CHINA – MEASURES AFFECTING IMPORTS OF AUTOMOBILE PARTS
Document: Appellate Body Report
Date: 15 December 2008
Document codes: WT/DS339/AB/R; WT/DS340/AB/R; WT/DS342/AB/R; WT/DS339/AB/R; WT/DS342/AB/R.; WT/DS339/AB/R; WT/DS340/AB/R; WT/DS342/AB/R
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)

CHINA – MEASURES AFFECTING IMPORTS OF AUTOMOBILE PARTS

AB-2008-10

Reports of the Appellate Body

Note:

The Appellate Body is issuing these Reports in the form of a single document constituting three separate
Appellate Body Reports: ; WT/DS340 /AB/R; and The cover page,
preliminary pages, Sections I through VIII, and the Annex are common to the three Reports. The page header
throughout the document bears three document symbols: , , and
, with the following exceptions: Sec tion IX on pages EC-103 and EC-104, which bears the
document symbol for and contains the Appellate Body's findings and conclusions in the Appellate Body Report
; Section IX on pages US-103 and US-104, which bears the document symbol for and
contains the Appellate Body's findings and conclusions in the Appellate Body Report ; and
Section IX on pages CDA-103 and CDA-104, which bears the document symbol for and contains the Appellate
Body's findings and conclusions in the Appellate Body Report

W
ORLD TRADE ORGANIZATION
APPELLATE BODY

China, Appellant
Canada, Appellee
European Communities, Appellee
United States, Appellee

Argentina, Third Participant
Australia, Third Participant
Brazil, Third Participant
Japan, Third Participant
Mexico, Third Participant
Separate Customs Territory of Taiwan, Penghu,
Kinmen and Matsu, Third Participant
Thailand, Third Participant

AB-2008-10

Present:

Bautista, Presiding Member
Hillman, Member
Sacerdoti, Member

I. Introduction
1. China appeals certain issues of law and legal in terpretations developed in the Panel Reports,
 (the "Panel Reports").
1 The Panel was
established to consider complaints by the Eur opean Communities, the United States, and Canada
regarding the consistency of certain measures impos ed by China on imports of auto parts with the
General Agreement on Tariffs and Trade 1994 (the "GATT 1994"); the Agreement on Trade-Related
Investment Measures (the " TRIMs Agreement "); the Agreement on Subsidies and Countervailing
Measures (the " SCM Agreement"); the Protocol on the Accession of the People's Republic of China
("China's Accession Protocol");2 and the Report of the Working Party on the Accession of China
("China's Accession Working Party Report").3

1Complaint by the European Communities , WT/DS339/R, 18 July 2008 (the "EC Panel Report");
Complaint by the United States , WT/DS340/R, 18 July 2008 (the "US Panel Report"); Complaint by Canada,
WT/DS342/R, 18 July 2008 (the "Canada Panel Report"). At its meeting held on 26 October 2006, the Dispute
Settlement Body established, in accordance with Article 9. 1 of the DSU, a single Panel pursuant to the requests
of the European Communities in document WT/DS339/8, the United States in document WT/DS340/8, and
Canada in document WT/DS342/8. (Panel Reports, para. 1.8) Following a request by the United States, the
Panel issued its findings in the form of a single document containing three separate Reports, with common
descriptive and analysis sections, but separate conc lusions and recommendations for each complaining party.
(Panel Reports, paras. 2.7 and 8.1)
2WT/L/432.
3WT/ACC/CHN/49 and Corr.1.

2. The measures challenged by the European Communities, the United States, and Canada (the
"complainants" (before the Panel) or the "appellees " (on appeal)) in this dispute—the measures at
issue—consist of three instruments enacted by the Chinese Government that affect auto parts imported
into China. These measures are: Policy on Deve lopment of the Automotive Industry (Order of the
National Development and Reform Co mmission (No. 8)) ("Policy Order 8")
4, which entered into
force on 21 May 2004; Administrative Rules on Impor tation of Automobile Parts Characterized as
Complete Vehicles (Decree of the People's Republic of China, No. 125) ("Decree 125") 5, which
entered into force on 1 April 2005; and Rules on Verification of Imported Automobile Parts
Characterized as Complete Vehicles (Public Announcement of the Customs General Administration
of the People's Republic of China, No. 4 of 2005) ("Announcement 4") 6, which entered into force on
1 April 2005. 7 The measures impose a 25 per cent charge 8 on imported auto parts 9 used in the
manufacture of motor vehicles in China, if the im ported auto parts are "characterized as complete
vehicles" according to specified criteria prescribed under the measures. The amount of the charge is
equivalent to the average tariff rate appli cable to complete motor vehicles under Schedule
CLII - People's Republic of China (Part I – Sche dule of Concessions and Commitments on Goods) 10
attached as Annex 8 to China's Accession Protocol ("China's Schedule of Concessions"), and is higher

4Panel Exhibits JE-18 and CHI-2 (Chapter XI only). The English translation of Policy Order 8, as
agreed by the parties, is contained in Annex E-1 to the Panel Reports.
5Panel Exhibits JE-27 and CHI-3. The English translation of Decree 125, as agreed by the parties (see
infra, footnote 7), is contained in Annex E-2 to the Panel Reports.
6Panel Exhibits JE-28 and CHI-4. The English tr anslation of Announcement 4, as agreed by the
parties, is contained in Annex E-3 to the Panel Reports.
7Panel Reports, para. 2.1. The Panel requested the parties to agree on one common translated version
of China's measures. Accordingly, on 2 August 2007, the parties submitted agreed translations of all provisions
of China's measures, except for Article 28 of Decree 125. The parties co uld not agree on a common translation
of Article 28. On 15 August 2007, the Panel requested the United Nations Office at Geneva to translate this
provision into English, and on 23 August 2007, the Panel forwarded the version translated by the United
Nations to the parties for comments. (See Panel Reports, paras. 2.3-2.4) The agreed translations and the version
of Article 28 of Decree 125 translated by the United Nations are attached as Annex E to the Panel Reports.
8Although China argued before the Panel that the measures "do not themselves impose any duty, fee, or
charge, but merely define the circumstances under which China will classify imported merchandise as falling
under different tariff provisions", the Panel found that the measures do impose both a charge and the
administrative procedures attached to the charge. (Panel Re ports, paras. 7.18 and 7.19) At the oral hearing in
this appeal, China stated that, except with respect to CKD and SKD kits , it was not appealing this finding of the
Panel.
9The Panel found that the auto parts subject to the m easures at issue could be generally categorized into
four groups of the Harmonized Commodity Description and Coding System headings at the four-digit level,
namely: (i) complete vehicles under headings 87.02, 87.0 3, and 87.04; (ii) the body and the chassis fitted with
engine under headings 87.06 and 87.07; (iii) parts and accessories of motor vehicles under heading 87.08; and
(iv) parts and accessories of motor vehicles under chapters other than chapter 87, in partic ular under headings
10WT/ACC/CHN/49/Add.1.

than the average 10 per cent rate that applies to auto parts.
11 The measures also provide for
administrative procedures relating to the imposition of this charge. Further details regarding the
content and the operation of the measures at issue are set out in the Panel Reports 12 and Section IV of
these Reports.
3. Before the Panel, the complainants claimed th at the charge imposed under the measures was
an "internal charge" that was inconsistent with Article III:2 of the GATT 1994 because it applied to
imported auto parts, but not to like domestic parts 13; and that, through the measures, China acted
inconsistently with Article III:4 of the GATT 1994 by treating imported auto parts less favourably
than like domestic auto parts by imposing add itional administrative requirements and additional
charges on automobile manufacturers that use importe d auto parts in excess of specified thresholds. 14
In the alternative, if the measures were consid ered to impose an ordinary customs duty, the
complainants claimed that such duty was in excess of the relevant tariff bindings in China's Schedule
of Concessions and was therefore inconsistent with Article II:1(a) and (b) of the GATT 1994.15 China
responded that the charge under the measures was an ordinary customs duty, within the meaning of
Article II:1(b), and not an internal measure subject to Article III; and that the measures were not
inconsistent with Article II of the GATT 1994 becau se they give effect to a proper interpretation of
"motor vehicles" in China's Schedule of Concessions. 16 China also contended that, in the event that
the measures were found to be incons istent with either Article II or Article III, they were justified
under Article XX(d) of the GATT 1994. 17 The complainants argued that the measures were not
justified under Article XX(d) of the GATT 1994.18

11Specifically, the Panel found that China imposes a charge equivalent to the amount of the tariff rate
applicable to complete vehicles, which is 25 per cent "o n average". The Panel referred to China's Schedule of
Concessions for the exact tariff rates applicable to products falling under tariff headings 87.02-87.04 and noted
that, although the exact tariff rates under these tariff headings vary slightly, in particular at the eight-digit level,
the parties had agreed that 25 per cent is the average tariff ra te applicable to motor vehicles at issue in this case.
Similarly, the Panel noted that the parties had agreed that the tariff rate applicable to auto parts is 10 per cent
"on average". (Panel Reports, para. 7.24 and footnotes 195 and 197 thereto)
12Panel Reports, paras. 7.1-7.81.
13Panel Reports, paras. 3.1(d), 3.4(a), and 3.7(a).
14Panel Reports, paras. 3.1(c), 3.4(b), and 3.7(b).
15Panel Reports, paras. 3.2(g), 3.5(h), and 3.8(g).
16Panel Reports, para. 4.140.
17Panel Reports, para. 3.11.
18Panel Reports, paras. 4.409-4.411, 4.583-4.588 and 4.486-4.493.

4. With respect to the treatment of imports of certain unassembled or partially assembled motor
vehicles, that is, completely knocked down ("CKD") and semi-knocked down ("SKD") kits
19, the
complainants claimed that China's tariff treatment of such kits under the measures was inconsistent
with Article II:1(a) and (b) of the GATT 1994. 20 The United States and Canada claimed that the
measures were also inconsistent with paragraph 93 of China's Accession Working Party Report.21
5. The complainants also challenged the consiste ncy of the measures with China's obligations
under Article III:5 of the GATT 1994 22; Article 2 of the TRIMs Agreement and paragraph 1(a) of
Annex 1 thereto 23; and Part I, paragraphs 7.2, and 7.3 of China's Accession Protocol along with
paragraph 203 of China's Accession Working Party Report. 24 In addition, the European Communities
and the United States claimed that the measures were inconsistent with Articles 3.1(b) and 3.2 of the
SCM Agreement .25 Finally, the United States argued that the measures were inconsistent with
Article XI:1 of the GATT 1994.26
6. During the proceedings, the Panel sent two lette rs to the World Customs Organization (the
"WCO") on 7 June 2007 and 16 July 2007, reques ting its assistance in matters relating to the
Harmonized Commodity Description and Coding System (the "Harmonized System"). 27 The WCO

19The Panel explained that, although the measures at issue do not define CKD and SKD kits, it would
consider CKD and SKD kits under the measures to refer to all or nearly all of the auto parts and components
necessary to assemble a complete vehicle, which must be packaged and shipped in a single shipment, and which
must go through the assembly process to become a complete vehicle once they have been imported into the
importing country. (Panel Reports, paras. 7.644-7.647)
20Panel Reports, para. 7.636.
21Panel Reports, paras. 3.5(i) and 3.9. Paragraph 93 of China's Accession Working Party Report is
reproduced in infra, footnote 64 as well as in Section VIII. Cana da also argued that the measures nullify or
impair benefits, as understood under Article XXIII:1(b) of the GATT 1994. (See Panel Reports, para. 3.9)
22Panel Reports, paras. 3.1(e), 3.4(d), and 3.7(c).
23Panel Reports, paras. 3.1(a), 3.4(c), and 3.7(d). In addition, the United States claimed that the
measures fell within paragraph 2(a) of the Illustrative List in Annex 1 to the TRIMs Agreement. (Panel Reports,
para. 3.4(c))
24Panel Reports, paras. 3.1(b) and (f), 3.4(e) and (f), and 3.7(e) and (f). The European Communities
and Canada also invoked paragraph 1.2 of China's A ccession Protocol and paragraph 342 of China's Accession
Working Party Report. (Panel Reports, paras. 3.1(b) and 3.7(f))
25Panel Reports, paras. 3.2(h) and 3.4(g). The European Communities made this claim "[i]n the
alternative". (Panel Reports, paras. 3.2(h) and 7. 633) The European Communities and the United States
requested that the Panel issue the recommendations set out in Article 4.7 of the SCM Agreement. (Panel Reports,
paras. 3.3 and 3.6)
26Panel Reports, para. 3.5(j).
27Panel Reports, paras. 2.5 and 2.6.

replied on 20 June 2007 and 30 July 2007 respectivel y, and the parties were invited to provide
comments on these replies.
28
7. In the Panel Reports, circulated to Members of the World Trade Organization (the "WTO")
on 18 July 2008, the Panel found that the measures at issue were internal measures within the scope of
Article III29 and that the measures were inconsistent with Article III:2, first sentence, in that they
subject imported auto parts to an internal charge in excess of that applied to like domestic auto parts30;
and were inconsistent with Artic le III:4 in that they accord imported auto parts less favourable
treatment than like domestic auto parts. 31 The Panel found, in the alternative, that, assuming the
measures fell within the scope of the first sentence of Article II:1(b), they imposed duties in excess of
the relevant tariff bindings in China's Schedule of Concessions and were thus inconsistent with
Article II:1(a) and (b) of the GATT 1994. 32 The Panel also concluded that the measures at issue were
not justified under Article XX(d) of the GATT 1994. 33 As regards CKD and SKD kits, the Panel
found that the measures were not inconsiste nt with Article II:1(b) of the GATT 1994 34; but that they
were inconsistent with China's commitment under paragraph 93 of China's Accession Working Party
Report.35 The Panel exercised judicial economy with respect to the claims under the
TRIMs Agreement, Article III:5 of the GATT 1994, and Articles 3.1(b) and 3.2 of the
SCM Agreement.36
8. On 15 September 2008, China notified the Dispute Settlement Body (the "DSB") of its
intention to appeal certain issues of law covered in the Panel Reports and certa in legal interpretations
developed by the Panel, purs uant to Article 16.4 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes (the "DSU"), and filed a Notice of Appeal 37 pursuant to Rule 20
of the Working Procedures for Appellate Review 38 (the " Working Procedures "). On 22 September

28Panel Reports, paras. 2.5 and 2.6 and footnotes 12 and 13 thereto. The Panel's letters and the WCO's
responses are reproduced in Annex C to the Panel Reports.
29Panel Reports, para. 7.212.
30Panel Reports, Section VIII:A(a)(i), Section VIII:B(a)(i), and Section VIII:C(a)(i).
31Panel Reports, Section VIII:A(a)(ii), Section VIII:B(a)(ii), and Section VIII:C(a)(ii).
32Panel Reports, Section VIII:A(b)(i), Section VIII:B(b)(i), and Section VIII:C(b)(i).
33Panel Reports, Section VIII:A( a)(iii) and (b)(ii), Section VI II:B(a)(iii) and (b)(ii) and
Section VIII:C(a)(iii) and (b)(ii).
34Panel Reports, para. 7.736, Section VIII:A(c)(i) and Section VIII:B(c)(i).
35Panel Reports, Section VIII:B(c)(ii) and Section VIII:C(c)(i).
36Panel Reports, paras. 8.2, 8.5, and 8.8. The Panel did not consider it necessary to rule on the
remaining claims under Articles XI:1 and XXIII:1(b) of the GATT 1994, or on Chin a's obligations under its
Accession Protocol. (Panel Reports, paras. 7.760-7.764)
37WT/DS339/12, WT/DS340/12, WT/DS342/12 (attached as Annex I to these Reports).
38WT/AB/WP/5, 4 January 2005.

