or as a whole vehicl e, China is obligated to charge a tariff rate no
greater than 10%. As set out above in answer to para graph (b), if China were to change its previous
practice from classifying CKDs and SKDs as parts, it must introduce a tariff line in its customs tariff
at a level greater than six digits for CKDs and SKDs, with a 10% rate of duty.
(d) ( All parties) Is tariff treatment always linked to ta riff classification? If not, could you
please provide the Panel with examples of a Member's tariff treatment commitment that is
made without any link to tariff classification.
Response of China

651. Please see the response to question 258 above.
Response of the European Communities (WT/DS339)

652. Tariff treatment is normally linked to the identification of the product at issue and relates to
the applicable duty rate as identified in the Schedu le of concessions of WTO members. In order to
"categorize" or "classify" products within the sch edule of concessions and then to look at the
applicable tariff treatment, one has to apply HS tariff classification rules as context due to the fact that
tariff concessions have been negotiated on the basis of the HS nomenclature.
Response of the United States (WT/DS340)

653. Tariff commitments are generally expressed in terms of tariff nomenclature (under the HS or
other systems), but not always. For example, Article I of the GATT 1994 requires MFN treatment for
like products, without any specific reference to ta riff classification. Another example is the
Ministerial Declaration on Trade in Informati on Technology Products. Attachment B of that
agreement lists products subject to the tari ff commitments in the agreement, regardless
 of how such
products are classified. A third example is Paragr aph 93 itself, which provides a tariff-treatment
commitment for CKDs/SKDs, even though such artic les were not at the time of accession listed in
China's tariff schedule, nor are CKDs/SKDs provided for in the headings of the HS nomenclature.

Response of Canada (WT/DS342)

654. Tariff treatment commitments under a Member's Schedule are always linked to tariff
classification. As Canada explained in footnote 79 of its second written submission, there may be
further classification at the national level beyond the six-digit classification under the Harmonized
System. Members may also have programs for waiver of customs duties that are not based upon tariff
classification. But those programs in effect waive a liability that has already crystallized based upon
the state of the imported product as it arrived at the border.
260. ( All parties) In respect of a CKD or SKD kit, do the parties agree that the parts and
components of such a kit could originate in different countries?
Response of China

655. Certainly. A CKD or SKD kit assembled in Ge rmany, for example, is almost certain to
include parts and components that originated in countries other than Germany. There is no difference,
in this respect, between a CKD/SKD kit and a full y-assembled motor vehicle, which is also very
likely to include parts and components that originated in more than one country.
Response of the European Communities (WT/DS339)

656. Yes, the parts and components of such a kit may and normally do originate in different
countries. However, the kit itself arrives in a single shipment from one country.
Response of the United States (WT/DS340)

657. Yes, it is possible that the parts and components included in a particular CKD or SKD kit
could originate in different countries, but such parts would be presented together and would be
imported by a single importer.
Response of Canada (WT/DS342)

658. Canada agrees that in those rare cases where a true CKD or SKD is shipped from one country
to another it may have parts of different origin. For example, the CKDs shipped from Canada to China
in 1999 that were referred to in paragraph 69 of Cana da's second written submission would certainly
have contained parts of US as well as Canadian origin, given the in tegration of production of the auto
industry in those two countries, and likely would also have had some parts of other origin ( e.g.,
Mexico, Japan, Korea, the EC, China, which suppl y parts to the automotive industry in Canada).
However, the CKD itself arrives in a single shipment from one country.
Comments by the European Communities on China's response to question 260
659. The European Communities refers to its reply to question 260. China now acknowledges that
parts and components originate from different countries.
F. S
UBSIDIES AND COUNTERVAILING MEASURES
261. ( United States ) At paragraph 63 of the attachment to your rebuttal submission, you
agree with China "in general that in the case of true border measures properly applying a
Member's Schedule there may well be no 'rev enue foregone' within the meaning of
Article 1.1(a)(1)(ii) of the SCM Agreement." Does this mean that if the Panel were to rule in

China's favour under Article II of GATT 1994, no basis would remain for your claim under the
SCM Agreement? Please explain in detail.
Response of the United States (WT/DS340)

660. One scenario in which a GATT Article II-compliant customs duty would not seem to result in
foregone revenue is as follows: If a WTO Member is properly applying its tariff schedule to imported
Product A, and it is also properly applying its tari ff schedule to imported Product B, then the WTO
Member is not foregoing revenue, even though the tariff rates for the two products are different.
661. In contrast, assume a scenario where a WTO Member is imposing tariffs on imported Product
A at the applicable bound rate in one set of ci rcumstances, but in another set of circumstances is
imposing tariffs on imported Product A at a rate below the applicable bound rate. In this scenario, the
WTO Member is foregoing revenue by virtue of th e fact that the tariff rate for imported Product A
varies depending on the circumstances. In this scenario, the appropriate "normative benchmark" is the
revenue collected when the bound rate is applie d to imported Product A. The revenue foregone
equals the difference between the revenue collected in the circumstance when the bound rate is
applied and the revenue collected in the circumstance when the lower rate is applied.
662. Similarly, if the government applies its tariff schedule to imported Product A at a rate below
the applicable bound rate if the importing comp any uses certain domestic goods, but applies the
applicable bound rate if the importing company does not use those domestic goods, then the
government would be foregoing revenue in those ci rcumstances where it applies a rate below the
applicable bound rate. The appropriate "normative benchmark" is the revenue collected when the
bound rate is applied to imported Product A (i.e., when the importing company does not satisfy the
requirement of using the domestic goods). The re venue foregone equals the difference between the
revenue collected when the bound rate is applie d to imported Product A (i.e., when the importing
company does not satisfy the requirement of us ing the domestic goods) and the revenue collected
when the lower rate is applied to imported Produc t A (i.e., when the importing company satisfies the
requirement of using the domestic goods). In th is example, the government's financial incentive
would fall within the "prohibited" category of Ar ticle 3.1(b) of the SCM Agreement because it is
contingent on the use of domestic over imported goods.
663. In the context of this dispute, if the Panel were to find China's measures consistent with
GATT Article II, either of the two scenarios described above could apply.
664. First, if the Panel were to find that China is properly applying tariffs to imported Parts A and
B (i.e., imported Part A receives its properly a pplicable bound rate, imported Part B receives its
properly applicable bound rate), the United States would agree that there may well be no revenue
foregone by the Chinese government within the m eaning of Article 1.1(a)(1)(ii) of the SCM
Agreement.
665. If, however, the Panel were to find that China is applying tariffs to imported parts at the
applicable bound rate in one set of circumstances (i .e., imported Part A receives a 25 per cent tariff
rate when it is assembled into a motor vehicle cont aining insufficient local content), but is applying
tariffs to the same imported Part A at a rate below the applicable bound rate in another set of
circumstances (i.e., the same imported Part A receives a 10 per cent tariff rate when it is assembled
into a motor vehicle containing sufficient local cont ent), the United States would argue that there is
foregone revenue (as described below in response to Panel question 267).

262. ( European Communities) Does the European Communities agree with the United States
that in the case of true border measures which properly apply a Member's Schedule, there may
be no "revenue foregone" within the meaning of Article 1.1(a)(1)(ii)? If so, how does the
European Communities reconcile this view with th e fact that it only makes a claim under the
SCM Agreement in the case that the Panel woul d have considered the measure as a border
measure consistent
 with Article II GATT?
Response of the European Communities (WT/DS339)

666. The European Communities claims that the Ch inese measures violate Articles 3.1(b) and 3.2
of the SCM Agreement only in case the Panel were, contrary to the arguments of the European
Communities, to find (a) that the measures fall under Article II of the GATT 1994 and (b) that China
is entitled to accord to the imports of auto parts th e treatment (i.e. 25% rate) it provides for vehicles in
its Schedule. 143 The European Communities has demonstrated in its previous submissions that the
Chinese measures, under such a "double hypothesis", constitute a financial contribution within the
meaning of Article 1.1(a)(1)(ii) of the SCM Agreement. China foregoes revenue "otherwise due" by
charging certain imported auto parts at the 10% ra te while charging other imported auto parts (i.e.
those that do not satisfy the local content requirement s set out in the measures) at the 25% rate which
constitutes a "defined, normative benchmark". 144 The European Communities considers that this
finding is not excluded if the 25% duty rate is in accordance with the Chinese Schedule.
263. ( European Communities) Please explain in detail the legal basis for your position that
legitimate border measures that are fully consiste nt with GATT Article II can nevertheless, in
law, constitute prohibited subsidies under Article 3.1(b) of the SCM Agreement.
Response of the European Communities (WT/DS339)

667. The European Communities considers that nothi ng in the wording, context or purpose of
Article 3.1(b) of the SCM Agreement excludes legitimate border measures consistent with Article II of
the GATT 1994 from the scope of prohibited subsidies.
668. A measure is a prohibited subsidy within the meaning of Article 3.1(b) of the SCM Agreement
if three conditions are met: The measure must (a) constitute a financial contribution within the
meaning of Article 1.1(a)(1), (b) confer a benefit within the meaning of Article 1.1(b), and (c) be
contingent upon the use of domestic over imported go ods within the meaning of Article 3.1(b). None
of these conditions is excluded by the existence of legitimate border measures consistent with Article
II of the GATT 1994.
669. As regards (a), a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM
Agreement requires that "government revenue that is otherwise due is foregone or not collected". As
set out by the Appellate Body in US – FSC, this is determined on the basis of a comparison between
the "revenue actually raised" and revenue that would have been raised "otherwise" taking into account
"some defined, normative benchmark". Both the re venue actually raised and the revenue otherwise
due can be based on border measures that are consistent with Article II of the GATT 1994.

143 See first written submission of the European Communities, para. 282, and second written
submission of the European Communities, para. 149.
144 See first written submission of the European Communities, para. 285 to 288, and second written
submission of the European Communities, para. 150 to 151.

670. Concerning point (b) above, a benefit
 within the meaning of Article 1.1(b) is conferred if the
financial contribution makes the recipient "better off" than it would otherwise have been. It is
irrelevant for this assessment whether border meas ures conferring the benefit are consistent with
Article II of the GATT 1994 or not.
671. With regard to point (c) above, subsidies are contingent upon the use of domestic over
imported goods within the meaning of Article 3.1(b) if the recipient gets the subsidy only under the
condition that he uses domestic over imported goods . The consistency with Article II of the GATT
1994 of any border measures providing the subsidy is, again, irrelevant.
672. A simple example demonstrates this point. The tariff schedule of WTO Member X sets forth
two different tariff rates for the import of processo rs: 20% for processors that will be assembled into
computers with domestic hard disks (category A processors), and 40% for processors that will be
assembled into computers with imported hard disks (category B processors). If X charges imports of
processors according to this schedule, such impor t duties would not infringe Article II of the GATT
1994. X would, however, grant a subsidy prohibited under Article 3.1(b) of the SCM Agreement.
First, there is a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM
Agreement. X foregoes revenues otherwise due if the revenues actually raised (i.e. 20% from imports
of category A processors) are compared with the revenue that would have been raised "otherwise"
(i.e. 40% from imports of category B processors). This 40% revenue is no "entitlement in the abstract"
but a "defined, normative benchmark" contained in X' s legal system. Second, X also confers a benefit
to manufacturers of computers which combine the processors with domestic hard disks since these
manufacturers do not have to pay the higher duties. Third, this subsidisation is contingent upon the
use of domestic over imported goods because com puter manufacturers only get the benefit of the
lower duty rate if they combine the processors with domestic hard disks. These findings are not
affected by the fact that the import duties were in accordance with the schedule and, thus, not contrary
to Article II of the GATT 1994.
264. ( European Communities) Are you arguing that the existence of a WTO-consistent tariff
rate on a complete article which is higher than a WTO-consistent tariff rate on the parts of that
article can, in itself, constitute a subsidy? Please explain in detail.
Response of the European Communities (WT/DS339)

673. The European Communities does not argue that th e existence of a WTO-consistent tariff rate
on a complete article which is higher than a WTO-consis tent tariff rate on the parts of that article can,
in itself, constitute a subsidy.
674. As set out above and in prev ious submissions, the European Communities argues that China
foregoes revenue "otherwise due" by ch arging certain imported auto parts at the 10% rate while
charging other imported auto parts (i.e. those that do not satisfy th e local content requirements set out
in the measures) at 25 %, and that this confers a benefit. 145 In abstract terms, the European
Communities does not argue that the difference between the tariff rates for the complete article and its
parts constitutes a subsidy. The subs idy rather consists of the differe nce between the lower tariff rate
for parts manufactured into articles with sufficient local content and the higher tariff rate for parts
manufactured into articles with insufficient local content.

145 See first written submission of the European Communities, para. 284 to 292, and second written
submission of the European Communities, para. 150 to 152.

265. ( European Communities) You stated at the Second Substantive Meeting that your claim
under the SCM Agreement was based on the do uble hypothesis that the Panel found that
China's measures are ordinary customs duties wi thin the meaning of Article II:1(b) and that
China is entitled to charge the 25% rate for parts.
(a) Please confirm that your contention is that if the Panel made these findings, the 25%
rate would be the rate for all auto parts, and that therefore charging the 10% rate in respect of
some parts would result in the Chinese government foregoing revenue that it otherwise was due.
Response of the European Communities (WT/DS339)

675. The European Communities does not contend, under the double hypothesis for its claim under
Article 3.1(b) of the SCM Agreement, that the 25% rate would be the rate for "all" auto parts. As set
out above and in previous submissions, the 25% rate would be the rate for auto parts that do not
satisfy the local content requirements set out in the measures. For other auto parts, i.e. those that
satisfy the local content requirements, the 10% rate would apply.
146
676. As set out in response to questions 157 and 1 58 from the Panel, the European Communities
does not argue that the 25% rate is a "default rate" and considers that such finding would not be part
of the relevant legal test in order to determine the "normative benchmark" under Article 1.1(a)(1)(ii)
of the SCM Agreement.147
266. ( European Communities and China) If the Panel were to find that China was entitled to
classify as a motor vehicle parts that have the essential character of a complete motor vehicle,
and therefore was entitled to charge the 25% duty in the instances set forth in the measures, in
your view would such a ruling mean that China was permitted to apply its motor vehicle rate to
certain parts, or would it mean that China was permitted to apply its motor vehicle rate to motor
vehicles?
Response of China

677. China does not understand the distinction suggested by this question. Under GIR 2(a), parts
and components that have the essential character of th e complete article are classified as the complete
article, not as parts. As the comp lete article, they are subject to the appropriate duty rates that apply
to the complete article.
678. This question may pertain to an aspect of GIR 2(a) that the parties have discussed during the
two substantive meetings of the Panel. It is unquestionably the case that, under GIR 2(a), a "part" will
sometimes be classified as the complete article. For example, a steering wheel that is part of a group
of parts and components that have the essential char acter of a motor vehicle will be classified and
assessed as a motor vehicle, not as a steering wheel. This follows from the ordinary application of
GIR 2(a). This is no different than the fact that the same steering wheel in a completely assembled
motor vehicle will also be classified as part of a motor vehicle, not as a steering wheel.
679. For these reasons, a finding by the Panel that China is entitled to classify as a motor vehicle
parts that have the essential character of a complete motor vehicle, and to charge the 25 per cent duty
in the instances set forth in the challenged measure s, would necessarily mean that China is allowed to

146 See first written submission of the European Comm unities, para. 288; second written submission of
the European Communities, para. 150; response by the European Communities to Question 157 from the Panel.
147 Response by the European Communities to Questions 157 and 158 from the Panel.

apply the 25 per cent rate of duty to auto parts a nd components that have the essential character of a
motor vehicle.
Response of the European Communities (WT/DS339)

680. Such a ruling would mean that China was permitte d to apply the 25% (motor vehicles) rate to
certain parts
, i.e. those parts that do not satisfy the local content requirements set out in the measures.
Comments by the European Communities on China's response to question 266
681. China's acknowledgment, in response to questi on 266, that such a ruling would mean that
China was "allowed to apply the 25 per cent ra te of duty to auto parts and components " (emphasis
added) supports the claim of the European Communities under Article 3 of the SCM Agreement. As
set out in greater detail in previous submissions 148, the 10% duty treatment for parts not Deemed
Whole Vehicles can be compared with the "defin itive, normative benchmark" of the 25% duty
treatment for parts Deemed Whole Vehicles since they both concern, under the hypothesis which
opens the application of Article 3 of the SCM Agreement, the treatment of imports of auto parts in the
Chinese legal system.
Comments by the United States on China's response to question 266
682. The United States takes China's response to mean th at if a bulk shipment of a particular auto
part falls within the purview of the measures, th en China would "classify" that part as a complete
vehicle. In this regard, the United States also re fers the Panel to China's response to Panel question
No. 175 and the comments of the United States thereon.
267. ( European Communities and United States ) How do the European Communities and the
United States reconcile their view that the 25 per cent charge on imported parts and
components is the appropriate "normative benc hmark" for purposes of the analysis of their
claims under Article 3.1(b) of the SCM Agreement, with their main claims that such charge is
not the appropriate rate of duty for auto parts, but rather the appropriate rate of duty for
motor vehicles? In other words, how can the di fference between the 25% complete vehicle rate
and the10 % parts rate constitute the revenue foregone that is otherwise due, if as the
complainants argue the 10% rate (and not the 25% rate) is the appropriate rate to apply to all
parts?
Response of the European Communities (WT/DS339)

683. The European Communities does not see any discr epancy. The claim under Article 3.1(b) of
the SCM Agreement is based on the hypothesis that China is entitled to apply the 25% duty rate to
auto parts not satisfying the local cont ent requirements set out in the measures . Under such a
hypothesis, the 25% rate constitutes the appropria te "definitive, normative benchmark". The claim
relating to Article II of the GATT 1994, on the other hand, is not based on the aforementioned
hypothesis. In the absence of the aforementione d hypothesis, the European Communities considers
that China cannot impose customs duties of 25% on the imports of auto parts.
684. For the convenience of the Panel, the European Communities reiterates the structure of its
claims which consists of three layers. In its main claim (level 1), the European Communities

148 See first written submission of the European Co mmunities, paras. 285 to 288; second written
submission of the European Communities, paras. 149 to 151.

demonstrates that the measures violate Article 2 of the TRIMs Agreement and constitute internal
measures inconsistent with Article III of the GATT 1994. In the alternative, i.e. were the Panel to find
that the Chinese measures are mere ly enforcing ordinary customs duties (level 2), the European
Communities sets out that China violates Article II of the GATT 1994 by imposing 25% duties on
auto parts instead of the applicable 10% duty rate provided for in the Chinese schedule. Were the
Panel to find that the measures are merely enforcing ordinary customs duties and that China is entitled
to apply the 25% rate on auto parts ("double hypothesis", level 3), the European Communities
alternatively claims that the measures violate Article 3.1(b) of the SCM Agreement. Within this third
alternative level, China fore goes revenue "otherwise due" when it imposes 10% on auto parts
satisfying the local content requirements set out in the measures 25% on auto parts that do not.
(a) ( European Communities and United States ) How can the application of the 25 per cent
rate be considered "legitimately comparable" to application of the 10 per cent rate, if the 25 per
cent rate (or the difference between it and the 10 per cent rate) are, in your view, WTO-
inconsistent in the first place?
Response of the European Communities (WT/DS339)

685. As set out above, the application of the 25% rate to auto parts is not
 WTO-inconsistent under
the hypothesis that China is entitled to apply the 25% duty ra te to auto parts. This hypothesis is the
basis for the claim under Article 3.1(b) of the SCM Agreement. Under this hypothesis, the 25% rate
constitutes the appropriate "definitive, normative be nchmark" in order to compare the "revenue
actually raised" with the revenue that would have been raised "otherwise". Therefore, the European
Communities considers that the 10% rate on auto parts satisfying the local content requirements
contained in the measures and the 25% rate for auto parts that do not are in fact comparable for the
purposes of Article 1.1(a)(1)(ii) of the SCM Agreement.149
Response of the United States (WT/DS340)