2008, China filed an appellant's submission.
39 On 10 October 2008, the European Communities, the
United States, and Canada each filed an appellee's submission 40, and Argentina, Australia, and Japan
each filed a third participant's submission. 41 On the same day, Brazil, Mexico, the Separate Customs
Territory of Taiwan, Penghu, Kinmen and Matsu, and Thailand each notified its intention to attend the
oral hearing as a third participant.42
9. By letter dated 17 September 2008, China requested authorization from the Appellate Body to
correct two clerical errors in its Notice of Appeal, pursuant to Rule 18(5) of the Working Procedures.
On 17 September 2008, the Appellate Body Division hearing the appeal invited the European
Communities, the United States, Canada, and the thir d participants, to comment on China's request.
No objections to China's request were received and, on 19 September 2008, the Division authorized
China to correct the clerical errors in its Notice of Appeal.
10. On 19 September 2008, the Presiding Member of the Division hearing the appeal in this
dispute received a letter from the United States requesting, pursuant to Rule 16(2) of the Working
Procedures, to change the dates scheduled for the oral hearing in this appeal from 27-28 October 2008
to 28-29 October 2008.
43 On the same day, the Division hearin g this appeal offered Canada, China,
the European Communities and the third participants the opportunity, if they so chose, to comment on
the United States' request. None of the participants or third participants objected to this request by the
United States. 44 By letter dated 26 September 2008, the Division informed the participants and the
third participants that it had decided to change the starting time of the oral hearing in this appeal from
the morning to the afternoon of 27 October 2008.
11. On 10 October 2008, the Appellate Body received an unsolicited amicus curiae brief. After
giving the participants and the third participants an opportunity to express their views, the Division
hearing the appeal did not find it necessary to rely on this amicus curiae brief in rendering its
decision.

39Pursuant to Rule 21 of the Working Procedures.
40Pursuant to Rule 22 of the Working Procedures.
41Pursuant to Rule 24(1) of the Working Procedures.
42Pursuant to Rule 24(2) of the Working Procedures.
43The United States made this request on the grounds that "a key member of the U.S. litigation team is
not able to ... be in Geneva until Tuesday, October 28."
44On 23 September 2008, Canada informed the Division that it supported the request made by the
United States. On 24 September 2008, the European Co mmunities informed the Division that it also supported
the United States' request. Neither China nor the third participants made any comment on the request.

12. On 10 October 2008, the United States requested the Appellate Body to issue three separate
reports in this appeal, setting out its conclusi ons and recommendations separately for each Panel
Report under appeal. The other participants and the th ird participants were afforded an opportunity to
comment on this request at the oral hearing. They made no objection to the United States' request.
13. The oral hearing in this appeal was held on 27 and 28 October 2008. The participants and
two of the third participants—Brazil and Japan—made oral statements. The participants and the third
participants responded to questions posed by the Members of the Division hearing the appeal.
II. Arguments of the Participants and the Third Participants
A. Claims of Error by China – Appellant
1. Characterization of the Charge Imposed under the Measures at Issue

14. China requests the Appellate Body to reverse th e Panel's finding that the charge imposed on
auto parts under the measures at issue is an internal charge subject to the disciplines of Article III:2 of
the GATT 1994, and to find, instead, that the charge is an ordinary customs duty within the meaning
of the first sentence of Article II:1(b) of the GATT 1994. China contends that, by failing to take into
account the context provided by the Harmonized System in interpreting Article II:1(b), the Panel erred
in its evaluation of the nature of the charge im posed on parts of motor vehicles under the measures.
This, in turn, argues China, led the Panel to err in separating the threshold question of whether the
charge imposed under the measures is an ordinary customs duty from the question of whether the
Harmonized System allows China to apply Rule 2(a) of the General Rules for the Interpretation of the
Harmonized System ("GIR 2(a)") 45 to multiple entries of auto part s that are related through their
common assembly.
15. China argues that Article II:1(b) plainly requires a two-step analysis. Customs authorities
first determine what the "product" is, and this determination, in turn, indicates which "ordinary
customs duty" in the Member's Schedule of Concessions applies to that product. By virtue of
Article II:1(b), a Member must exempt that produc t, on its importation, from ordinary customs duties

45The text of GIR 2(a) provides:
Any reference in a heading to an article shall be taken to include a reference
to that article incomplete or unfinished, provided that, as presented, the
incomplete or unfinished article has th e essential character of the complete
or finished article. It shall also be ta ken to include a reference to that article
complete or finished (or falling to be classified as complete or finished by
virtue of this Rule), presented unassembled or disassembled.

in excess of those set forth for that product in the Member's Schedule of Concessions. Classification
is the process by which customs authorities determine the nature and identity of a particular product.
The classification of the product necessarily precedes the determination of which ordinary customs
duty applies. However, neither the GATT 1994 nor any other covered agreement prescribes the rules
or standards by which Members' customs authorities are to classify products for purposes of
Article II:1(b). In particular, the covered agreements do not address whether a completely
unassembled article should be classified as parts or as the complete article, nor do they provide
guidance on the classification problems that customs authorities routinely face. China contends that,
although the Harmonized System is not formally part of the Marrakesh Agreement Establishing the
World Trade Organization ( the " WTO Agreement"), it is closely linked to it, and provides the rules
for the classification of parts and the complete article which are absent from the GATT 1994. China
argues that the Harmonized System also provides the decision-making rules for resolving a wide
variety of classification issues. By negotiating and scheduling tariff concessions with reference to the
Harmonized System, WTO Members understood th at national authorities would apply these
classification rules to determine the identity of a pro duct, and that this classification would, in turn,
determine the applicable rate of duty in the importing Member's Schedule of Concessions.
16. According to China, the Panel could have dete rmined whether the charge is an ordinary
customs duty or an internal charge only by evaluating whether the charge imposed under the measures
is related to a valid classification of the product under the rules of the Harmonized System. The Panel
properly recognized that a charge does not n eed to be collected or assessed at the moment of
importation in order to constitute an ordinary customs duty. The Panel also correctly understood that
the decisive factor for determining whether a charge is an ordinary customs duty is the "condition" or
"status" of the product to which the charge applies at the moment it enters the customs territory. Yet,
the Panel failed to take into account that it is th e Harmonized System which prescribes such condition
or status. Without a basis for determining the condition or status of a product at the moment it enters
the customs territory, it is, in China's view, impossi ble to determine whether a particular charge is
linked, or related, to the product at that moment and, therefore, equally impossible to determine
whether the charge is an ordinary customs duty.
17. China asserts that, if the me asures at issue impose a charge based upon a valid method of
classifying the product under the Harmonized System, the charge is an ordinary customs duty under
Article II:1(b), and not an internal charge subject to Article III:2. Under the Harmonized System,
GIR 2(a) specifies that an unassembled or disassemb led article is classified as the complete article
instead of as its constituent parts. China contends that GIR 2(a) allows national customs authorities to

classify unassembled auto parts as motor vehicles provided that the unassembled parts have the
"essential character" of a motor vehicle and enter the customs territory in a single shipment —even
though assembly will necessarily occur after the moment of importation. As explained in further
detail in its arguments regarding the Panel's "alternative" findings
46, China considers that the charge
under the measures is based on a valid application of GIR 2(a) to multiple shipments of parts and
components that are demonstrably linked to each ot her through their common assembly into the same
motor vehicle. The measures at issue, therefore, "define a customs procedure that gives effect to a
valid method of classification under the rules of the Harmonized System". 47 China submits that the
charge imposed using this valid method of classifi cation is an ordinary customs duty, because it is
based on a proper determination of the product that is subject to the duty assessment.
18. For these reasons, China requests the Appellate B ody to reverse the Panel's finding that the
charge under the measures is an internal charge w ithin the meaning of Article III:2 of GATT 1994, as
well as all of the Panel's conclusions and recomme ndations that were based on this finding. If,
however, the Appellate Body were to affirm the Pane l's finding that the charge is an internal charge,
then China submits that the Appellate Body shoul d find that the Panel's alternative reasoning and
findings under Article II of the GATT 1994, as well as the alternative conclusions and
recommendations, are "moot and of no legal effect".48
2. Consistency of the Measures at Issue with Article III:2 of the GATT 1994
19. China agrees with the Panel that a specific charge "cannot be at the same time an 'ordinary
customs duty' under Article II:1(b) of the GATT 1994 a nd an 'internal tax or other internal charge'
under Article III:2 of the GATT". 49 China submits that, because the Panel erred in its conclusion that
the charge imposed under the measure s is an internal charge, the Panel's finding under Article III:2 is
also in error and its conclusion that the charge is inconsistent with Article III:2 cannot be sustained.
China therefore requests the Appellate Body to reverse this finding, along with the related conclusions
and recommendations of the Panel. In response to questioning at the oral hearing, China confirmed

46See infra, paras. 22-30.
48China's appellant's submission, para. 49 and footnote 27 thereto (referring to Appellate Body Report,
Canada – Dairy (Article 21.5 – New Zealand and US II), para. 158; Appellate Body Report, US – FSC,
para. 132; and Appellate Body Report, US – Anti-Dumping Measures on Oil Country Tubular Goods,
para. 211). The specific Panel reasoning, findings, conclusions, and recommendations that China requests be
declared moot and of no legal effect are those containe d in Section VII:D of the Panel Reports, as well as the
alternative findings and conclusions in Section VIII of the Panel Reports. See also China's appellant's
submission, footnote 91 to para. 116.

that, if the Appellate Body upholds the characte rization of the charge under the measures as an
internal charge, it would necessarily have to uphold th e Panel's finding that the charge is inconsistent
with Article III:2.
3. Consistency of the Measures at Issue with Article III:4 of the GATT 1994

20. China requests the Appellate Body to rever se the Panel's findings and conclusions under
Article III:4 of the GATT 1994. China contends that the Panel's finding that the measures fall within
the scope of Article III:4 was "premised upon" 50 its finding that the charge imposed under the
measures is an internal charge. Because, in Chin a's view, the latter finding is in error, the Panel's
findings under Article III:4 must also be reversed.
21. China further submits that the administrativ e procedures under the measures at issue are
customs measures that implement a valid method of classification under the rules of the Harmonized
System and, as such, do not fall within the scope of Article III:4. China contests the Panel's finding
that the measures influence an automobile manufact urer to choose domestic over imported auto parts
and thereby adversely affect the internal use of impor ted auto parts. Any influence that the measures
have on an automobile manufacturer's decision to use domestic over imported auto parts derives
solely from the structure of the bound rates in China's Schedule of Concessions, which creates an
incentive for automobile manufacturers to assemb le vehicles in China from imported parts and
components that, in their entirety, do not have the "essential character" of a motor vehicle under
GIR 2(a). According to China, to the extent that this creates an incentive to use domestic auto parts,
such incentive "is inherent in China's permissible duty rates".51
4. The Panel's "Alternative" Findings u nder Article II:1(a) and (b) of the
GATT 1994
22. For the reasons set out above, China considers that the Appellate Body should reverse the
Panel's finding that the charge imposed under the measu res at issue is an internal charge within the
meaning of Article III:2 of the GATT 1994. Should the Appellate Body, in such circumstances,
examine the alternative findings of the Panel, it shoul d reverse the Panel's finding that the charge is
applied inconsistently with Artic le II:1(a) and (b) of the GATT 1994 and find, instead, that the
measures impose ordinary customs duties based upon a valid classification of related shipments of

parts and components as "motor vehicles", and that su ch duties are not in excess of the relevant tariff
bindings under China's Schedule of Concessions.
23. China contends that the Panel erred in finding that China may not apply GIR 2(a) to
unassembled auto parts that enter its customs territory in more than one shipment, when the parts are
demonstrably related to each other through their comm on assembly into the same motor vehicle. In
China's view, this finding was based on three pr incipal errors committed by the Panel in its
interpretation of GIR 2(a): (i) the Panel erred in its identification of the ordinary meaning of GIR 2(a)
and, in particular, of the term "as presented" within that rule; (ii) the Panel's interpretation contradicts
a decision taken by the Harmonized System Committee in 1995
52 (the "1995 HS Committee
Decision") and the WCO's explanation of that Decision in its answers to questions posed by the Panel;
and (iii) the Panel misunderstood key aspects of the negotiating history of GIR 2(a).
24. China submits that, within the Harmonized System, GIR 2(a) addresses the relationship
between the classification of parts of an article and the article itself. China contends that GIR 2(a)
allows customs authorities routinely to classify a co llection of parts as equivalent to the complete
article, regardless of their state of assembly or disassembly at the border. China points to the
"paradigmatic example"53 of a CKD kit which may, by virtue of GIR 2(a), be classified as a "motor
vehicle". Yet, the principle embodied in GIR 2(a) gives rise to a complicated classification problem,
namely: if importers are able to structure their imports of unassembled parts in many different ways,
how are customs authorities to determine where one collection of unassembled parts ends and another
begins? In China's view, GIR 2(a) applies to substa nce as well as to form. In other words, GIR 2(a)
applies regardless of the manner in which an importer chooses to structure its importation of
unassembled parts that, in their entirety, have the "essential character" of a motor vehicle, including
when those parts enter the customs territory at more than one given time or place.
25. China contests both the Panel's identification of, and reliance on, the ordinary meaning of the
term "as presented" in GIR 2(a). The Panel relied on dictionary definitions of "as" and "presented" to
attribute an "obvious"
54 temporal meaning to "as presented" , namely, the moment when a good is
presented to the customs authority. However, recourse to the dictionary shows that "as presented" can

52Decision of the Harmonized System Committee, HSC 39.235 (HSC/15), Interpretation of General
Interpretative Rule 2(a) (Annex IJ/7 to Doc. 39.600 E (HSC/16/Nov. 95)) (Panel Exhibit CHI-29).