686. The scenario that seems to be the premise of the Panel's question is that China's measures
impose ordinary customs duties in the amount of 25 per cent on imported parts if they are not
assembled into a motor vehicle with sufficient local content but impose ordinary customs duties in the
amount of only 10 per cent on those same imported part s if they are assembled into a motor vehicle
with sufficient local content. In this scenario, assuming that the Panel were to find that China's
measures constituted customs duties but applied tari ffs in excess of the bound rate in breach of GATT
Article II in some circumstances (e.g., in the ci rcumstances in which those measures apply a 25 per
cent tariff rate to imported parts assembled into a mo tor vehicle containing insufficient local content),
it would be appropriate to view the 25 per cent tari ff rate as the appropriate "normative benchmark"
for purposes of the analysis under Article 3.1(b) of th e SCM Agreement. That is the rate that would
apply to a particular imported part unless the auto manufacturer responds to the incentives provided in
China's measures and satisfies the requirement of usi ng that imported part in the assembly of a motor
vehicle containing sufficient local content. The United States does not view the SCM Agreement
analysis as being affected by the fact that the 25 per cent tariff rate is inconsistent with GATT
Article II. The 25 per cent tariff rate can still ser ve as the appropriate "normative benchmark" for
purposes of the analysis under Article 3.1(b) of th e SCM Agreement. Even though the application of
that tariff rate would be inconsistent with GATT Article II, it is still the rate that applies in China, i.e.,
under Chinese law (as determined by the Panel as a factual matter), and it is Chinese law that
determines the benchmark. The revenue foregone in this scenario would equal the difference between
the revenue collected when the 25 per cent tariff rate is applied to imported parts that are assembled

149 See second written submission of the European Communities, para. 151.

into a motor vehicle containing insufficient local content and the revenue collected when the 10 per
cent tariff rate is applied to the same imported pa rts if they are assembled into a motor vehicle
containing sufficient local content.
687. The United States views the charges imposed under China's measures not as ordinary customs
duties but rather as internal charges. (See the US response to question No. 190.) Specifically, China's
measures impose an internal charge in the amount of 25 per cent on imported parts if they are not
assembled into a motor vehicle with sufficient lo cal content but impose a charge of only 10 per cent
on those same imported parts if they are assembled into a motor vehicle with sufficient local content.
In this scenario, assuming that the Panel were to find that China's measures constituted internal
measures that are inconsistent with GATT Article III, it would be appropriate to view the 25 per cent
internal charge as the appropriate "normative benchmark" for purposes of the analysis under
Article 3.1(b) of the SCM Agreement. That is th e charge that would apply to a particular imported
part unless the auto manufacturer responds to the incentives provided in China's measures and
satisfies the requirement of using that imported part in the assembly of a motor vehicle containing
sufficient local content. As in the scenario where the charges at i ssue are treated as ordinary customs
duties, the United States does not view the SCM Agreem ent analysis as being affected by the fact that
the 25 per cent internal charge is GATT-inconsistent . The 25 per cent internal charge can still serve
as the appropriate "normative benchmark" for purposes of the analysis under Article 3.1(b) of the
SCM Agreement. Even though the application of th at internal charge would be inconsistent with
GATT Article III, it is still the charge that applies in China, i.e ., under Chinese law (as determined by
the Panel as a factual matter), and it is Chinese la w that determines the benchmark. The revenue
foregone in this scenario would equal the differen ce between the revenue collected when the 25 per
cent internal charge is applied to imported parts that are assembled into a motor vehicle containing
insufficient local content and the re venue collected when a 10 per cent charge is applied to the same
imported parts if they are assembled into a motor vehicle containing sufficient local content.
688. The United States notes that in response to Panel question No. 157, when attempting to
describe the "revenue foregone" by the Ch inese government within the meaning of
Article 1.1(a)(1)(ii) of the SCM Agreement, th e United States characterized China's measures as
requiring auto manufacturer to pay a combination of import duties and internal charges. The United
States believes that the correct view of China's meas ures, as a legal matter, is that they only impose
internal charges, as explained above.
(b) ( European Communities) At paragraph 287 of your first written submission, in respect
of your claim under the SCM Agreement, you argu e that to determine whether a government is
foregoing revenue that "otherwise would be due", it is necessary to "compare the revenues due
under the contested measure and the revenues that would have been raised otherwise taking
into account a normative benchmark governing such comparison." Comparing the revenue
raised under the contested measure (25 per cent) to what in your view would be collected if the
measure did not exist (10 per cent), it would appe ar that the contested measure produces more,

not less, revenue for the government of China than would be the case in its absence. Why is this
not the appropriate analysis; that is, why is 10 per cent not the appropriate "normative
benchmark" in this case, particularly given your view that the 25 per cent is WTO inconsistent?
Response of the European Communities (WT/DS339)

689. First and as set out in response to the previous question, the application of the 25% rate to
auto parts is not WTO-inconsistent under the hypothesis,
 on which the Article 3.1(b) claim is based,
that China is entitled to apply the 25% duty rate to auto parts.

690. Secondly, the European Communities does not compare "the revenue raised under the
contested measure (25 per cent) to what (…) would be collected if the measure did not exist (10 per
cent)". Instead, the European Communities compares the revenues actually raised from the imports of
auto parts satisfying the relevant local content requirements (10%) with revenues that could have
"otherwise" been raised. These re venues appear in form of the duties imposed on auto parts not
satisfying the relevant local content requirements ( 25%). As this 25% rate is explicitly foreseen for
certain imported auto parts in the Ch inese measures, it is, in the words of United States – FSC, no
"entitlement in the abstract" but a "definitive, normative benchmark".
150 By charging imports of auto
parts satisfying the relevant local content require ments with duties of only 10%, China has ignored
this benchmark and, thus, has forgone "government revenue that is otherwise due".
691. The European Communities does not understand the alternative analysis referred to in the
question. Comparing the 10% duties not with the 25% benchmark, but with the 10% duties would not
be a comparison since one thing cannot be compared with itself. Besides, an alternative analysis
cannot start with the 25% duties and compare these with the 10% duties. The European Communities
does not claim that China foregoes revenues by imposing 25% duties on auto parts not satisfying the
relevant local content requirements. The claim is rather that China foregoes revenue by charging
imports of auto parts satisfying the relevant local content requirements with duties of only 10%.
268. ( United States ) Is the United States arguing that the 15% ad valorem differential
between the 25% and the 10% rates, which accordin g to the United States is charged internally,
is the benchmark? If so, can the US explain th e legal basis for a conclusion that the 15% is
otherwise due to the Chinese Government when it is not charged on vehicles that have sufficient
local content?
Response of the United States (WT/DS340)

692. The United States assumes that this question inte nds to refer to the "differential between the
25% and the 10% rates" rather than the "differe ntial between the 15% and the 10% rates." As
explained above in response to question Nos. 190 and 267, the benchmark is the revenue collected
when the 25% charge is applied, and it is the diffe rential between the revenue collected when the 25
per cent charge is applied and the revenue collected when the 10 per cent charge is applied that, as a
legal matter, represents the revenue foregone by the Chinese government.
269. ( United States) With respect to your claim under the SCM Agreement, at the Second
Substantive Meeting you stated that the normat ive benchmark may change over time as the
measures have their intended effect of diverting parts purchases from imports to local sources,
i.e., that in the beginning most auto manufacturers will pay the 15% charge and some will pay
0%, but in the end the converse will be true.
(a) If this statement is correct, does this not imply that the amount of revenue foregone, and
any subsidization, would reach zero after the measures were in place for a certain period?
Response of the United States (WT/DS340)

693. The statement made by the United States at th e Second Substantive Meeting was not intended
to mean that the normative benchmark would ch ange over time. Rather, the United States was
addressing how to determine the appropriate norma tive benchmark in the circumstances of this

150 See first written submission of the European Comm unities, para. 288; second written submission of
the European Communities, para. 150; response by the European Communities to Question 157 from the Panel.

dispute. Specifically, the United States was attemp ting to explain that it was not always appropriate
to define the normative benchmark in terms of a "defau lt rate," to the extent that a default rate means
the revenue normally or most often collected. In many cases it is appropriate to define the normative
benchmark in these terms. However, in some case s, such as this dispute, the normative benchmark
will not necessarily represent the revenue level normally or most often collected. Rather, the
normative benchmark can mean the revenue level th at applies unless a particular contingency is
satisfied.
694. As the United States explained in paragraph 145 of the attachment to its rebuttal submission,
when measures provide incentives for manufacturer s to use domestic over imported goods, like the
measures at issue in this dispute, they are by thei r nature designed to change manufacturers' behavior
over time. The goal of measures like those at issue in this dispute is to change how business is
normally conducted and to create an incentive for ma nufacturers to begin sourcing more parts locally
rather than importing them. While the higher ch arge may prevail initially, as business practices
respond to these incentives, the revenue most ofte n collected under the measures would change as
well. More and more manufacturers would qua lify for the lower charge by assembling vehicles
containing sufficient local content.
695. Thus, in the case of China's measures, the normative benchmark – the 25 per cent internal
charge – remains the same over ti me. However, that does not mean that the 25 per cent internal
charge is a default rate in the sense that it repr esents the level of revenue normally or most often
collected, as the level of revenue normally or most often collected by the design of the measures
themselves will change over time. Rather, the 25 per cent internal charge is the rate that applies
unless an auto manufacturer satisfies the contingency of using sufficient local content in the assembly
of a vehicle to qualify for the 10% charge, and for th at reason the 25 per cent internal charge serves as
the normative benchmark.
(b) What is the legal basis for your contention that a "normative benchmark", which is
supposed to be the point of comparison fo r determining whether a measure engenders the
foregoing of revenue, can be identified on the ba sis of the effects of that same measure when
applied over a period of time?
Response of the United States (WT/DS340)

696. The United States is not arguing that the normative benchmark can be identified on the basis
of the effects of the measure at issue when app lied over time. As explained above in response to
Panel question 269(a), the normative benchmark remains the same over time.
270. ( United States) In your first written submission, in connection with your claim under the
SCM Agreement, you state that the measur es "exempt manufacturers from the charges
otherwise due if they use domestic auto parts rather than imported auto parts", and you further
argue that what the manufacturers are exempted from under those circumstances is an "across-
the-board 25 per cent charge on auto parts". However, in your answer to question 157 from the
Panel, you suggest that you are not arguing that 25 per cent is the "default" rate, or "general"
rate from which there are exceptions under certain circumstances.
(a) Are you arguing that an "across-the-board" rate, from which "exemptions" are granted
under certain circumstances is different from a "g eneral" rate from which "exceptions" are
granted under certain circumstances?

Response of the United States (WT/DS340)

697. The United States is not arguing that an "across-the-board" rate, from which "exemptions" are
granted under certain circumstances is different from a "general" rate from which "exceptions" are
granted under certain circumstances.
(b) Please provide your detailed legal reasoning for considering 25 per cent to be the
appropriate "normative benchmark" in this ca se for determining the existence of "revenue
foregone". If you are no longer arguing that there is a 25 per cent "across-the-board" rate on
auto parts, please explain in detail the basis for your position that 25 per cent nevertheless is the
appropriate "normative benchmark" to be applied for purposes of this claim.
Response of the United States (WT/DS340)

698. Please see the United States response to Panel question Nos. 267 and 268.
271. ( European Communities) At paragraph 291 of your first written submission, you argue
that vehicle manufacturers do not have to pay the higher rate of "typically 25%" if they satisfy
the local content requirements of the contested measures. In your answer to the Panel's
question 157, however, you state that you have not argued that 25% would be "the default rate"
of charges applied to imported auto parts and that the 10% rate would "only be available upon
demonstration that local content requirements w ere met". Please clarify in how a "typical" 25
per cent rate that will be reduced "if" loca l content requirements are met differs from a
"default" or "general" rate from which "exceptions" will be granted under certain
circumstances.
Response of the European Communities (WT/DS339)

699. In its first written submission, the European Communities stated:
Vehicle manufacturers which satisfy the local content requirements of Article 21 of
Decree 125 are financially "better off" than those which do not. They do not have to
pay the higher import duties for parts of typically 25% and are instead only charged at
10%. They receive a benefit in the amount of the difference between the two duty
rates.
151
700. This does not mean that vehicle manufacturers generally face a 25% duty rate for parts which
is reduced to 10% in case they manage do demonstrat e that they meet the local content requirements.
The European Communities has not argued that Ar ticle 28 of Decree 125 provides for such a default-
exception structure. It rather depends on the ex-o fficio "verification" by the Chinese authorities
whether auto parts are charged at 10% or 25%. Th e European Communities does not consider that the
25% rate must be the "default" rate in or der to qualify as a "normative benchmark" under
Article 1.1(a)(1)(ii) of the SCM Agreement.152 It is sufficient that the 25% rate is explicitly foreseen
for certain imported auto parts in the Chinese me asures so that it constitutes, in the words of
US - FSC, no "entitlement in the abstract" but a "definitive, normative benchmark".153

151 See first written submission of the European Communities, para. 291.
152 Response by the European Communities to Questions 157 and 158 from the Panel.
153 See second written submission of the European Communities, para. 150.

272. ( European Communities and United States ) Please confirm, as stated orally during the
second substantive meeting, that the European Communities and the United States are not
pursuing their respective claims under the SCM Ag reement in respect to importations of CKD
and SKD kits under Article 2(2) of Decree 125.
Response of the European Communities (WT/DS339)

701. The European Communities c onfirms that it is not pursuing its claim under the SCM
Agreement in respect to importations of CKD and SKD kits under Article 2(2) of Decree 125.
Response of the United States (WT/DS340)

702. The United States is not pursuing a claim under the SCM Agreement with regard to the
importation of CKD and SKD kits under Article 2(2) of Decree 125.
G. A
RTICLE III OF THE GATT 1994
273. ( All parties ) The Appellate Body in EC – Bananas III held that the distribution of
import licenses among operators within the European Communities went:
"far beyond the mere import licence requirements needed to administer the
tariff quota for third-country and no n-traditional ACP bananas or Lomé
Convention requirements for the import ation of bananas. These rules are
intended, among other things , to cross-subsidize distributors of EC (and ACP)
bananas and to ensure that EC banana ripeners obtain a share of the quota
rents. As such, these rules affect "the in ternal sale, offering for sale, purchase,
..." within the meaning of Article III:4 (...)." (Appellate Body Report on EC –
 In light of the Appellate Body holding in EC – Bananas III , would the following
questions be relevant to deciding whether the measures fall under Article III:4 GATT: namely,
first, whether they "go far beyond" the require ments needed to administer the customs duties
and, second, whether are intended, among other things to affect the internal sale of auto parts
and components.

Response of China

703. As China discussed in response to question 85 from the Panel, the fundamental problem with
the license allocation procedures at issue in EC – Bananas III is that they bore no relationship to the
tariff rate quota that the EC was allowed to mainta in. The criteria that the EC had adopted for the
allocation of quota licenses were neither necessary no r germane to the administration of the TRQ.
The EC was allowed to adopt procedures to alloca te import licenses in accordance with its rights
under Article II. However, the procedures that the EC adopted for this purpose did not allocate import
licenses on a neutral, non-discriminatory basis. Ra ther, they did so in a manner that was plainly
designed to favour operators who marketed banan as from EC and traditional ACP sources – a factor
that was entirely unrelated to the TRQ itself. It was this aspect of the license allocation procedures
that the panel and Appellate Body found to fall within the scope of Article III:4.
154

154 See EC – Bananas III at para. 211 ("At issue in this appeal is not whether any impose licensing
requirement, as such, is within the scope of Article III:4, but whether the EC procedures and requirements for

704. Applying these principles to the challenged me asures, the complainants would need to
demonstrate that the challenged measures "go far beyond" what is necessary to ensure the correct
classification of motor vehicles under China's Schedule of Concessions, including parts and
components that have the essential character of a motor vehicle. As in EC – Bananas III, this would
only be the case in respect of specific aspects of the challenged measures that are not necessary to
ensure the proper application of GIR 2(a) to part s and components of motor vehicles. In order to
make this showing, the complainants would need to demonstrate the specific respects in which the
challenged measures violate GIR 2(a), for example, because they result in classifications that are not
consistent with the essential character test, or becau se they result in classificat ions that are not based
on the manner in which parts and components are presented to Chinese customs authorities. As China
explained in its oral statement to the Panel at the second substantive meeting, and as discussed in
response to question 228 above, the complainants ha ve failed to support these conclusions based on
evidence and legal argument. The complainants th erefore have no basis to contend that there are
aspects of the challenged measures that are unrelated to the proper administration and enforcement of
China's tariff provisions for motor vehicles, or that "go far beyond" what is necessary for this purpose.
705. As for whether the challenged measures are "intended to affect the internal sale of auto parts
and components," whatever effect they have, in this regard, is the effect that arises from the difference
in duty rates in China's tariff schedule between mo tor vehicles and parts of motor vehicles. The
difference in duty rates, and whatever incentives or disincentives this difference in duty rates creates,
are inherent features of the Schedule of Concessions that China negotiated, and that China is entitled
to implement and enforce.
Response of the European Communities (WT/DS339)

706. The European Communities reiterates that the Chinese measures do not impose ordinary
customs duties but fall under Article 2 of the TRIMs Agreement and Article III of the GATT 1994 for
the reasons set out in great detail in its previous submissions.
155 The holding of the Appellate Body in
EC – Bananas III provides additional reasons for determining that the Chinese measures fall under
Article III:4 GATT.
707. The Chinese measures "go far beyond " the requirements needed to administer any possible
customs duties in several respect s. First, the measures go far beyond customs duty administration
when they impose charges not at the time or point of importation, but intern ally after assembly and
manufacture. Secondly, the measures do not impose charges "on importation", but on the basis of how
the auto parts are used after importation and, in particular, whether they are subsequently assembled
and manufactured in China into vehicles with an in sufficient level of local content. Thirdly, the
measures provide in Article 29 of Decree 125 that ma nufacturers have to pay charges even if they
purchase parts on the Chinese internal market from supp liers that previously imported them. Fourthly,
the measures go far beyond customs duty administration by imposing the very cumbersome
procedural requirements which are set out in detail in the first written submission.
156 This is illustrated

the distribution of import licenses for imported bananas among eligible operators within the European
Communities are within the sc ope of this provision."); EC – Bananas III (Panel Report) at para. 7.178
("although licences are a condition for the importation of bananas into the EC at in-quota tariff rates, we find
that the administration of licence distribution procedures and the eligibility criteria for the allocation of licenses
to operators form part of the EC's internal legislation.").
155 See second written submission of the European Communities, para. 35 to 56; also see first written
submission of the European Communities, para. 138 to 139.
156 See first written submission of the European Communities, para. 45 to 65.

by the currently pending applications under the pro cedures of the measures some of which date back
to 2005 (Exhibit EC - 26).
708. The European Communities also considers that the Chinese measures are intended,
among
other things to affect the internal sale of auto parts. The Chinese measures intend to make imported
auto parts less attractive for vehicle manufacturers since their use entails cumbersome administrative
procedures and risks – depending on the level of local content in the manufactured vehicles –
triggering higher internal charges on imported auto parts. 157 The burdensome procedures and the
threat of the internal charge of 15 % on imported parts create an incentive for vehicle manufacturers
to mainly use domestic parts. As such, the Chinese measures affect "the internal sale, offering for sale,
purchase, ..." within the meaning of Article III:4, and therefore fall within the scope of this provision
Response of the United States (WT/DS340)

709. The United States agrees that the factors listed in EC– BananasIII are relevant. Moreover, in
the event China's measures were considered as im posing ordinary customs duties, the United States
submits that China's measures presen t an even clearer case than in EC – Bananas IIIof a border
measure that breached Article III of the GATT 1994. Under China's measures, the measures on their
face affect the internal use, purchase, and sale of im ported parts by increasing the duties applicable to
other imported parts based on the level of local cont ent contained in an article manufactured within
China.
Response of Canada (WT/DS342)

710. Canada notes first that if its argument is accep ted that the measures are entirely internal, with
no legitimate connection to customs duties, then the above analysis is not necessary – the measures on
their face violate Articles III:2, 4 and 5 and the TRIMs Agreement.
711. Canada agrees that the factors in EC – Bananas III are relevant. Customs procedures that are
not necessary to administer charges under Article II are subject to Article III:4. Article III:4 does not
specify that laws or regulations must be "internal" to be subject to its purview, but rather any laws or
regulations "affecting" the "internal sale, offering for sale, purchase, transportation, distribution or
use" are subject to Article III:4.
712. With respect to the second question, the "intent" behind the measures is not relevant to
assessing whether the measures violate Article III:4. Wh at is relevant is whether the measures modify
the conditions of competition and therefore provide less favourable treatment for imported goods than
for domestic ones. This is not a question of "intent" but of the "effect" of the measures. In EC –
Bananas III, the examination of "intent" assisted the de termination of whether the measures at issue
"affected" the internal sale, etc. Similarly, in the present dispute the fact that measures have a
protectionist design emphasizes what is clear from the structure of the measures: that they are
intended to affect the internal competition of imported auto parts in the Chinese market.
Comments by the European Communities on China's response to question 273
713. China responded that measures only go far beyond the requirements needed to administer the
customs duties if "specific aspects of the challe nged measures […] are not necessary to ensure the
proper application of GIR 2(a) to parts and compone nts of motor vehicles". China, thus, distorts the

157 See first written submission of the European Communities, paras. 107 to 119 and 147 to 151;
second written submission of the European Communities, para. 59.

test set out by the Appellate Body in EC – Bananas III by falsely equating customs duty
administration with the "application of GIR 2(a) ". As repeatedly set out by the European
Communities
158, GIR 2(a) is of extremely limited relevance for customs duty administration in the
present case. If interpreted correctly, the "go far be yond"-criterion established by the Appellate Body
brings the Chinese measures clearly under the scope of Article III:4 GATT.159
714. With regard to the second element of the test , China's statement "whatever effect [the
measures] have, (…), in this regard, is the effect that arises from the difference in duty rates" does not
respond to the question from the Pa nel which relates to the intent of the measures. Besides, the
statement is wrong since the likely effect of the measures, i.e. reducing imports of parts through
discriminatory local content requirements, is diam etrically opposed to the likely effects of the
negotiated tariff differential in China's schedule, whic h is to give an incentive for the imports of auto
parts. Were China to argue that the measures do not intend to affect the internal sale of auto parts, its
response would ignore the stated purpose of the measures which is fostering the development of the
Chinese auto parts industry, a purpose to be achiev ed by making the purchase of imported auto parts
less attractive through higher internal charges and burdensome procedures.
274. ( Canada) In paragraph 17 of its second oral statement, Canada states that under the
measures, two otherwise-identical imported goods are given two different tariffs solely on the
basis of their end use. Could you please explai n how applying two different tariffs to the same
goods is an internal measure within the meaning of Article III.
Response of Canada (WT/DS342)

715. See Canada's response to Question 188.
275. ( China) Please comment on the view that China' s measures at issue, by making certain
imported auto parts less attractive due to addi tional procedural requirements and higher tariff
duties, create incentives to use domestic auto parts.
Response of China

716. As China explained in response to question 273, whatever incentives or disincentives arise
from the difference in duty rates in China's Sche dule of Concessions are characteristics that are
inherent to the Schedule of Concessions that Chin a negotiated. One function of ordinary customs
duties is to regulate access to markets. They do so, in part, through the incentives and disincentives
that are created by the establishment of duty rates at different levels. No party disputes that the higher
tariff rate for motor vehicles in China's Schedule of Concessions creates some degree of incentive to
assemble motor vehicles in China from auto parts a nd components, as compared to importing finished
motor vehicles. As China has explained throughout this proceeding, it is not inconsistent with China's
rights and obligations under Article II to ensu re that auto manufacturers do not evade this
characteristic of China's tariff schedule, and deprive China of customs revenue, through the
importation of motor vehicles in multiple shipments of parts and components.
717. With respect to the "additional procedural re quirements" associated with the challenged
measures, China notes that the complainants have fail ed to provide any evidence of the "burden" that
these procedures allegedly impose upon auto manufactur ers, and what impact they have had on any
auto manufacturer's sourcing decisions. In any event, as China explained in paragraphs 128 to 131 of

158 See e.g. second written submission of the European Communities, para. 93.
159 For details see the response by the European Communities to Question 273 from the Panel.

its second written submission, the alleged "burden" imposed by cu stoms procedures does not fall
within the scope of Article III of the GATT 1994. Th e Members' rights and obligations in respect of
customs-related procedures are set forth in Article VIII of the GATT.
Comments by the European Communities on China's response to question 275
718. The European Communities notes that China h as not, as requested in the question from the
Panel, commented on the complainants' argument that its measures create an incentive to use
domestic parts. China's assertion that the measures avoid evasion of tariff rates contained in its
schedule through "multiple shipments of parts" is misconceived for the reasons which the European
Communities has set out previously.
160 Contrary to China's allegation, the European Communities
has provided evidence of the administrative burden which the measures impose.161
Comments by the United States on China's response to question 275
719. China's answer – that tariffs always create a disincentive to import parts – entirely avoids the
key issue raised by this question: that Ch ina's measures adversely affect the internal purchase, sale
and use of imported auto parts, in direct breach of Articles III:4 and III:5 of the GATT 1995. The
usual customs duty imposed by WTO Members – whic h is based on the article in its condition upon
importation – does not create any further disincentives affecting the internal purchase, sale, and use of
an imported good. But China's measures – by asses sing duties based on the amount of local content
contained in automobiles manufactured within Ch ina – create a major disincentive to the purchase,
sale, and use of goods imported into China. And, this disincentive is in addition to, and separate from,
the disincentive related to the tariff.
720. The separate and distinct nature of the disin centive is highlighted by China's own description
of its treatment of fasteners under the measures. At the second meeting, China explained that (1)
fasteners are always assessed at the 10 per cent part s rate, but that (2) the use of imported fasteners
affects the local content calculations, so that us ing imported fasteners coul d require that all other
imported parts in a vehicle would be assessed a 25 per cent charge, instead of a 10 per cent charge.
Thus, separate and apart from any disincentive related to the rate of duty on fasteners, the measures
create a disincentive to the internal purchase, sale and use of imported fasteners. The same is true
with respect to all other parts subject to the measur es, but the fact that (according to China) fasteners
are never assessed at a 25 per cent rate helps to hi ghlight the distinction be tween (1) the disincentive
associated with customs duties normally applied by WTO Members and (2) the disincentive created
by China's measures on the use of goods post-importation.
276. ( China) If the Panel were to find that the charges fall within the scope of Article II
GATT, would the procedural aspects fall within the scope of Article II GATT?
Response of China

721. More accurately, they would fall within the scope of Article VIII of the GATT 1994. As
China explained in paragraphs 128 to 131 of its second written submission, 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 necess arily customs measures (provided, as discussed in
response to question 273, that the measures are germane to the customs purpose). Article VIII
concerns the "fees, charges, formalities and requi rements imposed by governmental authorities in

160 See most recently second written submission of the European Communities, paras. 92 to 132.
161 See first written submission of the European Communities, paras. 45 to 65.

connection with importation and exportation," including, inter alia, the documents and documentation
necessary to ensure the proper classification of import entries and the collection of ordinary customs
duties.
Comments by the European Communities on China's response to question 276
722. China responded that, were the Panel to find th at the charges fall under Article II of the
GATT, the procedural aspects would be governed by Article VIII:1(c) of the GATT 1994.
162 In the
view of the European Communities, the programmati c provision of Article VIII:1(c) does not exclude
the application of Article III:4 to measures that "go far beyond" the requirements to administer
ordinary customs duties and rather intend to affect the internal sale of products. As demonstrated in
previous submissions, this is the case for the Chinese measures. 163 Therefore, the procedural aspects
of the Chinese measures would still need to be assessed under Article III:4 of the GATT, even if Panel
were to categorize the charges as ordinary customs duties.
H. TRIMS AGREEMENT
277. ( China) If the Panel were to consider that par agraphs 1(a) and 2(a) of the Illustrative
List of the TRIMS Agreement spell out two specific TRIMs that are considered inconsistent
with respectively Article III:4 and XI:1 GATT, and thus decide that it does not have to make a
preliminary assessment on whether the meas ures fall within the scope of respectively
Articles III:4 and XI:1 GATT, why should the ch allenged measure not be considered as covered
by these specific examples? Please explain based on the language of the Illustrative List.
Response of China

723. The panel in EC – Bananas III considered that the TRIMs Agreement , including the
Illustrative List, "essentially interprets and clarifies the provisions of Article III (and also Article XI)
where trade-related investment measures are concerned."
164 Likewise, the panel in India – Autos
considered that the Illustrative List "simply provi des additional guidance as to the identification of
certain measures considered to be inconsistent with Article III:4 and XI:1 of the GATT 1994."165
724. Paragraph 1 of the Illustrative List describes tw o specific TRIMs that "are inconsistent with
the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 …" One
of these, as set forth in Paragraph 1(a), is an a dvantage which requires "the purchase or use by an
enterprise of products of domestic origin or from any domestic source …" These provisions cannot,
by their express terms, apply to the application of an ordinary customs duty in accordance with the
terms of a Member's Schedule of Concessions.
725. To begin with, the application of an ordinary customs duty cannot, for the reasons that China
has explained, be "inconsistent with the obligatio n of national treatment provided for in paragraph 4
of Article III …" As discussed in response to ques tion 203, and the earlier submissions cited therein,
the GATT clearly distinguishes between customs measure s that are within the scope of Article II, and
internal measures that are within the scope of Article III. The "discrimination" that Article II permits
in respect of the application of ordinary cust oms duties to the goods of another Member cannot

162 China's response refers to the second written submission of China, para. 131.
163 See second written submission of the European Communities, para. 56; response by the European
Communities to Question 273 from the Panel.
164 EC – Bananas III (Panel Report) at para. 7.185.
165 India – Autos at para. 7.157.

constitute an impermissible internal charge within the scope of Article III. Paragraph 1 of the
Illustrative List, in describing certain TRIMs that are inconsistent with Article III, does not change
this result. Otherwise, the charges that Memb ers are allowed to collect under Article II could
constitute a violation of the TRIMs Agreement, a r esult that is not consistent with the distinction
between customs charges and intern al charges, and that would risk encroaching upon with the rights
and obligations of Members under Article II. By its terms, paragraph 1 of the Illustrative List refers
to measures and charges of a type that are within the scope of Article III. Ordinary customs duties are
not of this type.
726. In addition, there is no "advantage" in the app lication of an ordinary customs duty that is
obtained by "the purchase or use by an enterprise of products of domestic origin or from any domestic
source." This is illustrated by the facts of the present dispute. Under China's Schedule of
Concessions, the purported "advantage" – the lower duty rate for auto parts and components – is
contingent upon what the manufacturer imports. If the manufacturer imports parts and components, it
pays the duty rate for parts and components. If th e manufacturer imports motor vehicles or parts and
components that have the essential character of a motor vehicle, it pays the duty rate for motor
vehicles. This is a feature that arises direc tly from China's Schedule of Concessions, not from "the
purchase or use by an enterprise of products of domestic origin …"
727. Consider, in this regard, two different sets of imports. To avoid any controversy over the
multiple shipment issue, we will assume that both sets of imports arrive in what all parties would
consider to be a "single shipment." One set of im ports consists of auto parts and components that do
not have the essential character of a motor vehicle. Accordingly, they are assessed at a duty rate of 10
per cent. The other set of imports cons ists of auto parts and components that do have the essential
character of a motor vehicle, and they are therefore assessed at a duty rate of 25 per cent. The first set
of imports will be assembled toge ther with domestic parts and components to form a complete motor
vehicle. However, the 10 per cent duty rate app licable to those parts and components is not an
"advantage" that required "the purchase or use by an enterprise of products of domestic origin." The
manufacturer obtained the 10 per cent duty rate because of what it imported, not because it purchased
or used a certainty quantity of domestic parts in the final assembly of the motor vehicle. The
applicable duty rate is a function of the proper cl assification of the imported parts, not the ratio
between imported and domestic parts in the vehicle that the manufacturer finally assembles.
166
728. This example illustrates that the purported "advantage" – the 10 per cent duty rate – is entirely
endogenous to China's tariff schedule. It falls outsi de the scope of paragraph 1(a) of the Illustrative
List because (1) it is not an internal charge or measure of the type that paragraph 1(a) defines; and (2)
in any event, it is not contingent upon the pur chase or use by the manufacturer of products of
domestic origin.
729. The same conclusion applies in respect of Artic le XI and paragraph 2(a) of the Illustrative
List. Paragraph 2(a) defines certain TRIMs that ar e inconsistent with Article XI of the GATT 1994.
Article XI, by its terms, explicitly excludes ordinary customs duties as a type of prohibition or
restriction on imports. The administration and enfo rcement of ordinary customs duties is therefore
outside the scope of the types of charges and measures that paragraph 2 of the Illustrative List seeks to
define. In addition, the challenged measures do not "restrict … the importation by an enterprise of
products used in or related to its local production …" , as set forth in paragraph 2(a) of the Illustrative

166 If it were otherwise, the proper application of GIR 2(a) could always give rise to an improper "local
content requirement" within the scope of paragraph 1(a) of the Illustrative List. This "advantage" would be
conferred whenever the tariff rate for parts and components of an article is lower than the tariff rate for the
complete article.

List. As Article XI itself makes clear, ordinary customs duties do not "restrict" imports. Rather, they
are charges that a Member is entitled to collect in accordance with its ri ghts and obligations under
Article II of the GATT 1994. A contrary reading of paragraph 2(a) of the Illustrative List would mean
that all customs duties constitute a violation of the TRIMs Agreement, to the extent that the article on
which the duty is assessed is "used in or related to " the local production of the importer. There is
simply no basis to conclude that the TRIMs Agreement was intended to prohibit ordinary customs
duties on any article that is used in or related to local production – a category that encompasses a vast
array of ordinary customs duties that WTO Me mbers routinely assess in accordance with their
Schedules of Concessions.
Comments by the European Communities on China's response to question 277
730. In spite of the Panel's request to specifically address the examples in paragraphs 1(a) and 2(a)
of the Illustrative List of the TRIMs Agreement , China's response with regard to paragraph 2(a) is
entirely – and concerning paragraph 1(a) largely – limited to a repetition of its well known "threshold"
arguments which the European Communities has repeatedly refuted.
167
731. In addition, China now argues fo r the first time – in spite of ample previous opportunities –
that the advantage of the lower charges does not "r equire (…) the purchase or use by an enterprise of
products of domestic origin" (see pa ragraph 1(a) of the Illustrative List) but that it is solely
"contingent upon what the manufacturer imports". This is incorrect. As demonstrated in previous
submissions168, the imposition of charges under the Chinese measures depends on whether the
Verification Center, after verifications, conclu des that the imported automobile should be
characterised as complete vehicles (Article 28 of Decree 125) which in turn depends on whether the
imported parts were assembled into vehicles with an insufficient level of local content (see Article 57
of the Automotive Policy Order, Articles 21 and 22 of Decree 125 and Articles 13 to 24 of
Announcement 4). In other words, the question of whether a manufacturer enjoys the advantage of the
lower charges depends on how the auto parts are used after importation and, in particular, whether
they are subsequently assembled and manufactured in Chin a into vehicles with an insufficient level of
local content.
169
278. ( All parties) In the light of the language of the General interpretative note to Annex 1A,
would it be possible to consider that Article 2 of the TRIMs Agreement should prevail over the
provisions of the GATT 1994?
Response of China

732. Yes, but as China noted at the second substantiv e meeting of the Panel, it does not consider
that this dispute implicates any potential conflict between the TRIMs Agreement and the GATT 1994.
Response of the European Communities (WT/DS339)

733. The General interpretative note to Annex 1A provides:

167 See response by the European Communities to Questions 85 and 103 from the Panel; second written
submission of the European Communities, para. 20 to 23.
168 See first written submission of the European Communities, para. 66; second written submission of
the European Communities, paras. 51 to 55.
169 See first written submission of the European Communities, para. 96 to 106.

In the event of conflict between a provisi on of the General Agreement on Tariffs and
Trade 1994 and a provision of another agre ement in Annex 1A to the Agreement
Establishing the World Trade Organizati on (referred to in the agreements in
Annex 1A as the "WTO Agreement"), th e provision of the other agreement shall
prevail to the extent of the conflict.
734. The European Communities does not consider th at there is in the present case a conflict
between Article 2 of the TRIMs Agreement and the applicable provisions of the GATT 1994. The
Chinese measures are inconsistent both with Article 2 of the TRIMs Agreement and with Article III,
paragraphs 2, 4 and 5 of the GATT 1994. Therefore, there is no need for the TRIMs Agreement to
prevail over the provisions of the GATT 1994.
735. Nevertheless, the European Communities recommends following the approach outlined by the
Appellate Body in EC – Bananas III where it considered that the ag reements more specific to the
matter should be considered first.
170 Therefore, the Chinese measures should be first examined under
Article 2 of the TRIMs Agreement and then u nder Article III of the GATT 1994. Thus, the finding
that the Chinese measures fall within paragraph 1(a) of the Illustrative List annexed to the TRIMs
Agreement and, thereby, "are inconsistent with the obligation of national treatment provided for in
paragraph 4 of Article III of GA TT 1994" (see Article 2.2 of the TRIMs Agreement ) informs their
examination under Article III:4 of the GATT 1994.171
Response of the United States (WT/DS340)

736. As a theoretical matter, yes, this would be possible. As the United States has explained,
however, the United States is not aware of any conf lict in the context of this dispute between the
TRIMs Agreement and the GATT 1994.
Response of Canada (WT/DS342)

737. To the extent a conflict between the TRIMs Agreement and the GATT occurs, the TRIMs
Agreement should prevail in the light of General interp retative note to Annex 1A. However, no such
conflict exists in this case.
738. China attempted to argue at the second heari ng that a TRIM would not apply because it was
solely a question of China enforcing its Schedule under Article II that was at issue and paragraph 1 of
the Illustrative List only applies to internal measures. This suggestion is incorrect, as what is relevant
is whether a TRIM imposes a local-content requirement. This can occur internally or at the border and
the TRIM will be deemed inconsistent with Article III:4 of the GATT. Further, a finding of a violation
of the TRIMs Agreement is not in conflict with China's defe nce because the measures do not actually
enforce China's Schedule but rather directly conflict with it. To the extent there was an actual conflict
between application of the TRIMs Agreement and China's so-called right to enforce its Schedule, the
General interpretative note to Annex 1A makes it clear that the TRIMs Agreement would take
precedent over such an Article II defence.

170 Appellate Body Report, EC – Bananas III, paras 202-204.
171 See second written submission of the European Communities, para. 61.

I. A
RTICLE XI OF THE GATT 1994
279. In paragraph 20 of its second oral statemen t (see also the United States' response to
Panel question No. 165), the United States states that China's measures could constitute a
prohibited import restriction under Article XI of the GATT 1994.
(a) ( United States ) Could the United States please elaborate on this point, with specific
reference to the requirements of Article XI of the GATT 1994 and the as pects of the measures
the United States believes qualify as import restrictions.
Response of the United States (WT/DS340)

739. Article XI:1 of the GATT 1994 states, in relevant part:
No prohibitions or restrictions other than duties, taxes or other charges, whether made
effective through quotas, import or expor t licences or other measures, shall be
instituted or maintained by any contracting party on the importation of any product of
the territory of any other contracting party . . . .
740. The range of measures that Members may not institute or maintain under Article XI:1 is quite
broad. The provision encompasses all prohibitions or restrictions on impor tation other than those
enumerated, regardless of whether a Member utilizes a quota, an import or export licensing regime, or
other measures to effect the prohibition or restriction. Se veral previous panels have characterized the
scope of this provision as "broad" and "comprehensive."
172
741. The only caveat contained in Article XI:1 is that "duties, taxes or other charges" are exempted
from coverage. While the measures do impose char ges, to the extent that the charges may be
considered to be imposed "on importation," the measures also constitute prohibitions or restrictions on
the importation of auto parts.
742. In paragraph 115 of its rebutta l submission China argues that "the process of importation is
complete, and goods have been imported, once all the customs formalities required in connection with
the importation of these goods have been satisfied." In its response to Panel question No. 37, China
states that a basic feature of the measures is "to defer the completion of customs formalities in respect
of parts that are declared as parts of register ed vehicle models until the auto manufacturer has
imported and assembled all of the imported parts and components that it will use to assemble the
vehicle model." China thus argues that the charges are imposed upon importation and that
importation does not occur prior to the assembly of th e parts into a motor vehicle. While the United

172 See India - Autos , WT/DS/146/R, WT/DS/175/R , paras. 7.246 (noting that the term "other
measures" is a "broad residual category" that is meant to suggest a broad scope of measures that could be subject
to Article XI:1 disciplines) and 7.264 (noting that "the text of Article XI:1 is very broad in scope, providing for
a general ban on import or export restrictions or prohib itions ‘other than duties, taxes or other charges'"), citing
India – Quantitative Restrictions, WT/DS90/R, para. 5.128; Turkey –Textiles, WT/DS34/R, para. 9.61 (noting
that the title of Article XI – General Elimination of Quantitative Restrictions" – makes clear the general rule that
Members shall not utilize quantitative restrictions against imports); and India-Quantitative Restrictions, para.
5.142 (noting that Article XI:1 is "‘comprehensive' in that it prohibits import restrictions ‘made effective
through quotas, import or export licences or other measures '"). Other panels that have found Article XI:1's
coverage to be "comprehensive" include: Panel Report, Korea – Various Measures on Beef , WT/DS 161/AB/R,
WT/DS/169/AB/R, para. 749; Japan – Agricultural Products I , BISD 35S/163, para. 5.2.2.2; and Japan – Semi-
Conductors, BSID 35S/116, para. 104.