equally mean the " manner or process by which the importer seeks a formal action"
55, suggesting that
"as presented" can refer to the manner in whic h an entry is documented for purposes of customs
classification. China adds that, in any event, it is doubtful whether the ordinary meaning of the term
"as presented" had much significance in this cas e because the WCO has determined, and the Panel
itself recognized, that GIR 2(a) can, at least in some circumstances, apply to multiple shipments of
parts. Thus, the relevant question before the Pa nel was what those circumstances are, and that
question had to be answered by reference to the scope and meaning of the 1995 HS Committee
Decision.
26. China stresses that this 1995 Decision represents the only time that the HS Committee has
interpreted the term "as presented" in GIR 2(a), and that the Decision pertains directly to the question
of whether, and in what circumstances, GIR 2( a) may apply to multiple shipments of unassembled
parts. Paragraph 10 of that Deci sion allows national customs authorities discretion to apply GIR 2(a)
to multiple shipments in two situations: in the case of split consignments, and with respect to the
classification of goods assembled from elements origina ting in, or arriving from, different countries.
However, asserts China, because the Panel wrongl y assessed the negotiating history of GIR 2(a) and
did not properly take into account the views expressed to it by the WCO, the Panel wrongly
concluded that neither of these situations encompasses circumstances in which unassembled articles
are imported in multiple shipments.
27. China refers to the Panel's finding that the HS Committee's reference to "split consignments"
was limited to the "unique situation where imported parts and components were intended to be part of
a single consignment, but were then split into multip le consignments for reas ons mainly relating to
transportation."
56 According to China, this finding was di rectly contradicted by the WCO's response
to the Panel's questions on the in terpretation of "split consignments", and the view expressed therein
that the term "split consignments" could refer to a "range of trading practices" 57, including situations
where parts to assemble a complete article arrive separately in multiple shipments from different
places. China submits that the Panel's disregard of the guidance provided by the WCO runs counter to

55China's appellant's submission, para. 97. (original emphasis) China refers to The New Shorter Oxford
English Dictionary , 4th edn, L. Brown (ed.) (Clarendon Press, 1993), Vol. 1, p. 123 and Vol. 2, p. 2341.
(China's appellant's submission, footnotes 76 and 77 to para. 96)
57China's appellant's submission, paras. 69 and 70 (referring to response of the WCO Secretariat to
Question 10 from the Panel, Panel Reports, Annex C-4, p. C-16).

the statement made by the Appellate Body in EC – Chicken Cuts to the effect that advice from the
WCO should inform a panel's consideration of how to interpret a particular GIR.
58
28. China emphasizes that the Panel "fundamentally misapprehended" 59 the negotiating history of
GIR 2(a). For example, it is clear that, when drafting GIR 2(a), it was understood that "split
consignments" encompassed articles imported in an unassembled condition "even if forwarded in
several consignments". 60 The Panel, however, determined that "the drafters of GIR 2(a) did not
intend to have the rule applied to the multiple shipment situation." 61 In so finding, the Panel referred
to discussions leading to the adoption of GIR 2(a) as evidence that the scope of GIR 2(a) was intended
to be limited in two ways: first, GIR 2(a) was not intended to apply to th e importation of parts and
components for industrial assembly; and, secondly, th e drafters of GIR 2(a) primarily intended it to
apply to goods that the importer would have impor ted in an assembled cond ition but for packing and
transportation difficulties related to those goods in their assembled state. China stresses, however,
that, although such limitations were discussed within the Nomenclature Committee of the Customs
Co-operation Council (the "CCC") when GIR 2(a) w as being drafted in 1963, they were ultimately
not included in the text of that Rule, precisely because the drafters did intend GIR 2(a) to apply to
goods imported for industrial assembly, including in multiple shipments. Thus, concludes China, the
premise of the Panel's interpretation of the limited sc ope of GIR 2(a) was not only without a basis in
the negotiating history of GIR 2(a), but is, in fact, directly contradicted by that negotiating history.
29. Finally, China claims that the Panel improperly intruded upon the jurisdiction of the WCO
and violated Articles 3.2 and 11 of the DSU by purporting to resolve a known question of
interpretation within the Harmonized System, whic h is not a WTO covered agreement. Even the
Panel, with its narrow understanding of the term "s plit consignments", recognized that there are some
circumstances in which GIR 2(a) applies to multiple shipments. When the WCO informs a panel that
the WCO is aware of an interpretative issue with in the Harmonized System, that the HS Committee
has considered this issue in the past, and that the HS Committee has decided to leave the resolution of
this issue to the discretion of national authorities, a panel should not take it upon itself to offer its own
resolution of this issue, or its own interpretation of the WCO's past decisions. To do so, in China's

 58China's appellant's submission, para. 75 (referring to Appellate Body Report, EC – Chicken Cuts ,
60China's appellant's submission, para. 83 (quoting Customs Co-operation Council, Nomenclature
Committee, 9th Session, Brussels (19 July 1962), Document No. 9550E, "Articles (Machinery, Apparatus, etc.)
Imported Unassembled or Disassembled" (Panel Exhibit CDA-18, p. 2)). (emphasis added by China)

view, amounts to "determin[ing] rights and obligations outside the covered agreements", which is not
the function of a panel under Articles 3.2 and 11 of the DSU.
30. China distinguishes this situation from one in which the interpretation of a Member's
Schedule requires consideration of the Harmonized System as context, or one where a panel is
incapable of resolving the matter before it. Furt hermore, China considers that the principle of
in dubio mitius
62 supports an interpretation of the terms "m otor vehicles" in China's Schedule and "as
presented" in GIR 2(a), that would preserve China' s right to define the boundaries between what
constitutes complete vehicles and what constitutes pa rts, and to exercise the discretion to make
classification decisions left to HS contracting parties by the HS Committee.
5. The Panel's Findings with respect to Paragraph 93 of China's Accession
Working Party Report
(a) Applicability of the Measures at Issue to Imports of CKD and SKD
Kits
31. China asserts that the Appellate Body "must reverse" 63 the Panel's findings under
paragraph 9364 of China's Accession Working Party Repor t because they were premised upon an
erroneous interpretation of the measures at issue. The Panel interpreted the measures to apply to
importers who, under Article 2(2) of Decree 125, import CKD and SKD kits under China's regular
customs procedures. China contends that impor ts under its regular customs procedures cannot be
viewed as subject to the measures at issue and th at the ordinary meaning of the measures plainly
establishes that they do not apply in these circumstances. China considers that the Panel's findings on
the meaning of Article 2(2) are subject to appellate review under Article 17.6 of the DSU "as a matter
of legal interpretation".65

62China's appellant's submission, para. 111 (referring to Appellate Body Report, EC – Hormones ,
footnote 154 to para. 165).
64Paragraph 93 of China's Accession Working Party Report provides:
Certain members of the Working Party expressed particular concerns about
tariff treatment in the auto sector. In response to questions about the tariff
treatment for kits for motor vehicles, the representative of China confirmed
that China had no tariff lines for completely knocked-down kits for motor
vehicles or semi-knocked down kits for motor vehicles. If China created
such tariff lines, the tariff rates would be no more than 10 per cent. The
Working Party took note of this commitment.
65China's appellant's submission, para. 140 (referring to Appellate Body Report, US – Section 211
Appropriations Act, para. 105).

32. China stresses that Decree 125 applies to and c oncerns the classification of auto parts as
motor vehicles following vehicle assembly. This is made clear, in particular, by the title of
Decree 125 and by Article 2(1). Both use the term "automobile parts char acterized as complete
vehicles", which is defined in Article 5 of the Decr ee to mean that the imported auto parts should be
characterized as complete vehicles at the stage when complete vehicles are assembled . In contrast,
Article 2(2) authorizes automobile manufacturers importing CKD or SKD kits to declare such
importation and pay duties, and provides that, in su ch circumstances, "these Rules shall not apply".
When the two paragraphs of Article 2 are read togeth er, it is clear that they define the circumstances
in which the rules set forth in Decree 125 are app licable (in respect of auto parts that have the
"essential character" of a motor vehicle following ve hicle assembly) and the circumstances in which
they "shall not apply" (when CKD and SKD k its are imported under China's regular customs
procedures and duties are paid upon importation). The fact that the remainder of Decree 125
consistently refers only to "automobile parts charac terized as complete vehicles" confirms that it
applies only to the treatment of auto parts at the st age when complete vehicles are assembled, and not
to their treatment when imported pursuant to Chin a's regular customs procedures. Moreover, the
Appellate Body itself has found that the words "shall not apply" have a clear exclusionary meaning, at
least in the context of Article 64.2 of the Agreement on Trade-Related Aspects of Intellectual Property
Rights (the "TRIPS Agreement").
66 The ordinary meaning of Decree 125, submits China, is that the
measures, including the charge imposed thereunde r, do not apply to importers who import CKD and
SKD kits and pay duties under China's regular customs procedures.
33. China argues that, notwithstanding this ordinary meaning, the Panel erroneously concluded
that importers who import CKD a nd SKD kits under the measures are "in principle" subject to the
charge by falling within the scope of the substa ntive criteria in Article 21(1) of Decree 125.
According to the Panel, Article 2(2) exempts impo rters of such kits only from the administrative
procedures, but not the substantive criteria, under D ecree 125. China considers this interpretation to
be "entirely without basis" 67, in particular, given that there is no textual distinction drawn in
Decree 125 between "administrative procedures", on the one hand, and "substantive criteria" and
"charge", on the other hand, or even any reference to the term "administrative procedures". Rather,
the unambiguous meaning of "these Rules shall not apply" in Article 2(2) is simply that the entirety of

66China's appellant's submission, para. 147 (referring to Appellate Body Report, India – Patents (US) ,
para. 42).

Decree 125—including the substantive criteria and the charge—is inapplicable to importers who
import CKD and SKD kits and pay duties under China's regular customs procedures.
34. China also alleges intern al incoherence in the Panel's inte rpretation of Decree 125. First,
elsewhere in its Reports, the Panel appeared to a ccept that the measures did not apply, at all, to
importers of CKD or SKD kits exercising the optio n provided in Article 2(2) of Decree 125 to import
under China's regular customs procedures.
68 Secondly, China contends that the Panel's finding, that
the measures impose a border "charge" on importers of CKD and SKD kits who exercise the option
under Article 2(2) and import under China's regular customs procedures, cannot be reconciled with
the Panel's finding that the charge imposed by th e measures is an "internal charge" falling under
Article III of the GATT 1994. In reaching that findin g, the Panel specifically found that there is only
one charge under the measures, and that such charge is triggered after the assembly of imported parts
into vehicles within China.
(b) Prima Facie Case
35. China claims that the Panel acted contrary to Article 11 of the DSU by ruling on a claim that
neither the United States nor Canada had advan ced and for which they failed to make out a prima
facie case of inconsistency. Specifically, China argues that neither the United States nor Canada even
alleged that the measures at issue apply to impor ters of CKD and SKD kits under China's regular
customs procedures.
36. China points out that the Appellate Body has established that the burden of introducing
evidence as to the scope and meaning of municipal law is on the party asserting that another party's
municipal law is, as such, inconsiste nt with relevant treaty obligations
69; that a prima facie case must
be based on evidence and legal argument put forwar d by the complaining party in relation to each
element of the claim70; and that a panel acts in violation of Article 11 of the DSU if it rules on a claim
in the absence of such evidence and legal arguments. 71 According to China, at no stage of the
proceedings was there any dispute among the parti es about the interpretation of Article 2(2) of
Decree 125 and its relationship to imports of C KD and SKD kits under China's regular customs

69China's appellant's submission, para. 161 (referring to Appellate Body Report, US – Carbon Steel ,
para. 157).
70China's appellant's submission, para. 162 (referring to Appellate Body Report, US – Gambling ,
para. 140).
71China's appellant's submission, para. 162 (referring to Appellate Body Report, US – Gambling ,
paras. 139 and 281).

procedures. In finding that the charge is impo sed under the measures, the Panel relied on its own
understanding of the scope of the exemption prov ided under Article 2(2) to make findings and
develop a "unilateral and unsubstantiated"
72 interpretation. The Panel found that the measures at issue
impose an internal charge and simultaneously impose ordinary customs duties on a class of imports
that the United States and Canada had not even allege d to be within the scope of the measures. If,
however, the Panel had begun its analysis of pa ragraph 93 of China's Accession Working Party
Report properly, by examining whether the United States and Canada had presented evidence and
legal argument to demonstrate that the measures impose an ordinary customs duty on imports of CKD
and SKD kits, the Panel would have found th at the complainants had not established a prima facie
case that the measures impose both an internal charge and an ordinary customs duty. China considers
that, by relieving the United States and Canada of th eir obligations in this regard, the Panel violated
Article 11 of the DSU.
(c) The Consistency of the Measures at Issue with Paragraph 93
37. Should the Appellate Body accept China's argument that the Panel's findings in respect of
paragraph 93 of China's Accession Working Part y Report must be reversed because they were
predicated on an erroneous legal interpretation of Ar ticle 2(2) of Decree 125, then the Appellate Body
need not examine those findings further. If, however, the Appellate Body disagrees, then China
argues, in the alternative, that the Panel's findi ng that the measures violate China's commitment under
paragraph 93 should be reversed. China challenges both grounds on which the Panel found that the
condition in paragraph 93 had been satisfied, namely: that the measures de facto created tariff lines;
and that China had created separate ten-digit tari ff lines in its customs nomenclature for CKD and
SKD kits.
(i) The "De Facto" Creation of Tariff Lines
38. China requests the Appellate Body to reverse the Panel's finding that the measures at issue "in
effect" created tariff lines for CKD and SKD kits and, in consequence, to also reverse the Panel's
finding that China violated its commitment under pa ragraph 93 to levy a tariff of no more than
10 per cent if such tariff lines were created. Chin a believes that, in reaching this finding, the Panel
ignored the words actually used in paragraph 93, and e ffectively read the term "tariff lines" out of that
provision.

39. China notes that the Panel interpreted the te rm "tariff line" in paragraph 93 to mean
"a horizontal line in a tariff schedule that provide s a specific heading number, regardless of the
number of digits … and a specific tariff rate fo r the product described under that heading".
73 The
Panel also interpreted China's commitment under pa ragraph 93 to be conditioned on a future event,
that is, the creation of tariff lines for CKD and SKD kits. However, even though none of the
complainants argued that the measures actually created tariff lines, the Panel erroneously accepted the
United States' argument that tariff lines for CKD an d SKD kits could be deemed to have been, or
"de facto", created given that, under the measures, Chin a effectively classifies such kits under specific
tariff lines for motor vehicles and applies the corres ponding tariff rate of 25 per cent. According to
China, this is an impermissible interpretation by th e Panel. Paragraph 93 specifically refers to "tariff
lines" to define the circumstances under which the co mmitment is triggered and, if the drafters had
intended for China's commitment to be triggered by the creation of tariff lines "in effect", as opposed
to through the formal creation of tariff lines, they would simply have written this into paragraph 93.
40. China further asserts that the Panel's interp retation produces absurd results when viewed
against the other findings made by the Panel. The Panel found that the status quo prior to the
introduction of the measures was that China had, be fore and after its accession to the WTO, properly
classified and assessed CKD and SKD kits as motor ve hicles, and that it could continue to do so
provided that it did not exercise its discretion to create separate tariff lines for CKD and SKD kits.
Yet, the Panel went on to find that any action implementing such classification of these kits as motor
vehicles and assessing a 25 per cent tariff would trig ger the commitment under paragraph 93 to levy a
tariff of no more than 10 per cent. In so findi ng, the Panel necessarily implied that China could
classify and assess CKD and SKD kits as motor vehi cles as it had done both prior to and subsequent
to its accession, as long as China never acknowledged that this is what it was doing.
(ii) The Creation of Tariff Lines at the Ten-Digit Level
41. China requests the Appellate Body to reverse the Panel's finding that China created tariff lines
for CKD and SKD kits in China's national customs tari ff at the ten-digit level. China argues that, in
reaching this finding: the Panel erred in its interp retation of "tariff lines" under paragraph 93 and in
applying that interpretation to tariff headings at the ten-digit level for CKD and SKD kits; ignored the
context provided by paragraph 89 of China's Access ion Working Party Report; afforded internally
incoherent treatment to the evidence before it, thereby also breaching Article 11 of the DSU; and
pronounced on measures that were outside its terms of reference.