States disagrees with this assertion, if accepted, this alleged deferral of "importation" would restrict
imports in at least two ways:
743. First, there is a temporal restriction. A ma nufacturer is not allowed to import a part for
assembly into a new vehicle until all parts of new vehicle are gathered for assembly. A manufacturer
cannot import parts in separate shipments at different times, but must combine all the imported parts
used in the same vehicle into a single importation.
744. Second, there is a qualitative restriction. A ma nufacturer is not allowed to import "parts" to
be included in a vehicle if the collected importe d parts in the finished vehicle will exceed the
thresholds established in the measures. At that point, a manufacturer can only import "vehicles." For
example, a manufacturer may wish to import spec ial premium tires to be included as an optional
feature on a particular model. If the engine, chassis, and body were imported, the measures would
deem the imported parts in that vehicle to "fulfill th e characteristics of a whole vehicle." At that point
the auto manufacturer in China would be prohibi ted from importing tires for the vehicle. Any tire
included in the vehicle would have to be considered a feature of a whole vehicle and imported as part
of the "vehicle." Thus, the manufacturer woul d be prohibited from importing tires in a separate
shipment, but would instead be required to collect all parts into a single importation which China
would then consider a complete vehicle.
745. The United States is not arguing that the measures are inconsistent with Article XI as part of
its case in chief; this is an argum ent in the alternative. Indeed that United States maintains that parts
are imported at the time they enter the territory of China and that the measures, rather than delaying
importation, actually impose internal charges on im ported parts in breach of Article III of the
GATT 1994. The United States is asserting, in the alternative, that if China were correct that the
measures prohibited importation until the time of assem bly, the measures would be inconsistent with
Article XI.
(b) ( China) Does China agree with the United St ates? Please comment on the United
States' arguments above.
Response of China

746. The US assertion in paragraph 20 of its se cond oral statement is premised upon multiple
mischaracterizations of China's arguments and the manner in which the challenged measures operate.
China has never argued that "no parts are to be c onsidered 'imported' until after manufacturing." Nor
has it described the challenged measures as operating on this basis. As China has explained most
recently in response to question 199 above, the ch allenged measures establish a customs process to
ensure the correct classification of parts and com ponents that have the essential character of a motor
vehicle. This classification determination is based on the prior evaluation of the vehicle model and
the resulting declaration that the manufacturer provid es at the time the parts and components enter the
customs territory of China. The measures do not "prohibit the importation of parts until after the
completion of a manufacturing operation," or prohibit the importation of auto parts in any other
respect. Manufacturers are free to enter auto pa rts and components into China. The customs
procedure that Decree 125 establishes merely assures the proper classification and collection of duties
on parts and components that have the essential character of a motor vehicle. Article XI makes clear
that the collection of ordinary customs duties is not a prohibition or restriction on imports that is
within the scope of the provision.

Comments by the European Communities on China's response to question 279(b)
747. The European Communities has addressed the mischaracterization of the Chinese measures
(e.g. "customs process", "determination is based on the prior evaluation (…) and the declaration")
apparent in China's response to this question in previous submissions.
173 China's assertion that it "has
never argued that 'no parts are to be considered 'imported' until after manufacturing'. Nor has it
described the challenged measures as operating on this basis" is directly contradicted by its response
to question 204. There, China stated that "the measures at issue in the present dispute (…) do not
impose duties on parts and components after they ha ve entered free circulation in China". This
implies that in China's view the parts are not yet in free circulation when charges are imposed. As
charges are imposed after manufacture (see Article 28 of Decree 125), this can only mean that parts
are not in free circulation or, in other words, imported when manufacture takes place.
J. ARTICLE XX(D) OF THE GATT 1994
280. ( Complainants) Paragraph (d) of Article XX refers to, inter alia, "laws and regulations
that are not in themselves inconsistent with the provisions of the GATT 1994". China argues
that the measures secure compliance with Chin a's tariff provisions for motor vehicles, which
are incorporated in the GATT and are therefore not inconsistent with the GATT provisions. Do
the complainants agree with China's view? If not, why?
Response of the European Communities (WT/DS339)

748. The European Communities does not agree with China's view that its measures secure
compliance with China's Schedule of Concessions. It is irrelevant that China's tariff provisions
reproduce China's Schedule and are not as such GATT- inconsistent. China has not demonstrated that
the measures are "necessar y to secure compliance with" its Sche dule as required under Article XX(d)
of the GATT 1994. The European Communities has already presented extensive arguments in this
regard174 and only provides a succinct summary of these arguments in response to this question.
749. First, the Chinese measures do not intend to secure compliance with China's schedule of
concessions, but actually aim at fostering the de velopment of the Chinese auto parts industry.
Secondly, the Chinese measures ar e not suitable to secure compliance with China's schedule of
concessions. As demonstrated in the alternative Article II claim, 175 the measures impose duties which
are at variance with China's tariff schedule. Thirdly, China has not demonstrated that there is in reality
a problem of tariff evasion that needs to be addr essed. Finally and even if there was a problem of
tariff evasion, China has failed to consider any l ess burdensome means to secure compliance with its
tariff schedule.
Response of the United States (WT/DS340)

750. The United States does not agree. As the United States explained in its opening statement at
the second meeting, China uses this type of la nguage to express two very different positions,
involving two entirely different factual contexts. A proper analysis of China's arguments requires
that these two different positions presented by China be disentangled.

173 See in particular second written submission of the European Communities, paras. 50 to 56.
174 See second written submission of the European Communities, para. 141 to 146.
175 See first written submission of the European Communities, para. 207 to 281; second written
submission of the European Communities, para. 67 to 135.

751. First, China uses this language of " securing compliance with China's tariff provisions for
motor vehicles" to mean that under its domestic tariff schedule, China is to charge a whole-vehicle
rate of duty on any imported part, so long as that pa rt 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 possible interpretation of Ch ina's WTO obligations that would allow for China
to impose a 25 per cent duty on bulk shipments of parts imported for manufacturing purposes. Thus,
under this formulation of China's position, there is no "law or regulation" identified by China "that is
not inconsistent" with the provisions of the GATT 1994.
752. Second, China uses the same language about " securing compliance with China's tariff
provisions for motor vehicles" to mean that China must be able to address certain limited, though
still hypothetical, examples, such as the case of a CKD split into two separat e shipments. China,
however, has failed to show a single instance
 where any importer ever engaged in the specific
practices identified by China. Moreover, Chin a's asserted rationale does not match the scope of
China's measures. To the contrary, China's measures sweep broadly to cover a ll imports of bulk parts
for manufacturing purposes, not just instances of CKDs split into two separate shipments. Thus,
leaving aside whether or not China's may (consiste nt with its WTO obligations) stop the hypothetical
practice of splitting CKD kits into two separate boxe s, the measures China has actually adopted are
not necessary to secure compliance with its provisi ons for motor vehicles because they are drastically
broader in scope than measures intended to stop such types of "evasion" alleged by China.
753. Finally, under Article 93 of the Working Pa rty Report, China is required to impose a
maximum of a 10 per cent rate of duty on CKDs/SKD s. Since China's measures – under China's own
theories of the application of GIR 2(a) – classify imported manufacturing parts as CKDs/SKDs,
China's measures result in a tariff treatment that is inconsistent with China's WTO obligations (as
contained in the Working Party Report).
Response of Canada (WT/DS342)

754. The measures do not secure compliance with China's tari ff provisions for motor vehicles. As
set out in paragraphs 87-90 of Canada's second written submission, the pur pose of the measures is
clear, namely to provide protection and support to th e domestic auto parts industry. Second, as the EC
pointed out in its second oral statement at paragraph 36, the measures are not designed to enforce
China's Schedule since, on their face, they conflict with it by imposing an additional 15% charge on
foreign auto parts. This additiona l charge is not listed in China's Schedule and therefore cannot be
applied.
281. ( All parties ) Which measure should be considered as "the law or regulation" falling
within the meaning of paragraph (d): Ch ina's tariff provisions for motor vehicles as such or
China's tariff provisions for motor vehicles as interpreted by China allegedly according to
GIR 2(a)?
Response of China

755. China does not perceive a distinction between its tariff provisions for motor vehicles "as
such" and its tariff provisions for motor vehicles as interpreted in accordance with the rules of the
Harmonized System. As the Appellate Body has found in EC – Computer Equipment and EC –
Chicken Cuts, tariff headings are interpreted in accord ance with the interpretive rules of the
Harmonized System. The term "motor vehicles" in China's tariff provisions must be understood in the
context of GIR 2(a) and its rules for distinguishing between an article and the parts and components of
that article.

756. In addition, as China discussed in paragra ph 168 of its second written submission, the
interpretive relationship between motor vehicles and parts of motor vehicles would arise even if
GIR 2(a) did not exist. The relationship between parts and wholes is intrinsic to any set of tariff
provisions that has separate headings for an article and its constituent parts; customs authorities must
have some basis to determine where one set of tari ff provisions ends and the other begins. Thus, the
question of tariff interpretation arises no matter wh at, and customs authorities must have some basis
to resolve this question of interpretation.
Response of the European Communities (WT/DS339)

757. China provided the response to this question in its first written submission when it alleged
that "the challenged measures implement and enforce the provisions of China's tariff schedule
 relating
to imports of 'motor vehicles'" (emphasis added). 176 This refers to the Schedule as such. China's
erroneous interpretation of its Schedule was developed by China ex post for the purposes of this
dispute and is not part of its Schedule. In the cont ext of China's Article XX(d) defence, it is for the
Panel to interpret China's Schedule and not for China.
Response of the United States (WT/DS340)

758. As the party asserting an affirmative defense, China has the burden of explaining how its
measures purportedly fit within the scope of Article XX(d). China has not been clear on its theory
regarding the supposed application of Article XX(d). As set out in the United States response to
Question 280, the United States submits that regard less of how China would formulate its purported
defense, China's measures do not fall within the scope of Article XX(d).
Response of Canada (WT/DS342)

759. Canada considers that the alleged GATT-consis tent "law or regulation" is the whole of
China's Schedule as implemented under Chinese law, and not one particular tariff line. The GATT-
consistent law or regulation consis ts solely of the Schedule and not secondary considerations such as
the GIRs under the Harmonized System, since they ar e not directly incorporated into the Schedule.
The GIRs are relevant as part of the Harmonized Sy stem in interpreting the proper classification of a
good under a Member's Schedule. However, that cont ext requires an application of the Harmonized
System as a whole, including GIR 1 and appropriate Explanatory Notes (such as for 87.06). Canada
also directs the Panel to its responses to Ques tions 187 and 210, and Section II.C.1 of its second
written submission.
Comments by the European Communities on China's response to question 281
760. China's response attempts to blur the line betw een the "law or regulation" which it allegedly
seeks to secure compliance with, i.e. its tariff sch edule provisions for vehicles, and its erroneous
interpretation thereof. As set out in the EC response to this question, it is for the Panel, and not for
China, to assess under Article XX(d) of the GATT 1994 inter alia whether (a) the Chinese tariff
provisions are consistent with the GATT 1994 and (b) the measures are necessary to secure
compliance therewith. China's interpretation of its "law or regulation", on the other hand, is irrelevant
in this context.
177

176 See first written submission of China, para. 203.
177 China's response is all the more surprising since China emphasises in response to question 290 that
the defence under Article XX(d) cannot depend on evaluations inside the domestic legal system of the WTO

282. ( China) In paragraph 145 of its second writte n submission, the European Communities
submits that China's arguments under Article XX(d) is "inherently contradictory" when it
comes to the attempt of justifying an infringeme nt of Article II of th e GATT 1994 because, in
that case, the measures "apparently do not enforce but deviate from China's Schedule." Does
China agree with the European Communities? If not, please explain how the measures can be
justified under Article XX(d) if the Panel were to find them inconsistent with Article II. Please
also explain whether, and if so, how the Panel's analysis of China's defence under Article XX(d)
in respect of an Article II violation should be different from that in respect of an Article III
violation.
Response of China

761. In respect of Article II, the Panel could find, for example, that there is uncertainty within the
Harmonized System concerning the circumstances under which customs authorities are allowed to
classify multiple shipments of parts and components as having the essential character of the complete
article. Based on such a finding, the Panel might conclude that the challenged measures are not in
accord with China's rights and obligations unde r Article II, as they do not have a clear affirmative
basis within the rules of the Harmonized System.
762. For the reasons that China set forth in paragra phs 42 to 45 of its second oral statement, China
considers that a finding of uncertainty within the rules of Harmonized System is a circumstance in
which the doctrine of in dubio mitius would apply, and should lead to the conclusion that China
retains its sovereign authority to define and enfo rce the boundaries between complete motor vehicles
and parts of motor vehicles, and be tween the substance of what an importer imports and the form in
which it does so.
763. However, another way of viewing the presence of a known and identifiable ambiguity within
the rules of the Harmonized System, and within international customs practice generally, is that China
is entitled to rely upon the general exception in Ar ticle XX(d) to adopt measures that are necessary to
secure compliance with its tariff provisions for moto r vehicles, and to ensure that those provisions
have meaningful effect. China's tariff provisions for motor vehicles reflect the tariff bindings set forth
in its Schedule of Concessions, and they are theref ore not inconsistent with the GATT 1994. To the
extent that the rules of the Harmonized System do not provide an unambiguous legal basis for China
to give effect to those provisions, this authority could be found in Article XX(d). The rules of the
Harmonized System may not clearly provide for every circumstance in which customs authorities
need to interpret and enforce their tariff schedules to ensure that they are undermined through the
manner in which importers structure and document their imports. In these circumstances, it is
consistent with the purpose of Article XX(d) to en sure that Members are nonetheless able to adopt
measures that are necessary to secure compliance with their tariff provisions.
764. The Article XX(d) analysis would be different in respect of a finding of a violation of
Article III. The Panel might find, for example, th at the challenged measures collect internal charges
in violation of Article III based on its understanding of when goods ar e considered to be "imported"
for the purpose of Article III. The Panel might also find, for example, that the challenged measures
impose procedures that constitute internal measures, again based on its understanding of the scope of
Article III in relation to the scope of Article II. In these circumstances, the charges and measures
could be justified under Article XX(d) as char ges and measures that are necessary to secure

Member concerned: "It would not be consistent with the object and purpose of the GATT to find that the
availability of a defence under Article XX(d) is contingent upon what a Member considers to be illegal under its
national laws – a consideration that will necessarily differ from one Member country to another."

compliance with a valid interpretation of China' s tariff provisions for motor vehicles, i.e., an
interpretation that encompasses parts and component s in multiple shipments that have the essential
character of a motor vehicle. That is, the Panel could find that China's interpretation of its tariff
provisions is not inconsistent with the interpre tive rules of the Harmonized System, and is not
otherwise inconsistent with the meaning of the relevant terms in China's tariff schedule, but that China
has adopted impermissible "internal" charges a nd measures as a means of securing compliance with
that interpretation.
765. While China would not agree with the finding of violation under Article III, it would seem to
be exactly the circumstance in which Article XX (d) would apply. The reference to customs
enforcement in Article XX(d) presupposes that Me mbers may need to take actions that are
inconsistent with its GATT obliga tions (and thus requiring the invoca tion of a general exception), but
that are otherwise necessary to secure compliance with its customs laws. The adoption of charges and
measures that violate the disciplines of Article III, but that are necessary to secure compliance with a
customs measure that the Member is allowed to impose in accordance with its Article II
commitments, would seem to be the paradigmatic case in which Article XX(d) would apply. If
Article XX(d) did not apply in this circumstance, it is hard to see when it would ever apply.
766. As China has explained throughout this proceed ing, the purpose of Decree 125 is to ensure
that its tariff provisions for motor vehicles apply without regard to the manner in which the
manufacturer chooses to structure and documents its imports of parts and components that have the
essential character of a motor vehicle. Decree 125 en sures that substance prevails over form in the
assessment of duties. For the reas ons that China has explained, Ch ina believes that Decree 125 falls
within the scope of China's rights and obligations unde r Article II. However, if the Panel were to find
that one or more aspects of the measure constitut es an impermissible measure or charge within the
scope of Article III, China considers that any such internal measure or charge is justified under
Article XX(d) to secure compliance with duties that China is allowed to collect by reason of the
importation of parts and components that have the essential character of a motor vehicle.
Comments by the European Communities on China's response to question 282
767. In its response, China does not manage to escape the inherent contradiction in its argument
which lies in the fact that measures providing for ordinary customs duties in excess of the Schedule
cannot be necessary to secure compliance with th e Schedule. Instead, China tries to hide the
contradiction by replacing the clear term "infri ngement of Article II of the GATT 1994" with the
evasive label "ambiguity within the rules of the Harmonized System". Such labeling does not change
the reality of China's contradictory Article XX defence.
768. With regard to the alleged justification of an Article III violation, the European Communities
notes that China has still not demonstrated that th e measures are necessary to secure compliance with
its tariff schedule provisions for vehicles. Instead, Ch ina formulates its hope that "it would seem to be
exactly the circumstance in which Article XX(d) woul d apply" or "[i]f Article XX(d) did not apply in
this circumstance, it is hard to see when it would ever apply". Such wishful thinking, however, cannot
replace a proper defense under Article XX(d).
283. ( China) China submits in its second written submission that it invokes Article XX(d) in
case the Panel were to find that, inter alia, (1) China needs a separate basis within the WTO law
to enforce its tariff provisions for motor vehicles; and (2) the rules of the Harmonized System do
not provide a basis for China to give meaningf ul effect to the higher duty rates for motor
vehicles. Could China please explain in detail wh at China is respectively referring to by these
two scenarios.

Response of China

769. Several of the Panel's questions following the fi rst substantive meeting of the Panel asked the
parties to discuss the legal basis within the WT O agreements for Members to adopt measures to
prevent the evasion of ordinary customs duties. As discussed in paragraphs 162 and 163 of China's
second written submission, and the answers to Panel qu estions cited therein, China considers that the
prevention of tariff evasion is a question of en suring the proper classification of imported goods,
including the proper classification of goods under ci rcumstances in which the importer has sought to
structure and document its imports so as to evade a specific classification result. For the reasons
explained therein, China considers that these are issues of customs administration that can be resolved
within the rules of the Harmonized System.
770. Because the Harmonized System provides cont ext for the interpretation of a Member's
Schedule of Concessions, the Harmonized System is, in China's view, the b asis in WTO law for the
resolution of these types of issues. In paragra ph 164 of its second written submission, China referred
to the event in which the Panel nonetheless considered that "China needs a separate basis within WTO
law to enforce its tariff provisions for motor vehicles ." By "separate basis", China was referring to a
basis in WTO law other than the rules of the Harmonized System. In referring to this circumstance,
China meant to address the possibility that, for whatever reason, the Panel would find that the
Harmonized System does not provide a basis in WTO law for Chin a to adopt measures to enforce its
tariff provisions for motor vehicles. This is one of the circumstances in which China considers that it
could properly rely upon Article XX(d) to justify the challenged measures.
771. The second circumstance to whic h China referred, in which the rules of the Harmonized
System do not provide a basis for China to give m eaningful effect to its tariff provisions for motor
vehicles, is the circumstance discu ssed in response to question 282 above. That is, the Panel could
find that there is ambiguity within the Harmonized System concerning the circumstances under which
customs authorities can classify multiple shipment s of parts and components as having the essential
character of the complete article, and conclude, for this reason, that the Harmonized System does not
provide a clear legal basis for the measures. For the reasons discussed in response to question 282,
this is another circumstance in which China cons iders that it could properly rely upon Article XX(d)
to justify the challenged measures.
Comments by the European Communities on China's response to question 283
772. As set out in our comments on the previous reply, China errs when it argues that
Article XX(d) of the GATT 1994 provides "a basis in WTO law other than the rules of the
Harmonized System". Logically, a measure infringing Article II of the GATT 1994 or "the rules of the
Harmonized System", as China now puts it, cannot be necessary to secure compliance with China's
Schedule.
284. ( Canada) Canada submits that "Canada accepts that Article XX(d), in principle, could
be used to justify internal charges necessary to enforce customs measures." (Canada's response
to Panel question No. 82) Please clarify whether "customs measures" in its answer refers to
China's tariff Schedule.
Response of Canada (WT/DS342)

773. Customs measures could include China's tariff Schedule in principle , since Article XX(d)
does not preclude such a defence under Article III. Ind eed, that is essentially what was at issue in the
EEC – Parts and Components
 case. A Member could in principle attempt to justify such internal

charges as necessary to enforce customs measures. Canada does not suggest that such a defence
would necessarily be successful simply by virtue of the relationship of the defence to a Member's
Schedule.
774. However, in reality, if the Panel were to find that China's measures violate Article III, then its
Article XX(d) must necessarily fail. This is because, on the facts of this particular case, the purpose of
the additional charge is to protect China's domest ic auto industry and not to enforce its Schedule.
Moreover, as explained at paragraph 79 of Cana da's second written submission and in response to
Question 84, China cannot use its Schedule as a defe nce to violate its other obligations under the
GATT.
285. ( Canada) Please elaborate on your position that China cannot use its Schedule to shield
a violation of Article III or the TRIMs Agreement unless specific provision is made for such
departure in the WTO Agreement itself.
Response of Canada (WT/DS342)

775. Canada emphasizes that China has no conditions in its Schedule that would allow it to classify
auto parts based on their end-use. Consequently, it has no justification to de rogate from applying the
tariff rate for auto parts listed in its Schedule. Even if, theoretically, China we re allowed to read into
its Schedule the ability to classify motor vehicles ba sed on end-use, the Appellate Body has made it
clear in EC – Export Subsidies on Sugar that a Member is not permitted to reduce its obligations
under other provisions of the GATT by qualifyi ng them under Article II:1(b) or any other
provision.
178 China is therefore barred in the present dis pute from attempting to read into its Schedule
the condition that it can classify auto parts based on end-use, as this would derogate from its
Article III obligations.
286. ( All parties ) If the Panel were to find China's measures to be inconsistent with the
provisions of GATT Articles III, could the parties ex plain whether, and, if so, to what extent the
Panel's analysis under China's Article XX(d) defence, must entail a similar type of analysis as
that undertaken in respect of Article II, in particular concerning the interpretation of China's
tariff Schedule.
Response of China

776. Under Article XX(d), a measure relating to customs enforcement must by necessary to secure
compliance with laws or regulations that are not in consistent with the GATT. In the event that the
Panel were to find that the challenged measures are in consistent with the provisions of Article III, the
Panel would need to evaluate, in respect of China's defence under Article XX(d), whether the
challenged measures secure compliance with an inte rpretation of China's tariff provisions for motor
vehicles that is consistent with its rights and oblig ations under the GATT. This is the circumstance
that China discusses beginning in the fourth paragraph of its response to question 282 above.
Response of the European Communities (WT/DS339)

777. In the view of the European Communities, when the Panel analyses China's alleged
justification under Article XX(d), it needs to examine whether the Chinese measures are "necessary to
secure compliance with" China's schedule of concessions . This entails a similar type of analysis as
under Article II because measures imposing duties that are inconsistent with China's Schedule cannot

178 EC – Export Subsidies on Sugar, Appellate Body Report, at para. 219.

be considered to be suitable and, thus, necess ary to secure compliance therewith. This analysis
resembles the one under Article II to the extent th at the Panel would need to examine whether the
charges imposed under the measures are in excess of those provided for in the Schedule. In contrast to
the analysis under Article II, this Article XX(d) analysis would however not depend on a finding that
the charges under the Chinese measures are ordinary customs duties.
Response of the United States (WT/DS340)

778. As a theoretical matter, it may be possible to justify under Article XX(d) a measure adopted
to enforce an ordinary customs duty consistent with Article II that is in breach of Article III of the
GATT 1994. (Article XX(d) does mention "customs en forcement.") However, in the context of this
case, the United States does not understand, and Ch ina has not met its burden of showing, why it
would be necessary to adopt a measure in breach of Article III in order for China to enforce any
legitimate customs measure, including the collection of ordinary customs duties on autos or auto
parts. Put another way, China has not explained why – if it is in fact applying an ordinary customs
duty – China cannot simply impose that rate of duty on auto parts based on their condition at the time
they are imported into the territory of China.
Response of Canada (WT/DS342)

779. As Canada has emphasized at paragraph 23 of its First Oral Statement, China's Article II
argument is really nothing more than an Article XX(d ) defence to its Article III violation. Article II is
itself not a "defence" – it imposes obligations on Members, which are cumulative to other obligations
in the WTO Agreement. The assessment of a defence under Article XX(d) is therefore different than
an assessment of whether China is imposing ordina ry customs duties as permitted by Article II:1(b),
first sentence, in two ways. First, China bears the bur den of proof to justify an Article XX(d) defence.
Second, there is a specific legal test to be app lied under Article XX(d) that does not apply where a
charge is properly classified under Article II. The relevant question under Article II would be whether
China is applying ordinary customs duties in excess of those set out in its Schedule for auto parts,
while an Article XX(d) defence instead involv es an examination of wh ether the measures are
necessary to secure compliance with China's Schedul e. The latter does not require an assessment of
the validity of China's interpretation of auto parts and motor vehicles under its Schedule, but only
whether the measures ensure compliance with that Schedule, where the Schedule is properly applied.
780. With respect to Article XX(d), Canada refe rs the Panel to Section III of its second written
submission. Canada maintains that this is the sole defence that China may invoke, as the measures do
not impose ordinary customs duties.
Comments by the European Communities on China's response to question 286
781. China's response that "the Panel would need to evaluate, (…) whether the challenged
measures secure compliance with an interpretation of China's tariff provisions for motor vehicles"
(emphasis added) is based on the same misunders tanding which the Europ ean Communities already
identified in its above comment on China's res ponse to question 281. Under Article XX(d), the
infringing measure must be necessary to secure complia nce with a law or regulation, and not with an
erroneous interpretation thereof.
287. ( China) With regard to China's arguments under Article XX(d) in respect of Article 29
of Decree 125, could China confirm whether it is its position that the measures at issue (i.e.
Policy Order No. 8, Decree 125, and Announcement 4) are "laws or regulations that are not
themselves inconsistent with the GATT 1994 " within the meaning of Article XX(d). If so, does

an analysis of this element under Article XX(d) in relation to Article 29 of Decree 125 depend on
whether China's measures themselves can be found consistent with the GATT 1994?
Response of China

782. The measures secure compliance with China's tariff schedule, which incorporates China's
Schedule of Concessions by reference.
179 This is the law or regulation that is not inconsistent with the
GATT 1994. As China discussed in paragraphs 185 to 187 of its second written submission,
Article 29 of Decree 125 is justified under Article XX(d) because it is necessary to ensure that China's
tariff provisions for motor vehicles are not subject to evasion by manufacturers who are able to
arrange with third-party suppliers to import parts and components that have the essential character of
a motor vehicle.
Comments by the European Communities on China's response to question 287
783. The infringement of Article III of the GATT 1994 through Article 29 of Decree 125 cannot be
justified on the basis of Article XX(d) of the GA TT 1994. Contrary to China's response, Article 29 of
Decree 125 is not necessary to prevent any evasi on of China's vehicle tariffs through collusion
between third-party parts suppliers and vehicle manu facturers. China has neither substantiated tariff
evasion, nor collusion or that any of these would necessitate a provision like Article 29 of
Decree 125.
180 As set out above, the measures do not en force the 25% tariff rate for complete
vehicles.
288. ( China) In its defence of "Article 29 Decr ee 125 measures" under Article XX(d), China
appears to take into account intentional circumvention of the measure by the manufacturers,
whereas "intent" does not seem to be considered relevant to justify other aspects of the
measures at issue under Article XX(d) and for its general definition of circumvention. Could
China elaborate on this argument and clarify the relevance of the importers' intent.
Response of China

784. China does not consider that intention is releva nt in either circumstance. The purpose of the
challenged measures is to ensure that parts and components that have the essential character of a
motor vehicle receive the same tariff classification, and are subject to the same rate of duty, without
regard to the manner in which the auto manufactur er structures and docum ents its imports. One
respect in which the auto manufact urer may structure its importation of parts and components is to
arrange to purchase imported parts and components from a third-party supplier in China. This is the
specific circumstance that Article 29 addresses.
Comments by the European Communities on China's response to question 288
785. The question whether the importers' intentions ar e relevant for this case has been the subject
of ever changing positions by China (see e.g. the second written submission of the European
Communities, paragraphs 125 to 129). It appears th at China has now come to the conclusion that
intention is not relevant at all although in its fi rst written submission the "demonstrated and declared
intention" was the cornerstone of the anti-circumve ntion theory (see China's first written submission,
paragraphs 33, 153, 155 and 162).

179 See China first written submission at para. 203.
180 See, for a discussion of China's Article XX(d) de fence in general, second written submission of the
European Communities, paras. 143 to 146.

289. ( Canada) Canada submits, inter alia, in relation to the requirements of the chapeau of
Article XX(d) that there is no question that the application of the measures adversely affects the
conditions of competition between imported a nd domestic parts (paragraph 103 of Canada's
second written submission). Please elaborate in your argument on the violation of the chapeau
of Article XX, in light of the Appellate Body's finding in US – Gasoline that "the provisions of
the chapeau cannot logically refer to the same standard(s) by which a violation of substantive
rules has been determined to have occurred." In other words, if the violation of China's
measures for which Article XX(d) is invoked is in relation to Article III, would the question of
discrimination between imported and domestic parts not already have been determined?
Response of Canada (WT/DS342)

786. Canada agrees with the Panel's statement. Canada was considering the third strand of
discrimination under the chapeau, namely whether the measures constitute a disguised restriction on
trade. The statement referring to respecting the app lication of the measures was simply to supplement
the main point of the paragraph, namely that "as set out in paragraph 88, the primary purpose of the
restriction is to afford protection to the dom estic automotive industry from imported competition".
Thus, reference to the application of the measures shows that, in the context of Article XX, both the
design and application of the measures, when taken i ndividually or as a whole, illustrate that they are
nothing more than a disguised restriction on trade. This is important, since the Appellate Body has
found that the prevention of abuse of the Article XX exceptions is a fundamental purpose of
assessment under the chapeau. For this reason, if the measures were considered provisionally
justifiable under Article XX(d), they fail to meet the chapeau requirements because they are an abuse
of the Article XX(d) exception.
290. ( China) The Panel in EEC – Parts and Components found that the examples of laws and
regulations identified in Article XX(d) would s eem to suggest that Article XX(d) only covers
measures designed to prevent actions that would be illegal under the laws or regulations. In
light of this statement, what are the illegal actions under the laws or regulations that China's
measures are designed to prevent? Please explain in detail.
Response of China

787. China does not consider that there is anything in the ordinary meaning of Article XX, or
Article XX(d) in particular, to support the conclusion that the actions that a measure seeks to prevent
must be "illegal." Article XX(d) makes no referenc e to "illegality." Moreover, the "illegality" of a
particular action is defined under municipal law. It would not be consistent with the object and
purpose of the GATT to find that the availability of a defence under Article XX(d) is contingent upon
what a Member considers to be illegal under its na tional laws – a consideration that will necessarily
differ from one Member country to another.
788. The specific term to which Article XX(d) refe rs is "customs enforcement." Members may
enforce their customs laws and regulations in ways that do not necessarily involve a prior finding of
illegal action by the importer. For example, a Member may require the submission of certain
documentation to ensure the correct classification of an import entry. While it may be illegal under
national law to fail to submit this documentation, or to submit this docum entation with material
inaccuracies or misrepresentations, Article XX(d) does not require that any such illegality actually
occur as a precondition to the adoption of the docum entation requirements. Likewise, a Member may
impose a particular customs control procedure to ensure the proper classification of an import entry,
to ensure compliance with a specific condition of en try, or for any other valid customs purpose. To
the extent that these types of measures have elemen ts that are inconsistent with a Member's other

GATT commitments (for example, because they are inconsistent with the requirements of Article III),
a Member may seek to justify these elements under Article XX(d) without regard to whether any
illegality has occurred under its natio nal laws or regulations. The question, in each instance, is
whether the measure is related to customs enforcement.
789. With that said, it is illegal under Chinese law to fail to pay the customs duties that apply to
imported articles. China has previously described the relevant Chinese laws and regulations, and
provided relevant excerpts, in response to ques tion 30 from the Panel. The challenged measures
secure compliance with these laws and regulations by ensuring that importers correctly declare the
entry of parts and components that have the e ssential character of a motor vehicle and pay the
corresponding duties, whether the parts and component s enter the customs territory of China in one
shipment or in multiple shipments.
Comments by the European Communities on China's response to question 290
790. Contrary to China's response, the European Communities considers that the Chinese measures
fail to satisfy the qualification "to secure compliance with laws or regulations" as interpreted by the
Panel in EEC – Parts and Components (at paras. 5.15 to 5.18). The Panel required that measures
prevent actions inconsistent with the obligations set out in laws or regulations or, in other words, are
related to the enforcement of oblig ations under laws or regulations . According to China, the "laws or
regulations" in question are the tariff provisions for vehicles contained in its Schedule. The measures,
however, do not prevent behaviour inconsistent w ith the Chinese Schedule. They do not enforce the
Schedule, but are on the contrary inconsistent w ith the Schedule by imposing charges that deviate
from the tariffs contained in the Schedule.
181
291. ( China) With respect to China's Article XX(d) defence, China stated at the second
substantive meeting that the illegal actions Chin a's measures are designed to prevent was the
improper declaration of goods being imported.
(a) Is China arguing that if an auto manufacturer imports a shipment of brakes and
declares them as such and if those brakes are me ant to be included in a registered vehicle model
that meets the thresholds for a "deemed whole vehicle" in China's measures, that auto
manufacturer is committing customs fraud?
Response of China

791. If a manufacturer were to import a shipment of brakes for a registered vehicle model,
Article 15 of Decree 125 would require the manufacture r to note this status on the import declaration
form. Failure to complete the declaration in acco rdance with Article 15 would constitute a violation
of Decree 125. As set forth in Article 36 of D ecree 125, a violation of the rules set forth in
Decree 125 may constitute an act of smuggling or a violation of customs supervision rules under the
Customs Law and the Implementation Rules on Customs Administrative Penalties . China has
previously discussed these laws and regulations in response to question 30 from the panel. As
discussed in response to that question, the exact na ture of the violation and the range of potential
penalties would depend upon the amount of the customs duties that were evaded through the improper
completion of the customs declaration form.
(b) Can China clarify whether it believes that if an auto parts supplier imports a shipment
of brakes and declares them as such and if tho se brakes are later sold to an auto manufacturer

181 See second written submission of the European Communities, para.146.

who includes it in a registered vehicle model that meets the thresholds for a "deemed whole
vehicle" in China's measures, that auto manufacturer is committing customs fraud?
Response of China

792. If the manufacturer purchases the parts from the s upplier for a registered vehicle model, the
manufacturer is required under Article 29 to pay the difference between any duty already collected in
respect of those parts and the duty applicable to parts and components that have the essential character
of a motor vehicle. This is a question of en suring the correct classification of these parts and
components. For the reasons discussed in respon se to question 290, China does not consider that
Article XX(d) can only be invoked in respect of what a Member might classify as "customs fraud."
Comments by the European Communities on China's response to question 291
793. In the view of the European Communities, Ch ina's responses reveal the absurdity of the
measures: Vehicle manufacturers who properly declare au to parts for what they are, i.e. on the basis
of "the 'objective characteristics' of the products in question when presented for classification at the
border" (see the Appellate Body in EC – Chicken Cuts, para. 246), can violate the measures and, thus,
commit an act of smuggling or a violation of customs supervision rules under Article 36 of
Decree 125. The same goes for vehicle manufactur ers who do not pay certain charges if they
purchase parts on the Chinese internal market from s uppliers that previously imported, declared and
cleared them. measures which criminalize behaviour that is consistent with the tariff provisions in the
Schedule cannot be "necessary to secure compliance" therewith.
292. ( All parties ) Is the object and purpose of the me asure relevant under the analysis of
paragraph (d) of Article XX? If so, under what element of analysis under paragraph (d)?
Response of China

794. China is uncertain as to what the Panel means by the "object and purpose of the measure." In
China's view, the relevant consideration under Article XX(d) is whether the measure is one that is
necessary to secure compliance with customs laws. This can be discerned by the nature and operation
of the measure at issue. In this respect, the "object and purpose of the measure" is a relevant
consideration under Article XX(d).
Response of the European Communities (WT/DS339)

795. Under Article XX(d) of the GATT 1994, a meas ure can be provisionally justified if it is
"necessary to secure compliance with laws or regul ations which are not inconsistent with the
provisions of this Agreement".
796. The Appellate Body in Korea – Various Measures on Beef held that Article XX(d) sets out a
two-pronged test:
For a measure, otherwise inconsistent with GATT 1994, to be justified provisionally
under paragraph (d) of Article XX, two elemen ts must be shown. First, the measure
must be one designed to "secure compliance" with laws or regulations that are not
themselves inconsistent with some provision of the GATT 1994. Second, the
measure must be "necessary" to secure su ch compliance. A Member who invokes

Article XX(d) as a justification has the burden of demonstrating that these two
requirements are met.
182
797. Under the first element of this test, China needs to demonstrate that its measures are
"designed to secure compliance" with its Schedule of concessions. As demonstrated in greater detail
in previous submissions, the Chinese measures are not designed to secure compliance with China's
schedule of concessions, but actually aim at foster ing the development of the Chinese auto parts
industry.183
Response of the United States (WT/DS340)

798. The Appellate Body has found that an exam ination of a measure under Article XX(d)
involves a two-step analysis:
For a measure ... to be justified provisiona lly under paragraph (d) of Article XX, two
elements must be shown. First, the measure must be one designed to "secure
compliance" with laws or regulations that are not themselves inconsistent with some
provision of the GATT 1994. Second, the m easure must be "ne cessary" to secure
such compliance.
184
799. In examining whether China's measures are in fact "designed to secure compliance" with
some GATT-consistent measure, the Panel should l ook at all facts and circumstances. The United
States notes that laws are often adopted for more than one reason, 185 and that statements of intent
contained in legislation may not be determinative. Nonetheless, the statements of intent contained in
China's laws are relevant and should be considered by the Panel. In particular, the Panel should take
note that China's measures state that they are intended to promote the development of China's
domestic auto parts industry, and the fact that China's measures make no mention of any goal of
preventing "tariff evasion" or "tariff circumvention."
Response of Canada (WT/DS342)

800. The object and purpose of the measures is relevant to assessing them under Article XX(d) in
three respects. First, the object and purpose is relevant under the first part of the provisional
justification test, namely whether the measures are "designed to secure compliance" with a GATT-
consistent measure. As explaine d at paragraphs 87-90 of Canada 's second written submission and
Question 280, above, the object and purpose of the m easures is not to secure compliance with China's
Schedule as, on their face, their fundamental thrust is to offer protection and support to the domestic
automotive industry.
801. Second, the object and purpose may colour th e assessment of whether the measures are
"necessary" under the second part of the provisional justification test, as the measures could not be
said to be necessary for a specific purpose (i.e ., enforcing a Schedule), if, in fact, the predominant
purpose of the measures was found to be different (i.e ., protectionist in nature). In this dispute,

182 Appellate Body Report, Korea – Various Measures on Beef, para. 157.
183 See second written submission of the European Communities, para. 144.
184 Appellate Body Report, Korea – Various Measures on Beef, para. 157.
185 The United States notes that "object and purp ose" has a specific meaning under the Vienna
Convention with respect to the interpretation of intern ational agreements, and that it may create confusion to
refer to the "object and purpose" of domestic measures adopted by individual countries.