42. China argues that the Panel's interpretation of "tariff lines" in paragraph 93 to include
headings at the ten-digit level is flawed in tw o ways. First, such an interpretation cannot be
reconciled with the Panel's own r easoning, namely, that the term "tariff lines" in paragraph 93 must
refer to something that did not exist at the time of China's accession. Because there was undisputed
evidence before the Panel that the ten-digit codes that the Panel foun d had been "created", in fact,
existed at the time of accession, the Panel should have examined this evidence as part of the
circumstances surrounding the conclusion of Ch ina's Accession Protocol , in accordance with
Article 32 of the Vienna Convention on the Law of Treaties
74 (the "Vienna Convention"). Had it done
so, the Panel would have found that the term "t ariff lines" in paragraph 93 could not encompass
China's pre-existing ten-digit codes, that were maintained for the purpose of compiling import
statistics for CKD and SKD kits.
43. Secondly, according to China, the Panel erred in failing to take account of the relevant context
in which the term "tariff lines" occurs. Because the subject matter of paragraph 93 is the tariff
treatment of imports of CKD and SKD kits, a "tariff line", within the meaning of that provision, must
mean an entry in China's tariff nomenclature that affects the tariff rate applicable to such imports.
The Panel, however, interpreted "tariff lines" in a way that ignores whether a particular horizontal line
in a tariff schedule has any bearing upon the tariff rate to which a product is subject and, in doing so,
ignored the context provided by paragraph 89 of China's Accession Working Party Report and by the
Harmonized System. The contracting parties to the International Convention on the Harmonized
Commodity Description and Coding System (the " Harmonized System Convention ")75 may, and do
create codes in their national customs nomenclatur es beyond the six-digit level prescribed by the
Harmonized System, including for reasons that are entirely unrelated to the tariff treatment of a
particular product. Paragraph 89 of China's Acces sion Working Party Report makes clear that China
establishes tariff rates at the eight-digit level, and describes the internal regulatory process that China
must use in order to change or establish separate tari ff rates for a particular product. As explained to
the Panel at the interim review stage, China h as long maintained ten-digit codes for CKD and SKD
kits under its eight-digit subheadings for various types of motor vehicles, for the purpose of compiling
statistics. These ten-digit statistical annotations are not "tariff lines" within the meaning of
paragraph 93 because they have no bearing on the tari ff rate to which CKD and SKD kits are subject.
China adds that it is "puzzled"
76 by the Panel's statement that its arguments regarding the ten-digit

74Done at Vienna, 23 May 1969, 1155 UNTS 331; 8 International Legal Materials 679.
75International Convention on the Harmonized Commodity Description and Coding System , done at
Brussels, 14 June 1983, 1503 UNTS 167.

codes should have been presented at an earlier stag e of the proceedings. China points out that the
United States and Canada, rather than China, bor e the burden of establishing the meaning of "tariff
lines" in paragraph 93, and that it was China that first brought the existence of the ten-digit statistical
annotations (both before and after accession) to th e Panel's attention by submitting import declaration
forms from 2001 and 2004.
44. China observes that it is also possible to view the errors committed by the Panel as a failure
by the Panel to comply with its duties under Article 11 of the DSU. In finding that China created
tariff lines, the Panel relied upon two pieces of eviden ce unrelated to the measures at issue, namely,
an excerpt from China's 2005 Customs Tariff
77 and a 2004 import declaration form 78, both of which
contained statistical codes for CKD and SKD kits at the ten-digit level. The Panel ignored, however,
other evidence that was squarely before it, namely, a 2001 import declaration form 79, which also
contained a ten-digit code for a CKD kit and, theref ore, plainly established that such ten-digit codes
existed prior to China's accession to the WTO. China contends that this treatment of the evidence is
"internally incoherent" a nd constitutes a failure of the Panel to make an objective assessment of the
facts, as required under Article 11 of the DSU. 80
(iii) The Panel's Terms of Reference
45. Finally, China contends that the Appellate Body should reverse the Panel's findings regarding
CKD and SKD kits because the ten-digit numerical c odes that the Panel found to have created tariff
lines were not, China asserts, within the terms of refere nce of the Panel, pursuant to Article 6.2 of the
DSU. China submits that, before the Panel, the United States and Canada were required to support
their assertion that China had violated paragraph 93 by identifying in their panel requests the specific
measure by which China "created" tariff lines for CKD and SKD kits. Yet, neither the United States'
nor Canada's panel request refers to any measure by which China creat ed such tariff lines, or to the
existence of ten-digit codes in China's nomenclature. Accepting, arguendo, the proposition that the
ten-digit codes and the 25 per cent duty that they impose constitute tariff lines, the Panel could not
rely on them because they were not identified in the panel requests as a measure at issue in this
dispute.

77Panel Exhibit CDA-48.
78Panel Exhibit CHI-48.
79Panel Exhibit CHI-47.
80China's appellant's submission, para. 189 (referring to Appellate Body Report, US – Upland Cotton
(Article 21.5 – Brazil), paras. 294 and 295).

B. Arguments of the European Communities – Appellee
1. Characterization of the Charge Imposed under the Measures at Issue

46. The European Communities subm its that the Appellate Body should uphold the Panel's
characterization of the charge imposed under the measu res at issue as an internal charge and find that
the Panel did not err by interpreting the term "ord inary customs duties" in Article II:1(b) of the
GATT 1994 without regard to the classification rules of the Harmonized System. The European
Communities adds that, even if the Appellate Bo dy were to accept China's argument that the
Harmonized System is context for interpreting th e meaning of "ordinary customs duties", China's
appeal must fail because China has not explained how its "narrow"
81 appeal would affect the various
other elements and reasoning set out by the Panel in its interpretation of Articles III:2 and II:1(b) and
its ultimate finding characterizing the charge as falling under Article III:2.
47. The European Communities considers that th e Panel undertook a thorough, and correct,
interpretation of "ordinary customs duties", and right ly identified the key temporal element that such
duties accrue at the moment of importation. China's argument that the charge is an ordinary customs
duty because it is related to a valid method of classification under the Harmonized System is,
according to the European Communities, errone ous for a number of reasons. First, China
"deliberately confuses" 82 the issue of whether the charge falls under Article II:1(b) or Article III:2,
which is a threshold issue, with the subsequent issu e of how a certain product must be categorized for
purposes of tariff classification. As the GATT panel in EEC – Parts and Components emphasized,
this threshold issue is "of fundamental importance" 83 because the GATT 1994 regulates ordinary
customs duties and internal charges differently. On ly after the threshold i ssue has been resolved by
characterizing the charge as an ordinary customs duty does the issue of tariff classification become
relevant, and then, as the Appellate Body recognized in EC – Chicken Cuts, "the Harmonized System
is relevant for purposes of interpreting tariff commitments in the WTO Members' Schedules." 84 The
European Communities stresses that classification is sues and the rules of the Harmonized System are
of no relevance to the threshold issue of whether a charge falls under Article II:1(b) or Article III:2.

83European Communities' appellee's submission, para. 48 (quoting GATT Panel Report, EEC – Parts
and Components, para. 5.4).
84European Communities' appellee's submission, para. 49 (quoting Appellate Body Report, EC –
Chicken Cuts, para. 199).

Therefore, according to the European Communities, China's argument that the classification rules of
the Harmonized System cannot be separated from the question of whether the challenged measures
impose ordinary customs duties not only blurs the f undamentally important threshold issue of which
legal regime applies to a certain charge, it also "defies logic".
85
48. Secondly, the European Communities concludes that China's argument would, if accepted,
lead to manifestly absurd results. China's a pproach would allow countries to impose internally
discriminatory taxes provided that such taxes were applied to validly classified products; and,
conversely, would preclude a charge from being char acterized as an ordinary customs duty if it is
related to an invalid classification of the product under the rul es of the Harmonized System. In the
European Communities' view, this approach to inte rpreting Article II:1(b) would add to or diminish
Members' rights and obligations a nd would not be consistent with Article 3.2 of the DSU. For these
reasons, the European Communities submits, the Pane l did not err in interpreting "ordinary customs
duties" without recourse to the rules of classification under the Harmonized System.
2. Consistency of the Measures at Issue with Article III:2 of the GATT 1994
49. The European Communities requests the Appellate Body to uphold the Panel's finding that
the charge imposed under the measures at issue is an internal charge that is inconsistent with
Article III:2 of the GATT 1994. The European Co mmunities highlights that China has not appealed
the Panel's finding regarding the qualification of the charge as an internal charge on the basis of its
evaluation of the actual features of the measures, and does not challenge the content of the Panel's
Article III:2 analysis. China's claim that the Pa nel erred in finding that the measures impose an
internal charge contrary to Article III:2 is based so lely on its claim that the Panel failed to take the
Harmonized System into account in determining th e threshold issue and must, according to the
European Communities, fail for the same reasons.
3. Consistency of the Measures at Issue with Article III:4 of the GATT 1994
50. The European Communities requests the Appellate Body to uphold the Panel's finding that
Article III:4 of the GATT 1994 applies to the measu res at issue. The European Communities points
out that one of China's two arguments regarding the Panel's finding under Artic le III:4 is based on its
challenge of the Panel's finding that the charge is an internal measure. For the reasons stated above,
the European Communities submits th at the Panel's finding was correct, and that, therefore, China's

85European Communities' appellee's submission, para. 50 (referring to China's appellant's submission,
para. 32).

argument should be dismissed. The European Comm unities also characterizes as "plainly illogical"
86
China's second argument, that the administrativ e procedures under the measures do not create an
incentive for using domestic over imported auto parts, and that any "influence" that the measures may
have on automobile manufacturers is attributable in stead to the structure of the tariff rates bound in
China's Schedule of Concessions. The tariff differe ntial in China's Schedule between the rates for
complete vehicles and for auto parts would give an incentive to import auto parts rather than complete
vehicles. By contrast, the European Communities submits, the measures at issue provide an incentive
for domestic automobile manufacturers to buy like domestic auto parts rather than imported auto
parts.
4. The Panel's "Alternative" Findings u nder Article II:1(a) and (b) of the
GATT 1994
51. The European Communities submits that the Appellate Body should dismiss China's appeal of
the Panel's alternative findings under Article II: 1(a) and (b) of the GATT 1994. The European
Communities observes that China's appeal is narro wly focused on the Panel's interpretation of
GIR 2(a), which the Panel considered only as part of the contextual analysis of the term "motor
vehicles" in China's Schedule of Concessions. It is unclear how China's appeal would affect the other
elements of the Panel's interpretative analysis a nd other grounds relied on by the Panel in its ultimate
conclusion under Article II:1(b). The European Co mmunities adds that China's appeal cannot, in any
event, succeed, because Chin a has not appealed the Panel's finding that the measures do not meet the
"essential character" criterion in GIR 2(a), which was a critical element of its Article II:1(b) analysis.
At the oral hearing in this appeal, the Europ ean Communities submitted that, if the Appellate Body
upholds the Panel's resolution of the threshold i ssue, then the Appellate Body should not accept
China's request to declare the Panel's alternative findings to be moot and of no legal effect. The
European Communities nonetheless invited the Appell ate Body to help secure a positive solution to
this dispute by addressing some of the troubling elements of the arguments made by China under
Article II, so as to leave no doubt about the serious systemic implications of China's position, nor as to
the inconsistency of the measures at issue with WTO law from all possible angles.
52. As a preliminary matter, the European Commun ities considers it important to set out the
factual context of the automotive industry, and to debunk the "fallacious picture of the industry" 87 put
forward by China, that automobile manufacturer s systematically import motor vehicles in an

unassembled or disassembled state for assembly in Chin a in order to circumvent the higher duties on
motor vehicles.
88 Vehicle production is a complex process, involving considerable logistical
sophistication, long supply chains, and the integr ation of complex technologies across many countries
and production facilities. Thousands of different parts in a single vehicle come from all over the
world, and a considerable proportion of parts and co mponents are the same in, or are interchangeable
between, several vehicle models. Manufacturers do not order all the auto parts necessary to assemble
a specific motor vehicle. Instead, they order part s in bulk to cover their various needs, and the
number of parts required for manufacture, repair, and after-sales service fluctuates according to
market conditions. Manufacturers in China impor t auto parts in bulk because those parts are not
always available in China, at least not always in the quality or quantity required to produce motor
vehicles in today's automotive industry. The Eur opean Communities stresses that the Panel made a
number of findings regarding "the commercial rea lities of the modern automobile and auto parts
industries"89, and that China ignores these findings in order to construct the "multiple shipments
theory" upon which its appeal is based.
53. Regarding the Panel's interpretation of GIR 2(a), the European Communities observes that,
although China provides an alternative definition of the term "as presented", China does not directly
disagree with the Panel's reading of that term. Indeed, the European Communities asserts, China's
arguments essentially ignore the lite ral meaning of the key words "as presented" in GIR 2(a), as well
as in GIR 1, which is the most important interpretative rule of the Harmonized System. GIR 1
provides that classification shall be determined acco rding to the terms of the heading and relevant
Section or Chapter Notes of the Harmonized System.
90 The European Communities understands
China to argue, first, that there is no material difference between the importation of a CKD kit and
"multiple shipments" of auto parts—other than how an importer decides to structure its importation of
unassembled auto parts; and secondly, that, because GIR 2(a) applies to the importation of a CKD
kit, it must also apply to the "multiple shipment " situation. However, according to the European
Communities, the two situations are fundamentally different, and China's position is at odds with the

88European Communities' appellee's submission, paras. 20 and 27.
90As set out in para. 7.385 of the Panel Reports, GIR 1 provides:
The titles of Sections, Chapters and sub-Chapters are provided for ease of
reference only: for legal purposes, classification shall be determined
according to the terms of the headings and any relative Section or Chapter
Notes and provided such headings or Notes do not otherwise require,
according to the following provisions.