"necessary" must be applied in the strictest sen se given the protectionist object and purpose of the
measures.
802. Last, an assessment of the object and purpose of the measures is relevant to considering
whether the measures are a disguised restriction on trade under the chapeau. While application, not
design is the relevant consideration under the chapeau, it would be difficult to assess whether a
measure is a "disguised restriction on trade" without taking into consideration its object and purpose.
Again, in this dispute, the measures on their face reveal that they are nothing more than a disguised
restriction on trade.
293. ( United States and European Communities ) China submits that the measures at issue
serve to protect important interests and values such as the prevention of tariff circumvention,
the collection of tax revenues and the enforcem ent of negotiated tariff concessions. Please
comment on China's position.
Response of the European Communities (WT/DS339)

803. As set out in previous submissions, China has not demonstrated that its measures serve to
protect any of these values. China has not demonstrated that there is in reality a problem of tariff
circumvention or that its measures serve the co llection of tax revenues or the enforcement of
negotiated tariff concessions.
186 Vehicle manufacturers which import auto parts for assembly and
manufacture into vehicles in China do not circumvent any tariffs. According to the negotiated tariff
concessions laid down in the Chinese schedule, imported auto parts are charged at 10%, and not – as
the measures provide – at 25% for the mere reason that they are manufactured into vehicles with
insufficient local content. As the measures impose charges in excess of what is provided in China's
tariff schedule, they disrespect the negotiated tariff concessions.
804. In the view of the European Communities, the one important value at stake in this case is the
respect for the core principles of the WTO system , namely the principles of non-discrimination and
the security and predictability of the multilatera l trading system. The Chinese measures put in
question these core principles of the WTO system.
Response of the United States (WT/DS340)

805. The United States has addressed these arguments by China in its response to Question 280,
and respectfully refers the Panel to that response.
294. ( All parties ) Please provide more specific eviden ce to support your arguments with
respect to the effect that the measures have had on trade.
Response of China

806. The lack of any adverse impact on trade is ev idenced most directly by the continued rapid
growth of the import of auto parts into China. Since Decree 125 was first in troduced in 2005, China
compared import statistics from 2004 and 2006 to illust rate the lack of impact. According to data
from the China Automotive Industry Yearbook, in 2004 , the total value of imported auto parts was
USD10.39 billion, whereas in 2006 the value was USD 12.45 billion, an increase of 19.8 per cent.

186 See second written submission of the European Communities, para. 146.

807. In addition, in 2006, many auto manufactur ers introduced new models of cars into the
Chinese market. According to the data from Ch ina Automotive Industry Yearbook, in 2006, there
were 110 new models of passenger car introduced, of which 43 were new models and more than 70
were upgraded models. Most of the new mode ls were from Volkswagen, GM, Toyota, BMW,
Mercedes-Benz, and other joint ventures in China.
Response of the European Communities (WT/DS339)

808. As illustrated in the graphics attached as Exhibit EC - 37
187, the adoption of the Automotive
policy order in May 2004 was followed by a dramatic fa ll of EC exports of car parts to China. In just
a few months, exports dropped to 53%, and then to as low as 33% of their May 2004 level. Thereafter
exports of parts began to grow sl owly and appear to have now stabilised at the level of May 2004.
However, this must be considered against th e booming Chinese demand and production of vehicles
and the much steadier growth rates of EC exports observed before May 2004.
809. A comparison between EC exports of car pa rts and Chinese production of motor vehicles
suggests that the adoption of the Automotive policy order prompted auto manufacturer to switch as
quickly as possible to domestic parts suppliers in order to adapt to the local content requirements
imposed by the measures. This resulted in a reduction of EC parts' market share, which now seems to
have become permanent as evidenced by the steady gap between the two curves.
810. Meanwhile, recent industry analysis suggest s that Chinese companies are becoming
increasingly aggressive and there are growing fear s that with government support and incentives
foreign companies will eventually be sidelined. Th e risks for foreign investors are growing (see
Exhibit EC – 38, last bullet point).
Response of the United States (WT/DS340)

811. The level of the trade effects of China's meas ures are not an element of the United States
claims under the WTO Agreement, and the United St ates has not made arguments with respect to
levels of trade effects. Should the DSB ultimatel y find that China's measure s are in breach of its
obligations and should China fail to come into co mpliance, the level of trade effects would be
considered in an arbitration under Article 22.6 of the DSU.
Response of Canada (WT/DS342)

812. The measures have a great impact given that the automotive industry is a signature industry
for any economy and the measures apply without restriction to the whole automotive industry.
813. It is apparent on its face, and for the comme rcial reasons set out in the complainants'
submissions (which China has not disputed) that in a highly competitive and price-sensitive market an

187 In this graphics, the European Communities has used export statistics for engines for vehicles and
their components, and parts and com ponents of motor vehicles (HS 8407 .31, 8407.32, 8407 .33, 8407.34,
8408.20, 8409.91, 8409.99, 8708). This is considered an approximation sufficiently accurate for the purpose of
giving an overview of the trade impact of the measures. Statistics for Chinese production of motor vehicles have
been obtained from the website of the National Bureau of Statistics of China
(http://www.stats.gov.cn/english/statisticaldata/index.htm).

increased cost and burden on imported auto parts will have a significant impact. To the extent that the
Panel needs to make a factual finding on this point, it is an inference that can easily be drawn.
188
814. With respect to the effect on parts manufacturers outside China, whose imports are those
discriminated against by the measures, Canada not es that the Canadian Auto Parts Manufacturers'
Association specifically indicated its concern about the measures, reflecting the effect they have had
on trade.189
815. Evidence of the effect of the measures is also found in statements by Chinese businesspeople
after the measures came into force. For example:
816. A presentation by a director of China Auto motive System, a Chinese-owned company and
one of the largest auto parts suppliers in China, in February 2007, referred to one of the "pillars"
supporting the growth of auto parts production in China being the government policy that "requires
local content" (i.e ., the measures), noting that "[t]hey rea lly boost the sales for China auto part
makers".
190
817. Similarly, in a July 2006 article discussing the auto industry in China, an analyst (from Global
Insight), referring to the measures, noted that th ey have already had a big impact on some luxury
brands with low production volumes, citing a stop in production of Cadillacs by GM in particular, and
stating that other vehicle manufacturers "may follow in its footsteps".191
Comments by the European Communities on China's response to question 294
818. China's choice of reference periods is vitiated by the fact that the Automotive policy order
was announced in May 2004. As shown in exhibit EC–37, this was followed by a dramatic reduction
of EC exports of parts to China (-60% between May and December 2004). The annual total for 2004
therefore constitutes an unnaturally low base as fa r as imports of car parts are concerned, which
results in an "inflated" percentage growth between the two periods.
819. Furthermore, the 19,8% growth of imports of parts should be compared with the growth of
Chinese production of cars. According to our calcu lations based on data from China's Statistics
bureau, China produced 5,186,400 cars in 2004, and 7,611,500 cars in 2006, i.e. an increase of 46.8%,
more than the double than the growth in imports of parts.
192 In other words, more and more parts are
sourced from local suppliers.
820. A more detailed analysis of the effects of the measures on the basis of monthly data and
considering the relation between imported parts a nd Chinese production of cars shows that Chinese

188 See, for example, Canada – Aircraft, Appellate Body Report, at para. 203: "Clearly, in our view, the
Panel had the legal authority and the discretion to draw inferences from the facts before it…".
189 Automotive Parts Manufacturers' Association News , "President's Message: Driving Canada's
Future", November 2006, at p. 2 (Exhibit CDA-45).
190 China Automotive Systems, Roth Capital Confer ence, Presentation Transcript, 21 February 2007,
online: http://china.seekingalpha.com/article/27700 (Exhibit CDA-46).
191Assembly Magazine, "The Great Race", 1 July 2006, online:
http://www.assemblymag.com/CDA/Articles/Feature_Article/3b60276b6ba1c010VgnVCM100000f932a8c0
(Exhibit CDA-47).
192 These figures were obtainined by adding the monthly figures contained in EC-36. As explained in
the exhibit, data for January and December 2006 are not available and were inferred as the average of the values
for the previous and following months. Even limiting production of cars in 2006 to the 10 months for which data
are available (Fed-Nov. 06), this would add up to 6,361,300 units, i.e. an increase of 22.7% compared to 2004.

production of cars grew, between the announcement of the Automotive policy order and the last
comparable figures (March 2007), by 101%, while EC exports of parts grew only by 18% (see second
graph of exhibit EC – 36).
Comments by China on Complainants' responses to question 294
821. The EC's claim that the challenged measures have had an impact on its exports of car parts to
China suffers from a basic flaw of logic and causation. The EC refers to a short-term decline in the
volume of EC exports to China after May 2004, when Order No. 8 was adopted. The inference that
the EC seeks to draw is that Order No. 8 had a dir ect and immediate impact on the value of the EC's
exports of car parts to China. The problem with th is reasoning is that Order No. 8, by itself, did not
impose any obligations on auto manufacturers, or have any impact on the classification and
assessment of duties on motor vehicles or parts of motor vehicles. As China has explained,
Chapter XI of Order No. 8 was a broad statement of policy concerning the administration and
enforcement of China's tariff rates for motor vehicles and motor vehicle parts.
193 It was not until the
adoption of Decree 125 in April 2005 that the chal lenged measures could have had any conceivable
impact on sourcing decisions. However, as the EC's ow n data illustrate, the EC's exports of auto parts
to China resumed their upward trend in early 2005 – just as Decree 125 took effect. 194 Since that
time, the value of EC car part exports to China h as reached record heights, reaching its highest point
as recently as March 2007, according to the EC's ow n data. This is hardly consistent with the
proposition that the challenged measures have had an adverse impact on trade.
295. ( China) What is the exact level of enforcement China seeks with respect to its laws and
regulations within the meaning of paragraph (d) of Article XX?
Response of China

822. As discussed in response to question 296 be low, China seeks to ensure the uniform
classification of parts and components that have the essential character of a motor vehicle, without
regard to whether they enter the customs territory of China in one shipment or in multiple shipments.
Proper classification of import entries is an objectiv e that, by its nature, customs authorities seek to
achieve in respect of all similar entries.
Comments by the European Communities on China's response to question 295
823. The European Communities would like to note that China's reference to "uniform" and
"[p]roper classification" attempts to distract from the fact that China has up to now not demonstrated
the proportionality of its measures. For the reasons set out in the EC second written submission, the
measures are in fact inappropriate and disproportionate.195
296. ( China) In the view of the European Communities, as an alternative to the measures at
issue, China could have investigated only individual instances of alleged evasion under its
customs laws, instead of imposing charges under th e measures on all imported auto parts that
are assembled into vehicles that do not satisfy the arbitrary Chinese local content thresholds.
Could China comment on this view, including why such a less trade-restrictive alternative
would not be reasonably available to achieve the desired level of enforcement.

193 See China's answer to question 48 from the Panel.
194 See EC-37.
195 See second written submission of the European Communities, para. 146.

Response of China

824. The EC's assertion is mistaken, in two respects. First, the measures do not "impose charges
on all imported auto parts that are assembled into vehicles that do not satisfy the arbitrary Chinese
local content requirements." Rather, as China h as explained, the measures ensure the correct
classification of imported auto parts and component s that have the essential character of a motor
vehicle. As China has also explained, the question of tariff evasion, in the present context, is one of
ensuring the correct classification of what is imported. One important objective of customs
classification is to achieve the same classification of an article whenever it is imported. To achieve
this uniformity of classification, the same classificat ion results should apply in all like circumstances,
not only in those cases in which customs authoriti es dedicate the necessary resources to investigate
specific import entries. This is why the measur es cannot be limited to "individual instances" – the
objective of the measures is to ensure the consiste nt classification of parts and components that have
the essential character of a motor vehicle, in all cases.
825. The second problem with the EC's assertion is that, in the absence of the challenged measures,
China would have essentially no m echanism for determining whether multiple shipments of parts and
components are related to each through their comm on assembly into a single article. Without a
customs process for determining whether a manufacturer is importing parts and components that have
the essential character of a motor vehicle in multiple shipments, there is no basis to investigate and
determine whether any given shipment of auto part s and components results in the evasion of China's
tariff provisions for motor vehicles. It is this lack of transparency into the commercial reality of what
an auto manufacturer is importing that the challenged measures seek to remedy.
Comments by the European Communities on China's response to question 296
826. China's arguments why investigations of cu stoms evasion on an individual basis do not
provide for a reasonably available alternative to the measures are not convincing. Acts of customs
evasion, the danger of which China has still not dem onstrated, would by their nature be individual
acts. Therefore, it would be possible for China to ensure the "uniform classification" of vehicles and
parts through individual investigations. China's reference to the possibly limited resources of its
customs authorities cannot justify otherwise dispr oportionate measures. Furthermore, China has not
demonstrated why it needs a "mechanism for dete rmining whether multiple shipments of parts and
components are related to each through their common assembly into a single article". In the view of
the European Communities a "mechanism" creating fictions such as the ones contained in the
measures is not suitable, necessary or proportionate to further the objective of uniform customs
classification.
297. ( Canada) In paragraph 35 of its second oral statement, Canada states that it has
demonstrated that China's measures are arbitr ary in application and expressly designed to
restrict trade. Please refer the Panel specifically to where in Canada's written submissions this
is demonstrated.
Response of Canada (WT/DS342)

827. It is important to note that under Article XX, China, not Canada, has the burden of proof to
show that its measures are necessary. Nonetheless, Canada has shown that the measures are applied in
a manner that results in arbitrary and unjustifiable discrimination and a disguised restriction on trade.
In paragraph 102 of its second written submission, Canada first notes that the measures apply
arbitrary discrimination because the thresholds under th e measures are by their very nature arbitrary.
As demonstrated in paragraphs 48-51 (including th e chart), the measures would rarely, if ever, result

in a motor vehicle or a good having the essential character of a whole vehicle. They simply do not
relate to proper classification for motor vehicles under the Harmonized System. Therefore, their
application results in arbitrary discrimination.
828. Canada has also shown that the measures resu lt in unjustifiable discrimination because they
presume circumvention in all instances, yet China h as not shown that a legal concept of "tariff
circumvention" exists, and even if it had, Canada has shown at paragraphs 91-96 and footnote 106 of
its second written submission, and in response to Qu estion 14, that no such evidence exists. Last,
Canada has elaborated on paragraph 103 of its seco nd written submission in answer to Question 289,
above, to explain how the measures are nothing more than a disguised restriction on trade.
298. ( China) In its response to Panel question No. 14 , China provides some import statistics
for the years 2002, 2003, and 2004. The data shows percentage increases in 2002 and 2004 that
are comparable to each other, however the growth for 2003 is nearly 200%. What was different
about 2003?
Response of China

829. The most significant development in 2003 was the dramatic increase in the production of
sedans. This is shown in the following statistics:
Production of Motor Vehicles in China

 1999 2000 2001 2002 2003 2004
Cargo Vehicle 756,312 751,699 803,076 1,092,546 1,228,181 1,514,869
Increase Ratio - -0.61% 6.83% 36.05% 12.41% 23.34%
Coach 509,179 709,042 834,927 1,068,347 1,177,476 1,243,022
Increase Ratio - 39.25% 17.75% 27.96% 10.21% 5.57%
Sedan 566,105 607,455 703,525 1,092,762 2,037,865 2,312,561
Increase Ratio - 7.30% 15.82% 55.33% 86.49% 13.48%
Total 1,831,596 2,068,186 2,341,528 3,253,655 4,443,522 5,070,452
Increase Ratio - 12.92% 13.22% 38.95% 36.57% 14.11%

830. As these figures show, total motor vehicle pr oduction increased by 36 per cent in 2003 (a
figure comparable to 2002), while sedan produc tion increased by 86 per cent – nearly doubling the
production of sedans as compared to 2002. This increase in the production of sedans corresponded
with the introduction of a large number of new vehicle models into the Chinese market.
831. China considers that the large increase in auto parts and engine parts in 2003 (as reported in
response to question 14) is clearly related to the sharp increase in the production of sedans in the same
year. China's customs statistics record the importation of only 34,858 CKD/SKD kits in 2003. The
parts and components for the remaining 910,245 additi onal sedans produced in that year must have
come from somewhere, and the sharp increase in the value of imported engines and auto parts in 2003
provides the answer.

832. These figures demonstrate that auto manufactur ers in China were sharply increasing their
production of motor vehicles, and sedans in particul ar, using very high ratios of imported parts and
components. As China has previously discussed in response to questions 77 and 160, the fact that
many of these vehicles models are assembled fro m imported parts and components that have the
essential character of a motor vehicle has been confir med by the fact that approximately 130 vehicle
models have been verified as such. China has al so provided examples of specific vehicles models in
response to question 160.
Comments by the European Communities on China's response to question 298
833. According to industry sources (exhibit EC – 41), 2003 was a year characterised by an
impressive growth in demand. Higher demand for car s resulted in increases in Chinese production of
cars and in the launch of new models. This of course in turn resulted in higher demand for parts.
834. Local suppliers of parts and assemblies could not meet this rise in demand for parts in the
short term, and car manufacturers, eager to maintain high production levels in order to satisfy demand
for cars, relied on imported parts, especially to accelerate the launch of new models (EC – 41, last
bullet point of the April 2003 report, sixth bullet point of the August 2003 report).
835. Against this example, it is clear that the measures at stake in these proceedings are not
designed and enforced to fight a non-existent "circu mvention" of the customs duty on motor vehicles,
but to make sure that the local industry of parts and components gets its "fair share" of the ever
increasing Chinese production of cars, or, in the word s of the Automotive policy order, to "nurture a
group of relatively strong auto-parts manufacturers".
836. As for China's circular argument that a high leve l of verifications is evidence of a high level
of models built from parts having the essential character of a motor vehicle, reference is made to
paragraphs 12 and 13 of the EC rebuttal submission.
299. ( Canada) Canada states in paragraph 37 of its second oral statement that
"Article XX(d) can be used to justify measures taken in respect of law or regulation otherwise
consistent with GATT, such as China's Schedule properly applied . The measures are not
actually used for customs enforcement, as the re are no customs duties at issue to enforce."
(emphasis added) Could Canada please explai n how the Panel can determine whether China's
Schedule is properly applied within the meaning of Article XX(d). Please also clarify what
Canada means by the statement that "there are no customs duties at issue to enforce."
Response of Canada (WT/DS342)

837. Canada's reference to "properly applied" means enforcement of the proper tariff rate for auto
parts or motor vehicles listed in China's Schedul e. This must be done based on the objective
characteristics of the product as presented at the bor der in a single shipment, not based on end-use or
multiple shipments from different exporters to diffe rent importers. If China had properly applied its
tariff rate based on proper classification of auto pa rts or motor vehicles, then it could validly attempt
to justify its measures as "necessary" if it were able to show an actual enforcement problem existed
based on a recognized legal defence. However, China has failed to meet its burden to demonstrate that
"tariff circumvention" is a valid defence, or that , even if it were, there is any evidence of such a
problem.
838. With respect to Canada's comment that "there are no customs duties at issue to enforce", see
Question 225.

300. ( China) The complainants have expressed a view that China's arguments relating to
Article II of the GATT 1994 are essentially Chin a's Article XX(d) defence. Does China agree
with this view?
Response of China

839. China emphatically disagrees with this view. China considers that it is, in fact, the
complainants who are attempting to shift the bu rden of proof by mischaracterizing what is
unquestionably a complex set of interpretive issu es under Article II as "essentially" an Article XX(d)
defence.
840. As China discusses in response to question 228 above, it was the complainants who opted to
bring an as such case against the challenged meas ures, including their claim that the challenged
measures are inconsistent with China's obligations under Article II. The complainants have the
burden of proving their claims, including their claim that the challenged measures do not collect the
ordinary customs duties on motor vehicles that China is allowed to collect under its Schedule of
Concessions. The complainants cannot shift this burden of proof to China by disregarding the
necessary elements of their own claims and forcing China to defend the measures under
Article XX(d). China is entitled to invoke Article XX(d) in the event that th e Panel identifies one or
more respects in which the challenged measures are in consistent with its WTO obligations. But it is
the complainants who have the burden of proving th e inconsistencies they ha ve alleged before the
question of Article XX(d) even arises.
841. In addition, it is entirely evident that the s ubstantive issues under Article II and Article XX(d)
are not the same, and are not even "esse ntially" the same. The core in terpretive issue under Article II
is whether the challenged measures collect ordinary customs duties in accordance with China's tariff
provisions for motor vehicles, as interpreted in accordance with GIR 2(a), including the terms
"essential character" and "as presented." China's position is that the challenged measures are based on
a proper understanding of these terms within the Ha rmonized System, that the measures collect valid
customs duties in accordance with China's Schedule of Concessions, and that the measures are
consistent with China rights and obligations under Article II. This is not the same question as whether
the challenged measures would be justified under Arti cle XX(d) in the event that the Panel found that
they were inconsistent with China's obligations in respect of Article II or Article III.
Comments by the European Communities on China's response to question 300
842. Contrary to what China suggests in its res ponse, the European Communities does not attempt
to "shift th[e] burden of proof to China". The European Communities and the other complainants have
demonstrated inter alia that the Chinese measures are "internal" measures inconsistent with
Article III:2, III:4 and III:5 of the GATT 1994. The burden of proof for a successful Article XX
defense rests then on China. China, however, fails to demonstrate that its measures are necessary to
secure compliance with its Schedule since they impo se charges which are in excess of the tariff rates
set forth therein.
196
301. ( European Communities ) Could the European Communities please elaborate its
argument in paragraph 35 of its second oral st atement that "even according to the statistics
provided by China itself, there has been an important and constant growth in the importation of
complete vehicles into China prior to the adoption of the measures."

196 See second written submission of the European Communities, para. 146.

Response of the European Communities (WT/DS339)

843. China has not been forthcoming in providing sta tistical information for the various assertions
it has made in relation to the circumvention of its schedules on motor vehicles. However, if one takes
as the basis the statistics provided by China in its reply to question 14 b) from the Panel that relates to
the period prior to the adoption of the measures, th ere is no evidence that would suggest any shift in
the pattern of trade between imports of complete ve hicles and their parts. There has been a constant
growth in the import of automotive products in gene ral, which is a testimony of the booming market
for vehicles in China following its economic success story.
302. ( European Communities ) Could the European Communities please elaborate on its
position in paragraph 36 of its second oral st atement. What analysis would the Panel be
required to carry out to determine whether "[the measures] impose charges which directly
conflict with China's tariff schedules instead of enforcing them" within the meaning of
Article XX(d)?
Response of the European Communities (WT/DS339)

844. See response to question 286 from the Panel.
303. ( All parties) The Panel in EEC – Parts Components held that Article XX(d) only covers
measures related to the enforcement of obligations under laws and regulations that are GATT
consistent and not measures which merely prevent actions that are consistent with laws or
regulations but undermine their objectives. In the context of the present case, do the measures
serve to enforce the payment of ordinary customs duties for "motor vehicles"?
Response of China

845. Yes. For the reasons that China has explained, it is consistent with a proper interpretation of
the term "motor vehicles" to conclude that the term includes parts and components that have the
essential character of a motor vehicle, including multiple shipments of parts and components that are
related to each other through their common assembly into a motor vehicle. It is this GATT-consistent
interpretation of the term "motor vehicles" that the measures serve to enforce.
Response of the European Communities (WT/DS339)

846. No, the Chinese measures do not serve to enforce the payment of ordinary customs duties for
motor vehicles. This would be the case if the measures helped to ensure that importers of vehicles pay
the appropriate customs duties for vehicle imports. However, the enforcement of the ordinary customs
duties for vehicle imports is not at stake in the present case. The measures do not concern the imports
of vehicles. They exclusively deal with imported auto parts,
 which even when considered together do
not have the essential character of a complete vehicl e, and impose on them charges in excess of those
provided for in the Schedule.
Response of the United States (WT/DS340)

847. As the United States has explained in its oral statement at the second meeting, and in response
to Question 280 above, the answer to this question depends on precisely what practice China is trying
to address. If China means that importations of bulk shipments of manufacturing parts are subject to a
whole-vehicle rate of duty, then no, the measur es do not enforce the payment of ordinary customs
duties on motor vehicles because bulk shipments of parts are not
 motor vehicles under any possible

reading of China's schedule. If China means that a CKD kit split into two separate boxes should be
subject to a whole-vehicle rate (and leaving aside for purposes of this ques tion China's commitments
under paragraph 93 of the Working Party Report), then China's measures arguably might enforce such
a policy. However, as the United States has explai ned, China's measures are vastly more broad in
coverage than the hypothetical CKD kit broken into two separate boxes, and thus the measures cannot
be necessary to enforce any policy regarding "split kits."
Response of Canada (WT/DS342)

848. The measures do not serve to "enforce" the paym ent of ordinary customs duties for "motor
vehicles" but, as explained in Canada's response to Question 280, directly "conflict" with China's
Schedule by imposing an additional 15% internal charge on auto parts.
849. In EEC – Parts and Components the panel found that a measure could be justified under
Article XX(d) if it served to enforce an obligatio n under a GATT-consistent law, but could not be
justified if it did not "enforce" the law or regula tion but only prevented the undermining of the policy
objectives of that law or regulation.
197 In other words, Article XX(d) cannot be used to prevent
"undermining" a Member's permitt ed charges, such as anti-dumping (or ordinary customs duties).
Applying this principle, China's measures cannot be justifiable under Article XX(d) in two respects.
First, the measures prevent "actions" fully consistent with China's Schedule, namely application of the
appropriate duty rates for auto parts, on the theo ry that the charges under the measures are necessary
to prevent "tariff circumvention", i.e., undermining of the Schedule. Second, not only are the
measures preventing actions consistent with China's Schedule, but they attempt to enforce the policy
objective of protecting and supporting China's automotive industry.198
Comments by the European Communities on China's response to question 303
850. See the comments of the European Communities on China's response to question 290.

197 EEC – Parts and Components, Report of the GATT Panel, at para. 5.17.
198 As set out in Canada's second written submission at paras. 87-90

ANNEX A-3

RESPONSES AND COMMENTS OF PARTIES TO AN ADDITIONAL QUESTION
FROM THE PANEL 6 AUGUST 2007

304. ( All parties ) Please clarify the order in which the following events take place under
China's measures with respect to imported auto parts characterized as complete vehicles:
- the assembly of imported auto parts into complete vehicles;
- automobile manufacturer's declaration for duty payment for imported auto parts;
- automobile manufacturer's application for v erification by the Verification Center and
the Center's issuance of verification report[s];
- the customs authorities' classification of imported auto parts; and
- the customs authorities' collection of duties for imported auto parts.
 Please support your answer with relevant pr ovisions of the measures as well as, if
possible, any documentary evidence showing a specific sequence of these procedures. Please
also confirm that imported auto parts that shou ld not be characterized as complete vehicles are
not subject to the above procedures applicable to imported auto parts characterized as complete
vehicles.
Response of China

1. To clarify the order in which the events specified by this question take place, it is important to
emphasize the distinction between the assembly of the first batch of a particular vehicle model, and
the subsequent assembly of that vehicle model in commercial production. As China explained in
response to question 167(b) from the Panel, th e self-evaluation and verification process under
Decree 125 is conducted on a vehicle model basis. This process results in a determination, on a
per-model basis, of whether the imported auto parts in that vehicle model meet one or more of the
thresholds set forth in Article 21 of Decree 125. This determination will apply to all subsequent
imports of auto parts for the same vehicle model, unless and until the imported auto parts used in the
assembly of that vehicle model change in relation to the thresholds specified under Article 21.
2. Thus, in relation to the events specified by th e Panel in this question, the first event that
occurs is the assembly by the manufacturer of the first batch of a particular vehicle model. As China
explained in response to question 167(b), this can be one vehicle or a small quantity of vehicles, a
number that the manufacturer may choose at its di scretion. The second event that occurs is the
manufacturer's application for verification of th e self-evaluation results. Under Article 19 of
Decree 125, the manufacturer is required to submit this application within 10 days after the assembly
of the vehicle model that is to be registered (i.e ., after the assembly of the first batch). The
verification application includes the results of the manufacturer's self-evaluation of the vehicle
model.
1 The Verification Center then conducts its review of the self-evaluation and releases its
verification report.2
3. The results of the self-evaluation and verification process determine the subsequent
declaration and classification of auto parts that the manufacturer imports for use in the regular
commercial production of the vehicle model. If the vehicle model has been verified as meeting one or
more of the thresholds of Article 21 of Decree 125, the manufacturer must import parts for that

1 See Article 25 of Decree 125 and Article 7 of Announcement No. 4.
2 See Article 19 of Decree 125.

vehicle model separately from other auto parts, and must declare the imported parts as parts of a
registered vehicle model.
3 The manufacturer provides this declar ation at the time the parts enter the
customs territory of China, as part of the normal customs entry process. These parts enter the customs
territory of China in bond and remain under customs control.4
4. Under Article 28 of Decree 125, the manufacturer declares the amount of duty owed to the
Customs after it has assembled the parts and com ponents into a finished motor vehicle. The
manufacturer is required to declare the amount of duty owed on the tenth working day of each month,
based on the number of registered vehicle models that it assembled in the prior month. 5 T h e
classification of the imported parts and compone nts in the assembled motor vehicles, and the
determination of duty liability, are based on the prior determination that the vehicle model in question
is assembled from imported parts and components that have the essential character of a motor
vehicle.6 As China explained in response to question 167(b) from the Panel, there is no additional
verification process that occurs after each entry of auto parts for that vehicle model, or after the
assembly of each motor vehicle of that vehicle model type. The results of the evaluation and
verification process, conduct in respect of the first batch of that vehicle model, will apply to all
subsequent imports of auto parts for that vehicle model, unless and until the manufacturer can
demonstrate that the imported parts and components in that vehicle model no longer have the essential
character of a motor vehicle.
7
5. China confirms that, following the self-evaluation and verification process, auto parts that are
not used in the assembly of registered vehicle models are not subject to the procedures described
above.
Response of the European Communities (WT/DS339)

6. The question from the Panel distinguishes betwee n procedures applicable to imported auto
parts characterised as complete vehicles and those th at are not. This implies that the procedures or
their sequence under China's measures could differ ab initio for imported auto parts characterised as
complete vehicles and those that are not. The European Communities would like to stress however
that this is not the case. Rather, it is only on the basis of the procedural steps under the measures that a
characterisation of parts as complete vehicles or not is made. For example, the characterisation of an
imported auto part as not
 "complete vehicle" can be based on either the review (Article 7(2) of
Decree 125) or the verification (Article 18 of Decr ee 125). Their characterisation as either "complete
vehicles" or "not complete vehicles" (i.e. parts) is the outcome of these procedural steps, which may
vary depending on the specifics of the situation and the stage of the process.
7. The Chinese measures provide for th e following sequence with rega rd to the procedural steps
mentioned by the Panel question (i.e. those afte r self-evaluation and review under Article 7 of
Decree 125):
• The assembly of imported auto parts into the first batch of complete vehicles;
• automobile manufacturer's application for verification by the Verification Center and the
Center's issuance of verification report(s);
• automobile manufacturer's declaration for duty payment for imported auto parts;

3 See Articles 14-15 of Decree 125.
4 See Articles 16, 27 of Decree 125.
5 See Article 31 of Decree 125.

• the customs authorities' classification
 of imported auto parts;
• the customs authorities' collection of duties for imported auto parts.
8. This sequence of events follows from the following considerations.
9. Assembly before verification : The assembly of imported auto parts into complete vehicles
precedes the verification of the vehicle model. This follows directly from Article 19(1) of Decree 1258
which provides:
An automobile manufacturer shall submit a verification application to the CGA
within 10 days after the first batch of vehicles of the registered vehicle model are
produced/assembled. The Verification Center shall, within one month after receiving
instructions from the CGA, conclude the verification and issue a verification report.
(footnote omitted, emphasis added)
10. Assembly and verification before duty d eclaration, classification and collection : Article 28 of
Decree 125 clearly sets out that the manufacturer's declaration for duty payment and the ensuing
classification and collection of duties by customs necessarily follows the assembly of imported auto
parts into complete vehicles and their verification:
After the imported automobile parts have b een assembled into complete vehicles, the
automobile manufacturer shall make a decl aration of duty payable to Customs and
Customs shall, (…), proceed with classification and duty collection.
If the Verification Center, after verifications , concludes that the imported automobile
parts should be characterized as complete ve hicles, the customs shall classify them as
complete vehicles, and shall base both the tariff and the import VAT on rates
applicable to complete vehicles. If th e imported automobile parts should not be
characterized as complete vehicles, the cust oms shall classify them as parts, and shall
base the tariff and the import VAT on rates applicable to parts.
11. Furthermore, Article 34 of Decree 125 is based on the premise that the manufacturer's
declaration (and, consequently, the classification and collection of duties by customs) follows after the
production/assembly of the complete vehicles.
12. Reference is also generally made to paragraphs 47 to 67 of the first written submission of the
European Communities, the correctness of which China has not disputed. The European Communities
has seen the practical examples in the reply of Ca nada and would like to associate itself with those
examples.
Response of the United States (WT/DS340)

13. As discussed below, the order in which th e listed events will occur will vary based on
different factual situations. Also, in addition to th e listed events involving the application of China's
measures, the US response below includes what is of ten the initial event in the sequence: namely, the
importation of the parts (that is, the time when the parts are physically brought into China).

8 The European Communities refers to the common tr anslation of Decree 125 as agreed upon between
the complaining parties and China as sent by China to the Panel on 2 August 2007, with the exception of
Article 28(1) for which we refer to the UNOG translation of 16 August.

14. Before addressing various scenarios, some bac kground is helpful. The process of applying
China's measures usually begins with the manufac turer performing the self-evaluation required by
Article 7 of Decree 125.
9 This process is mandatory, since it is a necessary precondition for obtaining
an import license. Article 7 provides that if th e manufacturer determines that the model does not
trigger any of the established thresholds then it must request a review by the Verification Center. If
the Verification Center concludes that imported part s in the model are not "characterized as complete
vehicles," then no registration is required at that time. The remaining requirements of the measures
are then not applied to that model until such time as changes are made in the composition of the
vehicle, which in turn would result in a need to re-examine the applicability of the thresholds.
15. If the self-evaluation determines that the im ported parts in the basic model exceed the
thresholds established in the measures, then Article 7 requires the manufacturer to register the vehicle
model. Pursuant to Article 19, the manufacturer mu st submit an application within 10 days after the
first "batch" of vehicles of the registered vehicle model is assembled to have the model "verified."
The Verification Center will then issue a verificatio n report. As indicated in China's response to
Panel question No. 171, and as commented upon by th e European Communities, the length of time it
takes to complete the verification report varies and can be significant.
16. Pursuant to Article 28, after the imported part s have been assembled into complete vehicles,
the automobile manufacturer shall make a declara tion for duty payments to customs. The customs
authorities will then make "classification" decisi ons and collect charges on the imported parts.
Further, Article 31 provides that "customs shall collect the duty and the import VAT for all imported
automobile parts used in assembling a certain vehi cle model in the last month by a manufacturer,
applying the tariff rates applicable to complete vehicles."
17. With this background in mind, the order of the various events listed above, under various
scenarios, is as follows:
18. For the first batch of assembled vehicles, th e order would be: importa tion of auto parts,
assembly of imported parts, application for verification, issuance of the verification report, declaration
for duty payment, "classification" by customs authorities, and collection of charges.
19. For parts imported after the initial batch (or ba tches), but before the verification report is
issued (a process that China con cedes can take a substantial period of time), the order would be:
application for verification, importation of auto part s, assembly of imported parts, issuance of the
verification report, declaration for duty payment, "classification" by customs authorities, and
collection of charges.
20. If a model has been in production for some ti me without any modification to its production
plan, and after initial inventories of auto parts have been exhausted, the order for parts imported at
that point will likely be: application for verificati on, issuance of verification report, importation of
auto parts, assembly of imported parts, declaratio n for duty payment, "classification" by customs
authorities, and collection of charges.
21. However, if any changes in the parts used in production occur, then importation of the parts
again becomes the first step in the list of events. For example, Article 20 provides that if optional
parts are installed on a vehicle, the manufacturer sh all report the options to the Verification Center
and make declarations at the time of the actual in stallation of the optional parts. The Verification
Center would then review and issue a verification repor t. Similarly, if the production plan is adjusted

9 See also Article 6 of Order No. 4.

in a way that would affect the local content re quirements of the measures, the manufacturer may
reapply for a re-verification. In these circumstances, the order would be similar to that of the "first
batch" of vehicles (paragraph 6 above).
22. Finally if an imported part – even if originally intended for use in producing a complete
vehicle – is not in fact used in such production within one year,
10 then the order of events would be:
importation of auto parts, assembly of other parts (but not this particular imported part) into complete
vehicles, declaration for duty payment, "classificat ion" by customs authorities, and collection of
charges.
23. In sum, although the importation of parts, application for verification, assembly operations,
and issuance of the verification report may occur in different orders depending on the circumstances,
the last three activities will consistently be the d eclaration for duty payment, the "classification"
determination, and then the collecti on of charges pursuant to Article 28. 11 Furthermore, in every case
it is impossible to predict whether an imported auto part will actually be used in the production of any
particular model until production actually occurs, and in many cases, the importation of the parts will
occur before even the issuance of a verification report for the model in which the part is intended to be
used.
Response of Canada (WT/DS342)

24. Canada notes that this reply reflects the info rmation set out by Canada in its first written
submission in Section IID to H, where the measures and their consequences are described in detail.
That information is, in Canada's view, sufficient to establish that the measures apply internal charges
on imported auto parts based upon their use in manufacturing, contrary to GATT Article III and the
TRIMs Agreement.
25. First, Canada emphasizes that the measures appl y to all imported auto parts, for it is the
measures that establish the artificial distinction between imported auto parts that are or are not
Deemed Whole Vehicles. For example, prior to cu stoms finally determining whether imported parts
are Deemed Whole Vehicles, vehicle and auto part s manufacturers that use imported auto parts must
track the imported content of all products and ma intain evidence of payment of ordinary customs
duties for those parts.
12 Even if a vehicle manufacturer has concluded that a particular vehicle model
should not be subject to charges under the measures gi ven its level of imported content, and even if
that self-verification has been confirmed on re view by the Verification Centre, the vehicle
manufacturer (and auto parts manufacturers that supply imported parts to that vehicle manufacturer)
cannot be certain that a different result will not be obtained on verification by the Verification Centre
after the first batch of vehicles has been produced.
13
26. With respect to the specific st eps in the Panel's question, Canada builds on the examples set
out at paragraphs 65 and 66 (includi ng Table 1) of its first writte n submission, with reference to
specific provisions of the measures, as appropriate. We use two examples of shipments of 100 brake
cylinders for a light truck with a customs value of 1,000 RMB to demonstrate the order in which the

10 This could occur for a variety of reasons, such as where parts are defective, destroyed in
manufacturing, or are used as replacement parts, and also where initial production forecasts are not accurate and
accordingly the manufacturer does not produce as many vehicles as originally planned.
11 Article 19 (2) of Decree 125 also contains special provisions covering models already in production
at the time Decree 125 entered into effect. See also Article 10 of Order No.4.
12 Decree 125, Article 22; Announcement 4, Article 20. This requirement is discussed in Canada’s First
Written Submission, at paras. 62 and 63.
13 Decree 125, Article 28; Announcement 4, Article 7.