Panel's finding, based on its interpretation of GIR 2(a) and the Appellate Body Report in EC –
Chicken Cuts , that "goods must be classified based exclusively on their objective characteristics,
which refer to their condition as they are pr esented to customs authorities at the time of
importation."
91 The European Communities adds that, even if importers could and would try to use
the "multiple shipment" practices that China claims it is trying to combat with the measures at issue,
the Panel correctly found that GIR 2(a) cannot be given the "radical" 92 interpretation put forth by
China.
54. Turning to China's arguments relating to the 1995 HS Committee Decision and the
negotiating history of GIR 2(a), the European Comm unities recalls that the Panel properly found that
the 1995 Decision is not binding, even on the contracting parties to the Harmonized System
Convention. Paragraph 10 of that Decision refers to tw o situations: "split c onsignments" and "the
classification of goods assembled from elements orig inating in or arriving from different countries".
According to the European Communities, whilst before the Panel China focused on the second of
these situations as justifying the application of GIR 2(a) to the "multiple shipment" situation, on
appeal it seems to consider that the "split consignment" scenario is also relevant.
55. The European Communities submits that the Pa nel was correct in finding that the "split
consignment" situation is not the same as the "multiple shipment" situation under the measures.
China's arguments to the contrary are based on its reading of the WCO Secretariat's response to a
particular question posed by the Panel. Accord ing to the European Communities, however, the
ordinary meaning of "as presented" and of "sp lit consignments", as well as the WCO's responses to
other questions of the Panel, indicate that the WCO Secretariat was unsure as to the meaning of
paragraph 10 of the 1995 HS Committee Decision. Further, the European Communities is of the view
that China misinterprets the WCO's response by fa iling to consider that the Panel's question was
formulated in a way that clearly presupposed either a complete article disassembled before shipment,
or a collection of parts that would form a complete article after assembly. These scenarios assume,
like GIR 2(a), that the unassembled or disassemble d article has the "essential character" of the
relevant product. According to the European Comm unities, this has nothing to do with the measures
at issue and China's "multiple shipment" theory, wh ere there is no article or set of disassembled parts
in the first place that has the essential character of a motor vehicle, but simply different parts imported
at different times, in different shipments, from di fferent exporters, and from different countries. The

European Communities contests, for similar reasons, that the negotiating history of GIR 2(a), and the
HS Nomenclature Committee's refere nce to "several consignments", support the view that the phrase
"split consignments" was meant to encompass multiple shipments of parts destined for assembly into
complete motor vehicles after importation. In th e European Communities' view, China reads these
words out of context, and ignores that they are pr eceded by the phrase "[t]he importation of machines
in an unassembled state"
93, which suggests, again, an assumption th at the parts in the shipment are "a
machine" in an unassembled state.
56. The European Communities does not believe th at the negotiating history of GIR 2(a)
contradicts the conclusions that the Panel drew from it or supports the notion that GIR 2(a) applies to
the multiple shipment situation. In the view of the European Communities, the discussions amongst
the negotiators were premised on the assumption that there must be an article that is shipped in an
unassembled or disassembled condition, and that the article must have the essential character of the
relevant product—as evidenced, for example, by the explicit reference to CKD vehicles in the course
of the discussion. That the references to "goo ds imported for industrial assembly" do not concern
China's multiple shipment situation is further de monstrated, according to th e European Communities,
by the fact that the WCO Secretariat explicitly informed the Panel that this part of paragraph 10 of the
1995 HS Committee Decision relates to rules of origin.
57. Finally, the European Communities requests that the Appellate Body dismiss China's claims
under Articles 3.2 and 11 of the DSU. The interpre tation of GIR 2(a) advanced by China is not a
"known interpretative issue" 94 within the Harmonized System. Indeed, for the European
Communities, it is "completely alien"95 to the Harmonized System. The European Communities adds
that China has not convincingly explained why the Appellate Body should reverse the conclusions of
the Panel merely on the grounds that the rules of another international organization provide members
of that organization with discretion to decide issues relating to tariff classification; nor has China
explained why the exercise of such discretion woul d not be constrained by its obligations as a WTO
Member.

93European Communities' appellee's submission, para. 84 (quoting Customs Co-operation Council,
Nomenclature Committee, 9th Session, Brussels (19 Ju ly 1962), Document No. 9550E, "Articles (Machinery,
Apparatus, etc.) Imported Unassembled or Disassembled" (Panel Exhibit CDA-18), p. 2).
94European Communities' appellee's submission, para. 100 (referring to China's appellant's submission,
paras. 100-113).
95European Communities' appellee's submission, para. 100. (original emphasis)

C. Arguments of the United States – Appellee
1. Characterization of the Charge Imposed under the Measures at Issue

58. The United States requests the Appellate Body to reject China's appeal and uphold the Panel's
characterization of the charge as an internal char ge and not an ordinary customs duty. The United
States refers to the characteristics of the measures at issue relied on by the Panel in characterizing the
charge as an internal charge; the Panel's interpreta tion of "internal charge" in Article III:2; and the
Panel's interpretation of "ordinary customs duties" in Article II:1(b). China's appeal makes no
mention of the first two of these analyses, a nd makes only passing reference to the terms of
Article II:1(b) in asserting that the Panel erred in interpreting this provision without regard to the
alleged "context" provided by the rules of the Harm onized System. Because China's arguments seek
to have this dispute resolved solely on the basis of a theoretical analysis of an interpretative rule of the
Harmonized System, the United States submits that these arguments are inconsistent with Article 3.2
of the DSU and its requirement to use the customar y rules of interpretation of public international
law—as reflected in Articles 31 and 32 of the Vienna Convention— in resolving WTO disputes.
59. The United States considers that the Panel correc tly determined that, although the rules of the
Harmonized System may have a role to play in in terpreting China's Schedule of Concessions, they do
not have a role in interpreting the scope of Article II:1(b) or Article III:2 of the GATT 1994, either as
context under Article 31, or as supplementary m eans of interpretation under Article 32 of the Vienna
Convention. China does not clarify for which specific term in Article II:1(b) it claims GIR 2(a)
provides context. In the United States' view, Chin a's arguments seem, in essence, not to rely upon the
Harmonized System as context, but, instead, to amount to an argument that GIR 2(a) itself determines
whether a charge is an ordinary customs duty with in the meaning of Article II:1(b). For the United
States, such an approach ignores the customary rules of treaty interpretation.
60. The United States points to three "critical flaws" 96 in China's argument that the rules of the
Harmonized System provide context for resolving th e threshold question of whether the measures at
issue fall under Article II:1(b) or Article III:2 of the GATT 1994. First, China mischaracterizes the
Panel's reference to the "condition" or "status" of a product at the moment it enters the customs
territory. By subsequently referring to a statement of the Appellate Body in EC – Chicken Cuts97, the
Panel made clear that its reference to the "conditi on" of a product was a reference to an examination

97United States' appellee's submission, para. 23 (referring to Appellate Body Report, EC – Chicken
Cuts, para. 246).

of the objective characteristics of a product at the time of importation. Classification of a product
cannot determine its objective characteristics; rath er, it is those objective characteristics that are the
starting point for the proper classification of the pr oduct. Secondly, accordin g to the United States,
China's approach would have required the Panel to begin its analysis at the end by, in effect,
beginning with the presumption that the measures im pose an ordinary customs duty, even though this
was the very question that the Panel had to answer. By structuring its threshold analysis as it did,
however, the Panel correctly followed the approach of previous panels, including the GATT panel in
EEC – Parts and Components . Its approach was also in line with previous statements of the
Appellate Body to the effect that a panel that ignores the fundamental structure and logic of a
provision in deciding the proper sequence of steps in its analysis risks reaching flawed results.
98
Finally, the United States rejects China's argument th at the charge is an ordinary customs duty since it
is based on a valid method of customs classification. The United States characterizes this argument as
illogical, because it suggests that the determinative fact or in whether a charge is an ordinary customs
duty is whether the method used under the challe nged measures to categorize a product for purposes
of applying a charge would be a permissible method of classification under the Harmonized System.
2. Consistency of the Measures at Issue with Article III:2 of the GATT 1994
61. The United States submits that the Appellate B ody should reject China's claims of error
regarding the Panel's finding under Article III:2 of the GATT 1994. The United States emphasizes
that China has not appealed any of the findings of the Panel with resp ect to the operation and
interpretation of Article III:2, or the operation of the measures at issue. Rather, China's request for the
reversal of the Article III:2 findings rests on its ar gument that the Panel erred in concluding that the
charge imposed under the measures is not an ordi nary customs duty, along with the Panel's finding
that a charge cannot at the same time be an or dinary customs duty and an internal charge.
Accordingly, for the same reasons put forward in support of the Panel's finding that the measures at
issue do not impose an ordinary customs duty, the Un ited States considers that China's appeal with
respect to the Panel's determination that the ch arge under the measures is an internal charge
inconsistent with Article III:2, should be rejected.

98United States' appellee's submission, para. 28 (referring to Appellate Body Report, Canada – Autos,
para. 151; Appellate Body Report, US – Shrimp , para. 119; and Appellate Body Report, Canada – Wheat

3. Consistency of the Measures at Issue with Article III:4 of the GATT 1994

62. The United States notes that China's claim that the Panel's finding under Article III:4 of the
GATT 1994 should be reversed is based on two grounds . The first argument is that, since the Panel
mischaracterized the charge as an in ternal charge, its findings under Ar ticle III:4 must be reversed.
For the same reasons put forward in support of th e Panel's finding that the charge under the measures
is an internal charge and not an ordinary custom s duty, the United States requests the Appellate Body
to dismiss this aspect of China's appeal. The Un ited States also rejects China's second argument, that
any influence the measures may have on an autom obile manufacturer's decision to use domestic over
imported auto parts is simply the result of the structure of China's Schedule of Concessions. The
United States agrees with the Panel that, while Chin a's Schedule provides an incentive to import auto
parts rather than motor vehicles, the question be fore it was whether the measures create an incentive
to use domestic auto parts over imported auto parts. The Panel correctly held that they did, and that
such incentive affected the internal sale, offering for sale, purchase, transportation, distribution, or use
of imported products within the meaning of Article III:4. Thus, the United States submits that the
Appellate Body should dismiss China's appeal of the Panel's findings under Article III:4.
4. The Panel's "Alternative" Findings u nder Article II:1(a) and (b) of the
GATT 1994
63. The United States first expresses its view that, should the Appellate Body uphold the Panel's
finding that the charge imposed under the measures is an internal charge, it need not examine China's
appeal with respect to the Panel's "alternative" finding s. At the oral hearing in this appeal, the United
States pointed out that the Panel's alternative findings were conditioned on an assumption that the
charge is an ordinary customs duty; if the Appella te Body were to find that such assumption is false,
then the Panel's alternative findings would no longer remain in place. However, the Panel also made
a number of significant findings regarding Article II:1( b) in its analysis of the threshold issue, and
those would remain in place. The United States also notes that China does not appeal the finding of
the Panel that the substantive criteria under Artic les 21 and 22 of Decree 125 do not meet the
"essential character" test in GIR 2(a). 99 The United States considers that this finding provides an
independent basis for the Panel's ultimate conclusion that the measures at issue are inconsistent with
Article II:1(a) and (b) of the GATT 1994. In any event, the United States contends that the Panel
properly understood the term "as presented" in GIR 2(a) and correctly found that the term "motor

99Panel Reports, Section VII:D.3.

vehicles" in China's Schedule of Concessions ca nnot include auto parts imported in multiple
shipments based on their subsequent assembly into a motor vehicle.
64. The United States asserts that the Panel correctly found that the plain meaning of the term
"as presented" in GIR 2(a) denotes a temporal meaning, namely, the moment when a good is
presented to the customs authorities. Notwithstanding other dictionary meanings presented by China,
the definition selected by the Panel made the most sense, according to the United States, particularly
in the light of the history of how the phrase was inserted into GIR 2(a), as well as the Appellate Body
Report in EC – Chicken Cuts. Furthermore, although China asserts that the Panel's own findings
indicate that GIR 2(a) can apply to multiple shipment s, at least in some in stances, the United States
does not understand the Panel to have made such a finding. Instead, the Panel examined whether
GIR 2(a) includes the situation where pa rts are imported in multiple shipments and are presented to
customs authorities separately, and found that it did not, because th e scope of GIR 2(a) is limited to
the specific moment when the goods are presented to customs authorities for classification.
65. As regards the Panel's treatment of the 1995 HS Committee Decision, the United States points
out that the Panel properly found that this Decisi on is not binding on the contracting parties to the
Harmonized System Convention , and that decisions that have not been codified into legal texts of the
Harmonized System or its Explanatory Notes do not have the same evidentiary weight as the General
Interpretative Rules, or other decisions that have been so codified. With respect to "split
consignments", the United States recalls that as re gards the first situation in paragraph 10 of the
1995 HS Committee Decision, before the Panel, the parties expressed a common understanding of this
term as referring to a situation where a carrier br eaks a consignment into multiple consignments for
reasons such as the need to bala nce loads, cost savings in shipment, or the nature of the goods
shipped, and that the Panel noted that this comm on understanding was consistent with the ordinary
meaning of "consignments" being "split". The WCO Secretariat's response regarding "split
consignments" did not, as China suggests, di rectly contradict the Panel's findings.
100 R a t h e r , t h e
response makes clear that it reflects the personal view of an official rather than a definitive statement
of the WCO Secretariat, and was premised on the hypothetical of a complete article (rather than
multiple shipments of parts). In any event, the WCO's response provides no definitive guidance on
the meaning of split consignments in the 1995 HS Committee Decision. Similarly, the 1963
discussions within the CCC cited by China do no t contradict the Panel's findings, because the
reference to "several consignments" is consistent with the Panel's conclusion that split consignments

100Response of the WCO Secretariat to Question 10 from the Panel, Panel Reports, Annex C-4, p. C-16.

may be forwarded in multiple shipments. Thus, there is no basis for the Appellate Body to reverse the
Panel's determination that the multiple shipments of auto parts that are considered as complete
vehicles under China's measures are not comparable to split consignments.
66. The United States argues that the Panel correctly determined that China failed to demonstrate
that the second situation referred to in paragra ph 10 of the 1995 HS Committee Decision, namely,
"goods assembled from elements originating in or arriving from different countries", refers to the
kinds of multiple shipments of auto parts covered by the measures at issue. The relevant historical
documents referred to by the Panel, which incl ude paragraph 10 of the 1995 HS Committee Decision,
were several steps removed from the Panel's task of interpreting the meaning of "motor vehicles" in
China's Schedule, and there is no indication that the Panel relied heavily on the 1995 HS Committee
Decision or on the statements made in 1963 by the Secretariat of the CCC. The United States also
supports the Panel's finding, based on its assessment of Explanatory Note (V) to GIR 2(a) and the
WCO Secretariat's responses to certain questions posed by the Panel, that the second situation referred
to in paragraph 10 of the 1995 HS Committee Deci sion did not concern the multiple shipments of
parts but, rather, referred to rules of origin issu es, something which is outside the scope of the
Harmonized System nomenclature.
67. Finally, the United States rejects China's argume nt that the Panel acted inconsistently with
Articles 3.2 and 11 of the DSU by purporting to resolve a known interpre tative issue within the
meaning of the Harmonized System. The Panel w as not determining rights and obligations outside
the covered agreements. Instead, it looked to the Harmonized System as context relevant to its
interpretation of the meaning of "motor vehicles" in China's Schedule and, in doing so, acted
consistently with Articles 3.2 and 11 of the DSU.
5. The Panel's Findings with respect to Paragraph 93 of China's Accession
Working Party Report
68. The United States requests the Appellate Body to uphold the Panel's conclusion regarding
paragraph 93 of China's Accession Working Part y Report and China's treatment of CKD and SKD
kits. The Panel's conclusion was based on three key findings, all of which, in the United States' view,
are correct: (i) that the measures imposed a 25 per cent charge on CKD and SKD kits; (ii) that the
charge was an ordinary customs duty when a pplied upon importation under Article 2(2) of
Decree 125; and (iii) that China had met the cond ition in paragraph 93 of creating separate tariff
lines.

(a) Applicability of the Measures at Issue to Imports of CKD and SKD
Kits
69. The United States submits that the Panel did not err in interpreting Article 2(2) of Decree 125
as allowing importers of CKD and SKD kits to opt out of the administrative procedures under the
measures, but not the charge imposed thereunder. In this regard, the United States considers that the
Appellate Body should not review a panel's findings on the construction of a Member's municipal law
de novo. For the United States, such findings are factual determinations beyond the scope of appellate
review. As such, panel findings on the meani ng of municipal law shoul d be challenged under
Article 11 of the DSU as a failure by the panel to make an objective assessment of the facts, and the
Appellate Body should accord such findings the same deference as other types of factual findings by
panels.
70. In any event, the United Stat es considers that the Panel did interpret Article 2(2) of
Decree 125 correctly. In the United States' view, read in its entirety, Decree 125 replaces China's
regular customs procedures and imposes an intricate new regime that applies to the importation of all
auto parts into China. The phrase "these Rules sh all not apply" in Article 2(2) does not carve out
CKD and SKD kits entirely from the scope of the m easures. Article 2(2) only provides the specific
procedure available to CKD and SKD kit importers fo r the payment of the charge under the measures.
Reading Article 2(2) in isolation leads to ambi guity, because, by both se tting the conditions for
importation—that is, through declaration and payment of duties—and then saying that the rules do not
apply to such importations, the provision "loops back on itself".
101 Rather, the United States submits
that, as the Panel held, Article 2(2) must be read toge ther with Article 21(1) to mean that importers of
CKD and SKD kits can exempt themselves from th e administrative procedures under the measures
and pay the charge at the border. For the United St ates, any other reading would be inconsistent with
the objective of the measures to levy a 25 per cent charge on all imported auto parts that are deemed
to have the character of a complete vehicle. L astly, the United States disputes China's assertion that
there is an incoherence between the Panel's finding th at a charge cannot at the same time be both an
ordinary customs duty and an internal charge, a nd its finding that Decree 125 imposes an internal
charge on imports of auto parts in general, but an ordinary customs duty on imports of CKD and SKD
kits. The United States contends that two different situations need to be distinguished. When an
importer pays the 25 per cent charge upon importation pursuant to Article 2(2), the charge can be
characterized as a customs duty, but in all other s ituations where Article 2(2) and the option to pay

upon importation are not used, the charge would be an internal charge. This means, according to the
United States, that the Panel did not find that a charge imposed on a single entry could be both an
ordinary customs duty and an internal charge.
(b) Prima Facie Case
71. The United States submits that, contrary to China's assertions, it made out a prima facie case
under paragraph 93 of China's Accession Working Part y Report. With respect to the operation of
Article 2(2) of Decree 125, the United States specifically set out its understanding that, "[i]f the
enterprise agrees to pay a 25% charge on [a] CKD or SKD [kit] at the border , the other aspects of
China's measures (such as verification of local content) would not apply"
102, and alleged that this
Article 2 procedure for paying a 25 per cent charge at the border is inc onsistent with China's
paragraph 93 obligations. The United States also explained how the measures de facto created a tariff
line, and this line of reasoning was employed by the Panel to find that China "created tariff lines" in
violation of paragraph 93 of its Accession Working Party Report.103
(c) The Consistency of the Measures at Issue with Paragraph 93
72. The United States requests the Appellate Body to uphold the Panel's conclusion that China's
measures are inconsistent with its commitment under paragraph 93 of China's Accession Working
Party Report. The United States points out that each of the Panel's findings—that the measures at
issue should be deemed to have satisfied the condition in paragraph 93, and that China's 2005
Customs Tariff 104 satisfied the condition—are separate findi ngs that independently support this
conclusion.
(i) The "De Facto" Creation of Tariff Lines
73. The United States argues that the Panel correc tly found that China's measures satisfied the
condition in paragraph 93 of China's Accession Wo rking Party Report, namely, "[i]f China created
such tariff lines." The Panel properly took account of the context of paragraph 93 as a whole, applied
it to the facts and circumstances of this dispute, and fully explained the rationale of its finding that the
measures should be deemed to create tariff lines. The United States disagrees with China that the

102United States' appellee's submission, para. 96 (quoting United States' response to Panel Question 80,
Panel Reports, Annex A-1, p. A-79)
103United States' appellee's submission, para. 97 (referring to the United States' response to Panel
Question 61, Panel Reports, Annex A-1, p. A-58).
104Panel Exhibit CDA-48.

term "tariff line" can only mean a line contained w ithin China's national customs tariff; instead, the
Panel correctly recognized that paragraph 93 reflects th e fact that the negotiators were concerned with
the tariff treatment of CKD and SKD kits, and not with the specific line under which these kits are
classified. In the United States' view, accepting Ch ina's interpretation "would empty paragraph 93 of
any meaning in terms of limiting the tariff rate"
105 on CKD and SKD kits to no more than 10 per cent.
74. The United States also rejects China's contention that the Panel's interpretation leads to absurd
results. The United States submits that CKD and S KD kits were treated on an ad hoc basis in the
period prior to China's WTO accession, and that th e rates imposed on these kits were substantially
lower than the rate for complete vehicles. 106 Thus, the "confirmation" in paragraph 93 represents an
acknowledgment that China did not have a consistent tariff treatment for CKD and SKD kits, and, in
particular, that there was no specific tariff line that w ould provide such consistent tariff treatment. In
these circumstances, the United States explains, the commitment in the last sentence of paragraph 93
was that, if China did establish tariff lines that woul d result in a consistent tariff treatment, the rate
would be no more than 10 per cent.
(ii) The Creation of Tariff Lines at the Ten-Digit Level
75. While the United States acknowledges that, unlik e Canada, it did not advance an argument
regarding ten-digit codes before the Panel, th e United States nonetheless submits that the Panel's
finding that the measures created tariff lines through ten-digit codes should be upheld.
76. The United States contests China's assertion that, since all parties agreed that China had no
tariff lines for CKD and SKD kits at the time of its accession to the WTO, and the tariff line identified
by the Panel in the 2005 Customs Tariff may have dated back to the time of its accession, the parties
implicitly have agreed that the line in the 2005 Customs Tariff is not a "tariff line" within the meaning
of paragraph 93 of China's Accession Working Pa rty Report. Whether or not there was some
unknown and unapplied ten-digit nomenclature in 2001, the line in the 2005 Customs Tariff meets the
condition in paragraph 93. The United States also points out that nothing in the Panel record
establishes that the tariff line for CKD and SKD kits in China's 2005 Customs Tariff existed in 2001,

106United States' appellee's submission, para. 101 (referring to, inter alia, the United States' response to
Panel Question 254, Panel Reports, Annex A-2, p. A-309).

because a comparable national customs tariff for 2001 is not on the record, and the two Panel exhibits
relied upon by China
107 involve different tariff numbers and different product descriptions.
77. The United States also argues that the Panel did not ignore the context provided by
paragraph 89 of China's Accession Working Part y Report. According to the United States,
paragraph 89 does not assist China on this issue, because it refers to eight-digit "tariff headings" rather
than "tariff lines". This difference does not imply that a ten-digit nomenclature cannot constitute a
"tariff line". To the contrary, because the term "tarif f lines" in paragraph 93 is broader, it may in fact
support just such a finding. The United States also claims that China has not rebutted the Panel's
"commonsense"
108 finding that a ten-digit line, just like an eight-digit line, can serve to establish a
violation by China of its commitment under pa ragraph 93 of China's Accession Working Party
Report.
(iii) The Panel's Terms of Reference
78. Finally, the United States argues that, in asserti ng that the Panel erred in ruling on a measure
that was outside its terms of reference, China c onfuses the specific measures at issue with the facts
used to establish that the measur es are in breach of a WTO obligati on. In this dispute, China's
2005 Customs Tariff was not a specific measure at issue, and the Panel properly made no findings on
whether the ten-digit tariff line was consistent w ith paragraph 93 of China's Accession Working Party
Report. Instead, according to the United States, the Panel used the ten-digit line as evidence to
establish that the measures at issue are inconsistent with paragraph 93. The United States adds that,
even though the relevant technical evidence was pre sented at a late stage of the proceeding, it was
nevertheless properly before the Panel, and the Panel explained in detail why its decision to accept the
relevant exhibit was consistent with the Panel's Working Procedures.
D. Arguments of Canada – Appellee
1. Characterization of the Charge Imposed under the Measures at Issue
79. Canada requests the Appellate Body to uphold th e Panel's finding that the charge under the
measures is an internal charge imposed on auto pa rts based on their end use after they have been
imported into China. The Panel conducted a proper analysis of the threshold issue of whether the

107China submitted a 2001 (pre-WTO accession) import declaration form for a CKD kit (Panel Exhibit
CHI-47) and a 2004 import declaration form for a CKD kit for a different vehicle model (Panel Exhibit
CHI-48). Each form contains a ten-digit code.

charge under the measures is an ordinary customs dut y under Article II:1(b) or an internal charge
under Article III:2 of the GATT 1994, and did so in accordance with the in terpretative rules in
Articles 31 and 32 of the Vienna Convention. Canada adds that it is unclear whether or how China's
narrow appeal of one aspect of the Panel's findings—t hat is, the alleged failure of the Panel to take
account of the rules of the Harmonized System as re levant context for interpreting Article II:1(b)—
would, even if successful, suffice as a basis for ove rturning the Panel's overall conclusion that the
charge under the measures at issue is an internal charge that is inconsistent with Article III:2.
80. Canada stresses, first, that the Panel applied the correct interpretative approach to ascertaining
the meaning of the first sentence of Article II:1(b), and correctly determined that the term, "on their
importation", when considered in context and in the light of the object and purpose of the
GATT 1994, establishes a strict and precise temporal el ement: that is, in order to be an "ordinary
customs duty", a charge must be based on the physi cal "status" or "condition" of the product at the
specific moment of importation. In Canada's view, China's emphasis on the proper tariff classification
of the "product" referred to in Article II:1(b ) confuses the threshold issue, under which GATT 1994
provision the charge falls, with the distinct i ssue of whether the charge under the measures is
consistent with China's Schedule, if it is found to be an ordinary customs duty. Canada submits that
the characterization of the measure must logically precede a determination of the conformity of that
measure with a WTO obligation and that such a se quence of analysis is fully supported by GATT and
WTO jurisprudence.
109 According to Canada, China's argument puts "the cart before the horse" 110,
because it assumes that, so long as the product is properly classified under the Harmonized System,
and in particular under GIR 2(a), this means that the charge is an ordinary customs duty. This
argument "misses the point" 111, since classification of a product, although relevant to the question of
which ordinary duty applies, has no bearing on whether a charge is an ordinary customs duty.
81. Because the reference to the "product" is not relevant to the threshold issue of whether a
charge falls under either Article II:1(b) or Article III:2, it necessarily follows, according to Canada,
that GIR 2(a) is equally irrelevant to that issue, ev en if it may be relevant to determining the "state" or
"condition" of a product. The Panel rejected China's argument that an ordinary customs duty need not
be based on the "status" or "condition" of the produc t at the border, but also includes charges imposed

109Canada's appellee's submission, paras. 50 and 51 (referring to GATT Panel Report, EEC – Parts and
Components, para. 5.4; GATT Panel Report, Greece – Import Taxes, para. 5; GATT Panel Report (unadopted),
Canada – Gold Coins , para. 49; Panel Report, Argentina – Hides and Leather , para. 11.139; and Appellate
Body Report, Canada – Autos, paras. 151 and 152).

"conditional upon" importation or "by reason of importation". The Pa nel found instead that, by virtue
of the term "on their importation", the first sentence of Article II:1(b) has a strict and precise temporal
element. Canada emphasizes that China has not app ealed that finding and cannot indirectly do so by
simply "repackaging"
112 arguments that were rejected by the Pane l. Accordingly, there is no basis for
accepting the proposition that the rules of the Harm onized System are relevant context to the
interpretation of "ordinary customs duties" in Article II:1(b).
82. Canada points out that, even though the rules of the Harmonized System are not relevant to
the threshold issue, the Panel nevertheless acknowle dged them, and correctly found that they could
not be determinative of the threshold issue. Th e Panel viewed the Harmonized System as relevant
only to the issue of product classification. The Panel observed, in this respect, that the term
"as presented" limits the application of GIR 2(a) to the specific moment at which goods are presented
to a customs authority, and that this was cons istent with the Appellate Body's statement in EC –
Chicken Cuts that tariff classification has to be based on the objective characteristics of a product
when presented at the border.113 In Canada's view, this demonstrates that the Panel did understand the
limited relevance of the rules of the Harmonized System in determining the meaning of the term
"ordinary customs duties" and considered that, if anything, these rules confirmed the Panel's own
interpretation of this term. Finall y, Canada submits that, even if the Appellate Body were to find that
the Panel did not adequately take into account the context of the Harmonized System, this would in no
way undermine the Panel's finding on the meaning and scope of the term "ordinary customs duties".
2. Consistency of the Measures at Issue with Article III:2 of the GATT 1994

83. Canada submits that the Panel properly found that the charge under the measures at issue is
inconsistent with Article III:2 of the GATT 1994. A ccording to Canada, China's appeal of the Panel's
finding under Article III:2 is based solely on China' s allegation that the Panel erred in the threshold
question of the characterization of the charge. As explained above, Canada c onsiders that the Panel's
treatment of the threshold issue was correct and, consequently, China's app eal of the Panel's finding
that the charge is inconsistent with Article III:2 should be dismissed.