steps in the Panel's question occur, although tho se steps may be demonstrated using any number of
other examples.
27. First, we take a brake cylinder imported by a parts manufacturer and used to manufacture a
vehicle model initially calculated not to be subject to charges under the measures, but, with sourcing
changes, it is recalculated as being found subject to such charges (the thir d scenario in the joint
Background section of the first written submissions). Then we consider a situation where a vehicle
manufacturer imports the shipment directly for use in a model self-verified as subject to the measures
(a scenario not described in the joint Background sec tion). For the sake of illustration, in both cases
the brake cylinders are shipped by vessel from Canada to Shanghai, and used to manufacture a vehicle
in Chongqing.
28. First example – a shipment of brake cylinders imported by an auto parts manufacturer in
China:
a. The vehicle manufacturer, as required by the M easures, files a self-verification plan for
the vehicle model in which it calculates the imported parts that it intends to use in
manufacturing that model. To get that information, the vehicle manufacturer is required to
consult all of its domestic supp liers to determine the importe d parts that those suppliers
will use in products the manufacturer will buy fro m them for use in the vehicle model. As
a result of those consultations, the vehicle manufacturer calculates the level of imported
parts that it will use and determines that only the Engine, the brake Assembly (in part due
to the use of imported brake cylinders), and the transmission Assembly are Deemed
Imported Assemblies under the measures. As the threshold of Deemed Imported
Assemblies has not been exceeded,
14 the vehicle manufacturer submits a self-verification
stating that parts used in that vehicle m odel are not Deemed Whole Vehicles under the
measures. The self-verification is reviewed by the Verification Centre, 15 which confirms
that imported parts used in the vehicle model will not be Deemed Imported Vehicles.
b. The shipment of brake cylinders is ordered by the auto parts manufacturer from abroad.
The auto parts manufacturer applies for and receives a licence to import the brake
cylinders.
16 No financial guarantee is posted under th e measures with respect to the brake
cylinders.17
c. The vessel carrying the shipment arrives at the port of Shanghai. The shipment is
unloaded, but is kept in the physical control of China customs.18
d. The importer declares the shipment.19

14One of the thresholds under Decree 125, in Article 21(2)(b), is an Engine and three other Assemblies.
15 See China’s response to Question 167, which confirms that the Verification Centre reviews
determinations of vehicle manufacturers under the measures, whether positive or negative.
16 Article 7 of Decree 125 requires a vehicle manufacturer to submit a self-verification report when
making an application for an import licence, but this requirement does not apply to auto parts manufacturers
who import auto parts.
17 China confirmed, in response to Question 185(a), that the bond procedure does not apply to parts
imported by auto parts manufacturers, who instead "go through the regular normal customs process and pay the
import duty to the customs".
18 As provided for in Articles 14 and 17 of the Customs Law of the People's Republic of China
("Customs Law") (attached as Exhibit CDA-49).

e. Chinese customs authorities classify the shipme nt as 100 brake cylinders for light trucks
(8708.93.40). Customs duties are assessed
20 at 10,000 RMB according to the import tariff
rate for those goods (1,000 RMB x 10% x 100 brake cylinders).
f. Customs issues a duty memorandum in the amount of 10,000 RMB for customs duty.
g. The importer pays 10,000 RMB in customs duty.21
h. The shipment of brake products is released from customs to the importer,22 and shipped to
the auto parts manufacturer's facilities.
i. The importing auto parts manufacturer then u ses the brake cylinder, together with other
imported and domestic parts, to manufacture a brake assembly that is a Deemed Imported
Assembly under the measures because it has four imported key parts. That Assembly is
then shipped to the vehicle manufacturer in Chongqing.
j. At around the same time, a wholly owned domestic parts manufacturer advises the
vehicle manufacturer that it will not be able to supply an axle shaft for the vehicle model.
The self-verification submitted by the vehicl e manufacturer for the vehicle model had
indicated that the axle shaft would have no imported content, but the vehicle
manufacturer is unable to find an alternative source domestically in sufficient time for the
first production of the model and must use impor ted axle shafts. As a result, the front
drive Assembly is now also Deemed Impor ted. Since the vehicle model now has a
Deemed Imported Engine and three other Assemblies, the vehicle manufacturer is
required to apply to customs for re-verification.
23 That re-verification confirms that the
imported content in the vehicle model has exceeded the permitted number of Deemed
Imported Assemblies, and that therefore imported parts used in the model will be charged
under the measures as Deemed Whole Vehicles.
k. The vehicle manufacturer uses the brake Asse mbly provided by the parts manufacturer
(which includes the imported brake cylinder) to manufacture a batch of 100 vehicles. The
vehicle manufacturer submits a verification app lication to customs for the first batch of
vehicles.24
l. The Verification Centre issues a verification re port confirming that the batch produced by
the vehicle manufacturer has exceeded the th resholds for imported content, and is
therefore subject to charges under the measures.25
m. The vehicle manufacturer pays charges under the measures for all imported parts, which
for the brake cylinders amounts to a payment of 15%, or 15,000 RMB.26

19 This must be done within 14 days of the declaration of the arrival of the vessel, as set out in
Article 24 of the Customs Law.
20 In accordance with Article 53 of the Customs Law. We do not disc uss in this example payment of
other amounts that are not at issue in this dispute (e.g., internal charges such as VAT that could, in accordance
with GATT Article II:2(a), be applied at the border).
21 In accordance with Article 60 of the Customs Law, this must be done within 15 days of issuance of
the duty memorandum.
22 In accordance with Article 29 of the Customs Law.
23 See Decree 125, Articles 20 and 21(2)(b).
24 See ibid., Article 19.
25 See ibid.

29. Second example – a shipment of brake cylinders imported directly by a vehicle manufacturer:
a. The vehicle manufacturer, as required by the measures, files a self-verification plan in
which it calculates that a particular model that it intends to manufacture will have
Deemed Imported Assemblies that exceed th e thresholds in the measures. That
determination is reviewed by the Verification Centre,
27 which confirms that imported
parts used in the model will be Deemed W hole Vehicles subject to charges under the
measures.
b. The vehicle manufacturer applies for an impor t licence for the brake cylinders (and other
auto parts imported directly by the vehicle manufacturer), attaching the self-verification
plan.28 The import licence is issued for the brake cylinder (and other parts), with a
notation that the parts are Deemed Whole Vehicles.
c. The vehicle manufacturer provides a duty guarantee for parts that it intends to import
based on the value of the monthly average of imported parts. 29 For the sake of
illustration, assume that the only monthly import of auto parts directly by the vehicle
manufacturer will be the shipment of 100 brake cylinders for light trucks. In that case,
the guarantee is set at 10,000 RMB.
30
d. The vessel carrying the shipment arrives at the port of Shanghai. The shipment is
unloaded, and released from physical control of customs. The vehicle manufacturer is
free to arrange for transport of the parts to Chongqing as it sees fit ( i.e., there is no
requirement to use bonded carriers, nor does customs supervise in any other way the
process of transport).
e. The importing vehicle manufacturer then uses the brake cylinders in brake assemblies that
it manufactures, which in turn are used in th e vehicle model. The vehicle manufacturer
submits a verification application to customs for the first batch of vehicles manufactured
using a particular combination of parts.
31
f. The Verification Centre issues a verification re port confirming that the batch of vehicles
has exceeded the permitted number of Deemed Imported Assemblies, and that therefore
imported parts used in the model will be charged under the measures as Deemed Whole
Vehicles.32

26 15% x 1,000 RMB x 100 brake cylinders. This assumes that the vehicle manufacturer can prove that
the auto parts manufacturer that imported the brake cylinder already paid 10,000 RMB in ordinary customs
duty, and thus under Article 29 of Decree 125 the vehicle manufacturer gets credit for this payment. If the
vehicle manufacturer cannot prove this payment, then the charge would be 25,000 RMB (as noted in Canada’s
First Written Submission in fn. 114). In accordance with Article 31 of Decree 125, the payment must be made
by the tenth working day of the month subsequent to the month in which the verification report is issued.
27 See China’s response to Question 167, which confirms that the Verification Centre reviews
determinations of vehicle manufacturers under the measures, whether positive or negative.
28 As required by Article 7 of Decree 125.
29 See Decree 125, Article 12.
30 China confirmed in answer to Question 18 that "customs calculates the bonds based on the applicable
rates for auto parts." As set forth above, the rate for br ake cylinders is 10%, and thus the guarantee with respect
to those parts would be 10% x 1,000 RMB x 100 brake cylinders.
31 See Decree 125, Article 19.
32 See ibid., Article 19.

g. Customs determines that the brake cylinder and other imported parts are subject to
charges under the measures as Deemed Whole Vehicles.
33
h. The vehicle manufacturer pays charges under the measures to the cu stoms office for all
imported parts used in the vehicle batch, whet her imported directly or contained in parts
bought domestically. 34 The brake cylinders are charged 25% under the measures, or
25,000 RMB.35 That amount equals the 10% ordinary customs duty (10,000 RMB) that
crystallized upon the arrival of the shipment of brake cylinders at Shanghai, and an
internal charge of 15% (15,000 RMB). The duty guarantee in the amount of 10,000 RMB
remains in place.
30. The specifics of the measures' application may vary, as these examples demonstrate. The
verification and assembly processes, assembly and issuance of the original or subsequent verification
reports may vary in order depending on the example. However, the final steps under the measures for
all imported parts will always involve the declaratio n for duty payment, the so-called classification of
the parts, and the determination and collection of charges.
Comments by the United States on China's response on question 304

31. As the United States has explained in its pr ior oral and written submissions, under China's
measures the level of the charge assesse d on any particular imported part cannot
 be determined until
after the part is actually used in the production of a co mplete vehicle. The reason for this is twofold:
(i) because no manufacturer can accurately predict whether any particular imported part will actually
be used in the production of a specific vehicle model, as opposed to th e other possible uses or
dispositions of that part (such as use in production of a different vehicle model, or use as a
replacement part, or being discarded as defectiv e, or being destroyed in manufacturing); and
(ii) because the determination of whether any specific vehicle model meets the local-content
thresholds is based on a lengthy post-manufacturing verification process, and that determination must
be revisited whenever the composition of the parts used in the model is modified. It is for these very
reasons that, under China's measures, the char ges on imported parts are not assessed until after
manufacturing of vehicles within China.
32. China's response to Question 304 ignores the first set of issues set out above, and tries to
underplay the second. In particular, China's res ponse tries to make it sound as if the uncertainties
regarding the level of charges to be applied to any particular imported part are a minor issue affecting
small numbers of imported parts, when in fact these uncertainties are ongoing and an inherent part of
a system which assesses a charge based on the level of local content contained in a product assembled
within China after importation.
33. China's response suggests that th ere is an initial decision on the "first batch" of assembled
vehicles which establishes certainty on all future imports. However, since the issuance of the
verification report on the first batch of vehicles takes weeks or months, the vehicle manufacturer will
likely be importing parts and assembling them during the period prior to the issuance of the
verification report. Thus, in this entire period prior to the issuance of the verification report, the level
of charges to be imposed on imported parts used in the vehicle model is unsettled. Moreover, a
"vehicle model" is not a static concept. Whenev er the composition of the parts in a model changes,

33 See ibid., Article 28.
34 See ibid., Article 31.
35 25% x 1,000 RMB x 100 brake cylinders.

additional verifications will be required, which ag ain leaves uncertain the level of charges to be
imposed on imported parts used in the production of the model.
34. China's response states that "the results of the self-evaluation and verification process
determine the subsequent declaration and classification of auto parts that the manufacturer imports for
use in the regular commercial production of the vehicl e model." This statement undermines China's
assertion that its charges are customs duties ass essed upon importation. Since parts used in
production may be imported prior to the issuance of China's verification report, and since the
determination of the level of the charge is based on an examination of the final assembled vehicle and
the amount of imported content in that vehicle, Chin a's own statements confirm that the level of the
charges assessed on a particular part is not based on the characteristics of the part itself (or on any
element of the importation process), but rather on th e amount of imported content in the vehicle and
on processes that occur within China after importation.
35. Although the measures require a manufacturer (when the part is imported by a manufacturer
rather than a parts supplier) to declare that an imported part is part of a registered vehicle model at the
time the part enters China, that declaration is no t dispositive. Rather, the government of China,
pursuant to Article 28 of Decree 125, makes the dis positive determination, and does not do so until
after the part has been assembled into a complete vehicle.
36. Finally, China states that "there is no additi onal verification process that occurs after each
entry of auto parts for that vehicle model, or afte r the assembly of each motor vehicle of that vehicle
model type." While verification may not occur after the assembly of each vehicle, the " classification"
of each imported part and the assessment of the charges due on each imported part do occur after the
assembly of each motor vehicle. Verification simply examines the amount of imported content in a
particular vehicle model; that is, the verification pr ocess is tied to models, not to the importation of
any particular part. Under China's measure, the only way to determine definitively the "classification"
of a particular imported part, and thus the only wa y to assess the level of the charge on that imported
part, is to determine after importation and assembly
 whether that part was used in a vehicle that is
deemed a "whole vehicle" under China's local-content criteria.
Comments by Canada on China's response to question 304
37. Canada would first note that China’s res ponse to Question 304 contains the following
statement: "[t]he results of the self-evaluation and verification process determine the subsequent
declaration and classification … of the vehicle model". That is, classification occurs after the
manufacturing of the vehicle. China attempts to conf use this fact by alleging that classification occurs
at the border based on a prior determination. Article 28 of Decree 125, on its face, makes it clear that
"after the imported automobile parts have been assembled into complete vehicles … Customs shall
proceed with classification and duty collection". Ev en if classification were only based on the import
declaration as China suggests, this would still not cha nge the fact that the declaration is not voluntary
and is itself based on end-use classification. It is the self-verification and subsequent review by
customs together with the Verification after the ma nufacture of the first batch of vehicles which form
the basis for the final declaration. It follows that any subsequent declaration must necessarily also be
based on the end-use of those parts, not their classification at the border.
38. Second, Canada disagrees with China’s explana tion of how the measures operate. Article 19
of Decree 125, read in context, shows that the firs t event is not the production or assembly of the first
batch of vehicles. Rather, the first event is the self-verification followed by customs review of the
self-verification. China conflates the customs review of the self-verification under Article 7 with the
Verification of the first batch of manufactured vehicles under Article 19. Decree 125 makes clear that

self-verification and review precede Verification of the first batch of vehicles. Self-verification and
customs review are necessary as part of the registration process (see Articles 7-9), whereas the
assessment of the first batch of vehicles and subseque nt Verification of that batch (Article 19) occur
after the vehicle model is registered.

ANNEX A-4

RESPONSE OF CHINA TO A QUESTION FROM THE UNITED STATES
FOLLOWING THE SECOND SUBSTANTIVE MEETING

1. Consider a vehicle model (Model I), reg istered under Article 7 of Decree 125, with
respect to which the imported automobile parts used in that particular model are required to be
characterized as complete vehicles. Part A used in Model I is produced in the United States.
Part B used in Model I is produced in Canada. All other imported parts used in Model I are
produced in other countries. Assume that Pa rt A and Part B both have their own tariff
headings under China's tariff schedule, and that they would be so classified under those
headings if they were not characterized as comp lete vehicles. The following sequence of events
occur:
• Model I is registered in 2006.
• In December 2006, the manufacturer imports from the United States 300
units of US-produced Part A and declares the parts as being characterized
as complete Model I vehicles under Decree 125.
• In January 2007, the manufacturer imports from Canada 250 units of
Canadian-produced Part B and declares the parts as being characterized as
complete Model I vehicles under Decree 125.
• During 2007, the manufacturer starts pro duction of Model I, and produces
200 Model I vehicles. It decides to halt production in late 2007.
• The remaining 100 units of Part A and 50 units of Part B are held in
inventory, to be used in other models with respect to which imported parts
are not characterized as complete vehicles, or to be sold to dealers as
replacement parts.
A. Please explain how the 2006 importation of 3 00 units of Part A are reflected in China's
official import statistics. In particular, what would be:

(i) the year of importation;
(ii) the tariff heading (e.g, the heading for Model I or the heading for Part A)
(iii) the number of units;
(iv) the value (e.g., as based on the value of Part A, or the value of a complete Model I);
(v) the country of origin (and/or country of exportation, if reflected in China's
statistics);
(vi) the timing of when such imports are reflected in China's official statistics.

B. Please explain how the 2007 importation of 250 units of Part B are reflected in China's
official import statistics. In particular, what would be:

(i) the year of importation;
(vii) the tariff heading (e.g., the heading for Model I or the heading for Part B);
(ii) the number of units;
(iii) the value (e.g., as based on the value of Part B, or the value of a complete Model I);

(iv) the country of origin (and/or country of exportation, if reflected in China's
statistics);
(v) the timing of when such imports are reflected in China's official statistics.

C. Please explain whether the production of 200 Model I vehicles during 2007 has any
effect on China's import statistics.

D. Please explain the effect, if any, on Ch ina's import statistics of the manufacturer's
decision to use the remaining units of Part A and Part B for uses other than producing
Model I or other vehicles the parts of which are characterized as complete vehicles.

E. Please explain whether the production of 200 Model I vehicles has any effect on China's
production statistics.

2. Consider a vehicle model (Model II) produced in the United States. Model II is
produced exclusively from imported parts. Only one part from China, Part C, is used in the
production of Model II. Part C has its own ta riff heading under China's tariff schedule. The
Chinese exporter of Part C knows that Part C will be used in the production of Model II, and
knows that Model II will be produced entirely from imported parts.
In December 2006, the exporter exports 300 units of Chinese-produced Pa rt C to the United
States, to be used in the production of Model II. Please explain how the 2006 exportation of 300
units of Part C is reflected in China's official export statistics. In particular, what would be:

(i) the year of exportation;
(ii) the tariff heading (e.g., the heading for Model II or the heading for Part C);
(iii) the number of units;
(iv) the value (e.g., as based on the value of Part C, or the value of a complete Model II);
(v) the timing of when such exports are reflected in China's official statistics.

Response of China
1. Please see China's response to panel question 175 concerning customs statistics.

Comments by the United States on China's response
2. China has chosen not to respond to the questions posed by the United States. Instead, China
includes only a reference to its response to Panel question 175. That response of China contains a
mere assertion: "With regard to the question of whether the import statistics of China will match the
export statistics of other countries, in most cases the figures will match, but there are always
exceptions."
1
3. China provides no explanation for this asserti on regarding "most cases", and in fact, this
assertion must be wrong. As the United States questions are intended to highlight, whenever an
imported part is treated as a "whole vehicle" under China's measures, there will necessarily be
completely different treatment – in each and every case – under China's import statistics and the

 1China's responses to the written questions from the Panel following the second meeting, response to
question 175.

exporting country's export statistics. Moreover, when Chinese producers export parts to other
countries, China applies no measures comparable to Decree 125. As a result, China's own import and
export statistics for auto parts must be completely inconsistent.
4. The United States submits that China's failure to respond to the US questions is telling.
China's entire defense in this dispute is based on its purported interpretation of the HS Convention. A
main object and purpose of that agreement is to ensure the consistency and usefulness of trade
statistics (and not, as China implies, to ensure the collection of certain levels of duty). Yet when
asked a question that would require China to rec oncile the operation of China's measures as they
affect trade statistics with the object and purpose of the HS Convention to ensure the consistency of
such statistics, China refuses to respond. The reason is clear – China' s proposed interpretation of the
GIR 2(a) would destroy the usefulness of trade st atistics, and, as such, that interpretation is
unsustainable as being fundamentally incompa tible with the object and purpose of the HS
Convention. Without any possible tie to the goals set out in the HS Convention – a non-WTO
Agreement upon which China so heavily relies – Ch ina's measures must be seen for what they
actually are: namely, as domestic content requirement s intended to foster the growth of a domestic
auto parts industry, adopted without any regard to the plain inconsistency of those measures with
China's WTO obligations.