113Canada's appellee's submission, para. 63 (referring to Panel Reports, para. 7.187, in turn quoting
Appellate Body Report, EC – Chicken Cuts, para. 246).

3. Consistency of the Measures at Issue with Article III:4 of the GATT 1994

84. Canada submits that, even if the Appellate Body were to agree with China that the charge
under the measures is an ordinary customs duty, the Panel's finding of inconsistency with Article III:4
of the GATT 1994 should be upheld since, contrary to China's arguments on appeal, this finding was
not based on the Panel's characterization of the ch arge as an internal charge. Rather, the Panel's
conclusion under Article III:4 was based on findings ( not appealed by China) that other elements of
the measures, including the administrative procedures, which are distinct from the charge, accord less
favourable treatment to imported auto parts than to like domestic auto parts. In particular, the Panel
found that the measures create a disincentive for auto mobile manufacturers to use imported auto parts
through administrative procedures that impose lengthy delays, and by virtue of the criteria set out in
the measures at issue for ascribing the "essential char acter" of a "motor vehicle" to imported auto
parts. For these reasons, Canada argues that the Ap pellate Body should dismiss China's appeal of the
Panel's finding in respect of Article III:4.
4. The Panel's "Alternative" Findings u nder Article II:1(a) and (b) of the
GATT 1994
85. Canada suggests that, if the Appellate Body affi rms the Panel's finding on the threshold issue,
the Appellate Body should decline China's request to declare the Panel's alternative findings under
Article II:1(b) to be "moot and of no legal effect ". The reasons given by the Panel for deciding to
make alternative findings demonstrate that, even if the charges under the measures are not ordinary
customs duties, certain elements of the measures, su ch as the "essential character" criteria contained
therein, could under a different measure be applied to auto parts when they arrive at the border.
Canada distinguishes these circumstances from those in Canada – Dairy (Article 21.5 – New Zealand
and US II), where the Appellate Body declared that pane l's alternative findings to be moot and of no
legal effect.114 Canada believes that there is significant value in maintaining the Panel's alternative
findings under Article II:1(b) even if the Appellate Body upholds th e Panel's finding that the charge
under the measures at issue is an internal charge subject to Article III:2, because those Article II
findings may help to prevent or resolve any disagr eement as to the measures that China might take to
comply.

114Canada's appellee's submission, para. 73 (referring to Appellate Body Report, Canada – Dairy
(Article 21.5 – New Zealand and US II), para. 158).

86. Canada emphasizes the narrow scope of China's a ppeal of the Panel's alternative findings.
China appears to be simply re-arguing the case th at it presented to the Panel, based on the same
evidence, and asking the Appellate Body to reach a different conclusion than did the Panel.
Moreover, China has not appealed the Panel's find ings that the criteria in Articles 21 and 22 of
Decree 125 for characterizing auto parts as complete vehicles necessarily violate Article II:1(b) even
when applied to parts in a single shipment. No r has China appealed the Panel's findings on the
meaning of the term "on their importation" in Article II:1(b). Canada adds that, in any event, the
Panel properly took account of the Harmonized System as context for its interpretation of Article II
and was correct in its examination of the interpre tative issues relating to the Harmonized System put
forward by China.
87. Canada submits that the Appellate Body should accord deference to the weight and
appreciation that the Panel gave to the evid ence concerning the non-binding 1995 HS Committee
Decision, which China relied upon as evidence supporting its interpretation of GIR 2(a). In Canada's
view, a panel's interpretation of laws or ru les at the international level—outside the WTO
Agreement—is equivalent to a panel's in terpretation of municipal law, and the same standard of
review should be applied in both instances. It fo llows, in Canada's estimation, that the Appellate
Body should reject China's request to overturn th e Panel's findings of fact and interpretation of the
rules of the Harmonized System that supported its findings under Article II:1(b), because China has
not challenged the findings under Article 11 of th e DSU nor established any other basis for the
Appellate Body to interfere with the Panel's exercise of its discretion to make such findings.
88. Even if the Appellate Body were to review the Panel's alternative findings, Canada submits
that they should be upheld, without any need to enter into the substance of China's arguments
concerning its alleged discretion under the Harmonized System. This is because: (i) even assuming
that China enjoys a discretion by virtue of the rules of the Harmonized System, such discretion may
not be relied upon to excuse a violation of Article II:1(b) of the GATT 1994; and (ii) the Panel found
that even when applied to a single shipment of pa rts, the criteria in Articles 21 and 22 of Decree 125
necessarily violate Article II:1(b), and China has not a ppealed that finding. Canada adds that China's
appeal also ignores an important basis for the Panel's findings and a key rule of the Harmonized
System, namely, GIR 1, which provides, in effect, that a good should be classified under the
subheading that describes it.

89. Canada considers that the Panel correctly inte rpreted GIR 2(a); properly understood the non-
binding nature of the 1995 HS Committee Decision; and found that these elements did not support
China's position that it could classify multiple shipments of parts as complete vehicles. Canada agrees
with the ordinary meaning of the term "as presented" in GIR 2(a) identified by the Panel, because it is
in line with statements of the Appellate Body in EC – Chicken Cuts and the understanding of the
WCO Secretariat as expressed in its responses to questions of the Panel. China's alternative definition
of the term is inadmissible because it was not before the Panel and is, in any event, outweighed by the
other evidence that was before the Panel.
90. Canada submits that the Panel correctly foun d that the two situations referred to in
paragraph 10 of the 1995 HS Committee Decision are not relevant to a consideration of the measures
at issue in this case. With resp ect to the split consignment situation, Canada submits that there are
four reasons why it is not relevant. First, there is no reference in the Explanatory Notes to GIR 2(a) to
split consignments, and the Nomenclature Commi ttee that developed GIR 2(a) considered and
rejected the inclusion of the concept of "split ship ments" in GIR 2(a). Secondly, the practice relating
to split consignments, on which pa ragraph 10 is based, relates to a few products, mainly machinery,
and not to motor vehicles or their parts. Thirdly, the negotiating history makes clear that parts used
for manufacturing purposes, and shipped separately , were not intended to be covered by GIR 2(a).
The Panel correctly found that GIR 2(a) was inte nded to apply to a shipment of parts imported
together in one shipment for industria l assembly—for example, a CKD kit—but not to parts and
components imported in multiple shipments for assembly. Fourthly, China presented no evidence that
the reference to split consignments in the 1995 HS Committee Decision was relied upon by China or
any other WTO Member, at the time of China's ac cession or subsequently, in order to classify and
assess tariffs on multiple shipments in a way comparable to the measures at issue. With respect to the
classification of "goods assembled from elements orig inating in or arriving from different countries",
which is the second situation referred to in paragraph 10 of the 1995 HS Committee Decision, Canada
submits that the Panel correctly found that this did not inform the interpretation of the term "as
presented" in GIR 2(a) but, rather, referred to rules of origin issues.
91. Finally, Canada rejects China's contention that the Panel acted inconsistently with Articles 3.2
and 11 of the DSU by purporting to resolve a known interpretative issue within the Harmonized
System, allegedly by "interpreting a non-WTO ag reement in a manner that conflicts with the
interpretation of that agreement adopted by th e international organization responsible for its

administration".
115 Canada submits that the Panel, in fact, complied with its duties under Article 11 of
the DSU by addressing GIR 2(a), the 1995 HS Committee Decision, and other WCO documents
which were put before it by China, and which were central to China's arguments. In addition, the
Panel was not providing an interpretation of the provisions of another inte rnational agreement.
Rather, in line with the approach outlined by the Appellate Body in EC – Chicken Cuts, the Panel
properly took into account the Harmonized System as context in interpreting China's WTO Schedule
of Concessions. Canada adds that, from a systemic point of view, panels woul d be deprived of their
ability to resolve disputes under Article II:1 of the GATT if the Appellate Body were to find, as China
requests, that panels may not make their own assess ment of the weight to be accorded to competing
views and evidence in respect of the classification of products under the Harmonized System.
5. The Panel's Findings with respect to Paragraph 93 of China's Accession
Working Party Report
(a) Applicability of the Measures at Issue to Imports of CKD and SKD
Kits
92. Canada believes that the Panel correctly interp reted the measures at issue and found that
Article 2(2) of Decree 125 does not exempt imports of CKD and SKD kits from the application of the
charge under the measures at issue. Canada c onsiders that the Panel correctly relied on two key
provisions of Decree 125: Article 2(2) and Artic le 21(1). Overall, Decree 125 draws a distinction
between CKD and SKD kits, which are identifiable as complete vehicles at the border, and the less
complete collections of parts listed in Article 21(2) and (3) of Decree 125, wh ich are more difficult to
identify as being complete vehicles. For Canada, it accords with the internal logic of the measures at
issue that importers of CKD and SKD kits may id entify such kits as complete vehicles on their
importation and, thereby, be relieved of the administrative procedures under the measures.
93. Canada submits that Article 2(2) must be read in the context of other provisions of
Decree 125, which clarify that imports of CKD and S KD kits are within the scope of application of
the measures. Article 2(2) merely provides a choice to importers of CKD and SKD kits to declare the
imports without going through the administrative procedures. In any event, and irrespective of
whether or not these procedures are utilized, CKD a nd SKD kits are still characterized as complete
vehicles and subject to the 25 per cent charge. At th e oral hearing in this appeal, Canada argued that
Policy Order 8 also makes clear that Article 2(2) of Decree 125 does not exempt imports of CKD and
SKD kits from the charge imposed under the measur es. Chapter XI of Policy Order 8 modifies the

115Canada's appellee's submission, para. 118 (quoting China's appellant's submission, para. 113).

normal customs procedures for imported auto pa rts characterized as complete vehicles, and
specifically refers to CKD and SKD kits. There is no exception in Chapter XI for such kits, and
Decree 125 is an elaboration of Policy Order 8. Thus, according to Canada, when Policy Order 8 and
Decree 125 are read together, it is clear that the charge imposed thereunder applies to automobile
manufacturers that import CKD and SKD kits under Article 2(2) of Decree 125.
(b) Prima Facie Case
94. Canada asserts that it did make out a prima facie case that the measures applied to imports of
CKD and SKD kits under Article 2(2) of Decree 125. Before the Panel, Canada took issue with
China's statement that, when CKD and SKD kits enter China under Article 2(2), they do so under
China's normal customs procedures. Canada e xpressed its understanding that "Article 2(2) of
Decree 125 applies ordinary customs duties to 'true' CKDs/SKDs."
116
(c) The Consistency of the Measures at Issue with Paragraph 93
(i) The "De Facto" Creation of Tariff Lines
95. In Canada's view, the Panel was correct in finding a violation of the commitment under
paragraph 93 of China's Accession Wo rking Party Report. Canada cont ends that China triggered its
obligation, under paragraph 93, to charge no more than 10 per cent on imports of CKD and SKD kits,
because the measures at issue ma ndate Chinese customs authorities to classify CKD and SKD kits
under the tariff lines for motor vehicles, and that th is obligation could be triggered without China
having created explicit tariff lines in its national cu stoms tariff. Canada submits that the Panel's
finding is not contrary to the ordinary meaning of "tariff lines" in paragraph 93, because the measures
effectively determine both the classification of and tariff rates for CKD and SKD kits, thus "creating a
tariff line by any other name".117 To read the obligation as suggest ing that China's commitment could
be triggered only by the formal creation of a tariff line would allow China to avoid its obligations by
enacting measures that mandate tariff treatment that is not in accordance with its Schedule, but that do
not create formal tariff lines.

116Canada's appellee's submission, para. 135 (quoting Canada's response to Panel Question 192). See
also Canada's appellee's submission, para. 139.

(ii) The Creation of Tariff Lines at the Ten-Digit Level
96. Canada requests the Appellate Body to uphold the Panel's finding regarding ten-digit tariff
lines. Canada agrees with the meaning of the term "tariff line" provided by the Panel, namely, a
horizontal line in a tariff schedule with a speci fic tariff rate and a specific heading number, regardless
of the number of digits. In Canada's view, if China wishes to accord the term "tariff line" a special
meaning—that is, confined to tariff headings at th e eight-digit level—then, under Article 31(4) of the
Vienna Convention, China has the burden of establishing that special meaning, which it has not done.
China's interpretation of its ob ligation under paragraph 93 would render meaningless the commitment
contained therein, because China could avoid it by simply not amending its national customs tariff at
the eight-digit level. As for the new argument ra ised by China on appeal, namely, that the Panel
ignored the context provided by paragraph 89 of China's Accession Working Party Report, Canada
notes that China never raised this argument before the Panel and, in any event, it does not assist
China: there is no reference to "tariff lines" in paragraph 89, much less any indication that tariff lines
are restricted to eight digits. For Canada, the reference in paragraph 89 to eight-digit "tariff headings"
is perfectly consistent with th e conventional understanding that tariff lines may be created at the
ten-digit level, below an eight-digit tariff heading.
97. Canada also rejects China's reference to an alleged pre-accession practice of classifying CKD
and SKD kits at the ten-digit level. First, China' s arguments are premised on an assertion of fact that
it did not raise before the Panel—namely, that it had classified CKD and SKD kits as motor vehicles
at the ten-digit level—and which is inconsistent with the Panel's (f actual) finding that separate tariff
lines for these kits did not exist wh en China acceded to the WTO. Even if it were true that China had
a tariff line at the ten-digit level at the time of accessi on, this would only be one circumstance under
Article 32 of the Vienna Convention surrounding the conclusion of paragraph 93 of China's Accession
Working Party Report. Canada argues that there are other circumstances—such as the practice of
other WTO Members classifying at the ten-digit le vel and assessing a lower duty on such kits based
on that classification, as well as China's incoherent tariff assessment of CKD and SKD kits prior to its
accession—which "point to an opposite result".
118 Canada adds that, because the Panel did not find
any ambiguity, obscurity, or absurd ity in the term "tariff lines", using Article 31 to elucidate its
ordinary meaning, recourse to supplementary mean s of interpretation under Article 32 was, in any
case, unnecessary.

(iii) The Panel's Terms of Reference
98. Finally, Canada considers China's argument that the ten-digit tariff lines for CKD and SKD
kits were outside the Panel's terms of reference to be confusing. If it is China's argument that Canada
should have identified in its panel request the measu res which create the tariff line, then Canada did
identify the measures at issue, which result in th e imposition of a 25 per cent charge on imports of
CKD and SKD kits. If, on the other hand, it is Chin a's argument that Canada was required to list the
tariff lines themselves as the measures at issue, then such an argument is flawed because it conflates
the evidence in support of a claim of inconsistency of the measures—that is the ten-digit tariff lines—
with the measures themselves. China's tariff lines are not the measures at issue; rather, Canada
argues that, as the Panel found, China has created a tariff line for CKD and SKD kits by introducing
the measures at issue.
E. Arguments of the Third Participants
1. Argentina

99. Argentina submits that the Panel did not err in characterizing the charge under the measures at
issue as an internal charge within the meaning of Article III:2 of the GATT 1994. The imposition of
the charge is triggered by internal factors, that is, the assembly, fitting, equipping, and manufacture of
imported auto parts into a complete vehicle, all of which occur after importation. Argentina supports
the Panel's finding that factors such as the d escription of the charge under domestic law as an
"ordinary customs duty", the fact that the good is not in free circulation, and the policy purpose of the
charge, are not decisive for purposes of the threshold determination; nor is the place or moment of its
collection, as is made clear by the Ad Note to Article III.
100. Even if, in the alternative, th e charge imposed under the measu res were an ordinary customs
duty, Argentina agrees with the Panel's alternative finding that the charge would violate Article II:1(b)
because it would be in excess of China's commitmen ts in its Schedule of Concessions. Argentina
considers that the Harmonized System and the Ge neral Interpretative Rules are "essential to the
interpretation of a Member's Schedule of Concessions"
119, but submits that GIR 2(a) can apply only if
GIR 1 fails to give guidance as to the appropriate classification of a product. Argentina agrees with
the appellees that the term "as presented" in GIR 2(a) requires goods to be classified according to their
"objective characteristics" at the moment they arri ve at the border. The term "as presented" cannot

119Argentina's third participant's submission, para. 33 (quoting Appellate Body Report, EC – Computer
Equipment, para. 89).

cover situations where products from different orig ins are presented to customs at different times.
Only on an exceptional basis—for example, due to the complexity of shipping certain articles, such as
a heavy duty crane—could customs officials accord th e tariff treatment of the complete article to
parts, because it is impossible to deliver all the pa rts at once. According to Argentina, GIR 2(a)
covers situations where the goods presented are in complete or unfinished, but have the "essential
character" of the complete and finished goods. It does not, however, apply to the measures at issue in
this dispute.
2. Australia

101. Australia asserts that the Appellate Body shou ld uphold the Panel's findings that the charge
imposed under the measures at issue is an internal charge within the meaning of Article III:2 of the
GATT 1994. Australia considers that the Panel a ppropriately examined the threshold question of
whether the charge is an ordinary customs duty und er Article II:1(b), or an internal charge under
Article III:2. Whilst Australia considers that th e Harmonized System provides relevant context for
interpreting WTO Members' Schedules of Concessions, it is irrelevant for the determination of this
threshold question, and cannot displace the express terms of the GATT 1994.
102. Australia submits that China's appeal of th e Panel's alternative findings—that the charge
imposed under the measures at issue is inconsiste nt with Article II:1(a) and (b) of the GATT 1994—
must also fail. Even for purposes of interpreting the term "motor vehicles" in China's Schedule of
Concessions, the Harmonized System cannot displace the express provisions of the GATT 1994.
Article II:1(b), in particular, establishes that th e "terms, conditions and qua lifications" included in
WTO Schedules of Concessions are the "outer limit" 120 of the treatment as regards ordinary customs
duties that may be levied on imports. Further, GIR 2(a) does not offer guidance on the key aspect of
the charge imposed by the challenged measures, that is, the fact that it accrues after the point of
importation and is levied on products manufactured within China. Australia therefore agrees with the
Panel's finding that the charge imposed under the m easures is, in the alternative, inconsistent with
Articles II:1(a) and (b) of the GATT 1994.

120Australia's third participant's submission, para. 6.

3. Japan

103. Japan considers that China has fo rmulated a "remarkable appeal" 121 by arguing, in essence,
that all of the Panel's findings on the releva nt Articles of the GATT 1994 constitute legal error
because the Panel has not followed an interpretation of the rules of the Harmonized System issued by
the WCO. Japan submits that China's appeal must fail because the questions raised in this dispute are
not a matter of WCO rules, and because, in any even t, China misrepresents the scope and content of
the WCO rules and statements on which it relies.
104. Japan submits that China's appeal is predominan tly concerned with the alleged failure of the
Panel to consider properly classification rules under the Harmonized System. It is not the role of
WTO panels or the Appellate Body to interpret or apply international instruments other than the WTO
covered agreements. Japan asserts that, at most, th e rules of the Harmonized System provide context
for the interpretation of WTO Members' sched uled commitments on agricultural products, as
recognized by the Appellate Body in EC – Chicken Cuts.
122 The Appellate Body has not suggested,
however, that these rules provide context for the interpretation of Article III of the GATT 1994.
105. Japan observes that China's appeal is premised on rules of the Harmonized System that China
considers confer discretion on HS contracting parties to treat parts imported through multiple
shipments as a whole vehicle based on assemblie s occurring after importation. Even assuming this
were accurate, Japan considers it "doubtful" that th e Harmonized System could assist a panel or the
Appellate Body in establishing a "demarcation line" 123 between "internal charges" under Article III:2
and "ordinary customs duties" under Article II:1(b) of the GATT 1994, because WCO rules are not
concerned with internal taxes and their relationship to customs duties. Japan also agrees with the
Panel's careful interpretation of Ar ticle II:1(b) and Article III, notabl y, its conclusion that the term
"ordinary customs duty" in Article II:1(b) read with in its context, as compared to "internal charge",
contains a strict and precise temporal element. Japan also shares the con cern expressed by the Panel
that, if assembly of goods after importation could provide a basis for tariff classification, this would
undermine the boundary between Article II and Article III of the GATT 1994, as well as the security
and predictability of WTO tariff concessions.

121Japan's third participant's submission, para. 17.
122Japan's third participant's submission, para. 25 (referring to Appellate Body Report, EC – Chicken
Cuts, para. 199).
123Japan's third participant's submission, para. 27.

106. Japan submits that, even assuming that WCO rule s were relevant, China's interpretation of
GIR 2(a) is "implausible".
124 Specific statements made by the WCO Secretariat to the Panel, along
with documents of the Harmonized System submitte d by China, illustrate that GIR 2(a) does not
apply to the issues that were before the Panel in this dispute. The responses of the WCO Secretariat
to the questions from the Panel also demonstrate that the rules of the Harmonized System are silent on
the meaning of the term "as presented" in GIR 2(a) . Japan does not see how the alternative definition
put forward by China would affect the Panel's interp retation that "as presented" refers to the "specific
moment when goods are presented" 125 to the customs authorities for classification. Moreover, as
regards the two situations referred to in the 1995 HS Committee Decision, the term "split
consignments" is not defined under the rules of th e Harmonized System; and the reference to "goods
assembled from elements originating in or arriving fro m different countries" is a reference to rules of
origin and does not, as China contends, cover the multiple shipment situation under the measures at
issue. This means, according to Japan, that it is quite possible that the WCO statements relied upon
by China are consistent with the temporal limitation that the Panel found to exist both in
Article II:1(b) of the GATT 1994 and in the term "as presented" in GIR 2(a).
107. Finally, even assuming the Harmonized System c onfers a discretion on contracting parties to
the Harmonized System Convention to classify products from multiple shipments as a whole product,
this discretion must be exercised in a manner c onsistent with WTO Members' obligations under the
WTO Agreement. Japan also agrees, in this regard, with the Panel's statement that "[a]ny discretion a
WTO Member may have on trade-related matters must be exercised in a manner not only consistent
with its obligations under the WTO Agreement, but also supportive of the overall objects and
purposes of the WTO Agreement".
126
III. Issues Raised in This Appeal
108. The following issues are raised in this appeal:
(a) Whether the Panel erred in finding that th e charge imposed under the measures at
issue is not an ordinary customs duty with in the meaning of Article II:1(b), and in
finding instead that the charge is an in ternal charge within the meaning of
Article III:2 of the GATT 1994;

124Japan's third participant's submission, para. 32.

(b) Whether the Panel erred in finding:
(i) that the charge imposed under the measu res at issue is inconsistent with
Article III:2, first sentence, of the GATT 1994; and
(ii) that the measures at is sue are inconsistent with Article III:4 of the
GATT 1994;
(c) If the Appellate Body reverses the Panel's finding that the charge imposed under the
measures at issue is an internal charge a nd, instead, finds that the charge is an
ordinary customs duty within the meaning of Article II:1(b), then whether the Panel
erred in its "alternative" finding that the measures at issue are inconsistent with
Article II:1(a) and (b) of the GATT 1994;
(d) Whether the Panel erred in finding that the me asures at issue are inconsistent with the
conditional commitment made by China in paragraph 93 of its Accession Working
Party Report ("China's Accession Working Party Report") and, more specifically:
(i) whether the Panel erred in construing the measures at issue as imposing a
charge on completely knocked dow n ("CKD") and semi-knocked down
("SKD") kits imported under Article 2(2) of Decree 125;
(ii) whether the Panel ruled on a claim fo r which neither Canada nor the United
States had made out a prima facie case and, thereby, acted inconsistently with
Article 11 of the DSU; and
(iii) in the alternative, whether the Panel er red in finding that China had fulfilled
the condition underlying the commitment in paragraph 93 of China's
Accession Working Party Report to apply tariff rates of no more than
10 per cent to imports of CKD and SKD kits and, in particular:
- whether the Panel erred in deeming tariff lines for CKD and SKD
kits to have been created throug h the enactment of the measures at
issue; and
- whether the Panel erred in finding that China created separate tariff
lines for CKD and SKD kits at the ten-digit level.

IV. Background and Overview of the Measures at Issue
A. Introduction
109. This dispute concerns measures taken by China th at: (i) impose a "charge" (referred to in the
measures as a "tariff" or "duty")
127 on imported auto parts "characterized as complete motor vehicles"
based on specific criteria in the measures; and (ii) prescribe administrative procedures associated
with that charge. 128 These measures—the measures at issue in this dispute—comprise three legal
instruments enacted by China, namely: Policy on Development of the Automotive Industry (Order of
the National Development and Reform Commission (No. 8)) ("Policy Order 8"); Administrative
Rules on Importation of Automobile Parts Characterized as Complete Vehicles (Decree of the
People's Republic of China, No. 125) ("Decree 125"); and Rules on Verification of Imported
Automobile Parts Characterized as Complete Vehicles (Public Announcement of the Customs General
Administration of the People's Republic of China, No. 4 of 2005) ("Announcement 4").
129
110. Policy Order 8 130 entered into force on 21 May 2004 and provides the legal basis for the
introduction of Decree 125 and Announcement 4, both of which entered into force on 1 April 2005. 131
Policy Order 8 directs the General Administration of Customs (the "CGA"), jointly with other
relevant governmental departments 132, to promulgate specific management rules for the import of

127We use the term "charge" for ease of reference and uniformity with the Panel. While acknowledging
that the measures do not explicitly refer to a "charge" , but instead refer to a "tariff" or "duty", the Panel
explained that it would use this term since the nature of this charge was a key issue in dispute. (See Panel
Reports, footnote 188 to para. 7.19) The legal nature of the charge under the measures is also one of the issues
raised in this appeal, and, like the Panel, we use the term without prejudice to the substantive issue of whether
the charge imposed under the measures at issue falls within the scope of Article II or Article III of the
GATT 1994. The Panel found that the legal obligation to pay the charge originates in the measures themselves,
even though other domestic laws or regulations in China may also be relevant to the imposition and collection of

128Panel Reports, para. 7.67.
 129See Panel Reports, para. 2.1. The agreed English translations of the measures at issue are attached as
Annex E to the Panel Reports.
 130See Panel Reports, paras. 7.3-7.12.
 131Panel Reports, paras. 7-13-7.17. The Panel also noted China's explanation that there is no legal
hierarchy between the measures, at least not in the sens e that one prevails over the others in case of conflict
between them. (See Panel Reports, para. 7.17)
 132The Panel also noted that the relevant government departments responsible for the administration of
the procedures under the measures include: (1) the CGA; (2) the National Development and Reform
Commission (the "NDRC"); (3) the Ministry of Commerce; (4) the Ministry of Finance; (5) the Leading Panel
for the administration of the importation of automobile parts characterized as complete vehicles, which is
represented by the CGA, the NDRC, the Ministry of Commerce and the Ministry of Finance; and (6) the
Verification Centre. (Panel Reports, footnote 211 to para. 7.39)

whole vehicles and auto parts.
133 These rules were implemented through Decree 125—which
establishes procedures for the supervision and administ ration of auto parts that are imported and then
assembled into certain models of automobiles, and specifies criteria for characterizing such auto parts
as complete vehicles—and Announcement 4, whic h provides further details on the procedural
requirements and criteria referred to in Decree 125.134
111. The measures at issue set up a regulatory re gime and impose a charge with respect to
imported135 auto parts used in the production or assembly 136 of certain models of motor vehicles that
are sold in the Chinese domestic market. The meas ures at issue prescribe thresholds regarding the
type or value of imported auto parts used to assemble specific vehicle models. If the imported parts
used in a given vehicle model meet or exceed these thresholds, then all of the imported parts used to
assemble that model are "characterized as complete vehicles" and subject to the charge under the
measures at issue. The charge is imposed followi ng assembly of the vehicles, and the measures set
out a number of procedural and administrative st eps designed to determine whether the charge
applies, and ensure tracking and reporting of the imported auto parts, along with payment of the
charge, in respect of the relevant auto parts. The amount of the charge imposed corresponds to the
tariff rate applicable to complete vehicles, that is, 25 per cent on average. Imported auto parts that are
not "characterized as complete vehicles" under the m easures at issue are subject to duties at the tariff
rates for auto parts in China's Schedule of Concessions 137, that is, 10 per cent on average. The
measures at issue are more fully explained below, a nd in detail in paragraphs 7.1 through 7.81 of the
Panel Reports.

 133Panel Reports, paras. 7.10 and 7.11 (referring to, inter alia, Article 60 of Chapter XI of Policy
Order 8).
134Panel Reports, paras. 7.13-7.17.
 135The Panel noted that the word "imported", as used in the measures at issue, is synonymous with
"foreign", and does not necessarily co rrespond to or bear upon the mean ing of "imported" under the covered
agreements. (Panel Reports, footnote 194 to para. 7.23)
136The Panel noted that the original Chinese text of the measures at issue contains the two words
"shengchan" (生产) and "zuzhuang" ( 组装), which are properly translated into "to produce" for "shengchan",
and "to assemble" for "zuzhuang". In referring to the measures at issue, we use the verbs "to assemble" and "to
produce" interchangeably, and without prejudice to any views of the parties, at least as expressed before the
Panel, as to the significance of the te rms used in the Chinese original text. (See Panel Reports, footnote 191 to
para. 7.20 and footnote 212 to para. 7.39) The Chinese original texts of Policy Order 8, Decree 125 and
Announcement 4 were submitted to the Panel as Exhibits JE-18, JE-27 and JE-28, respectively.

137Schedule CLII – People's Republic of China (Part I –Schedule of Concessions and Commitments on
Goods), attached as Annex 8 to China's Accession Protocol, WT/ACC/CHN/49/Add.1. The Panel set out a
summary version of the relevant parts of China's Schedule of Concessions at paragraphs 7.373 and 7.374 of the
Panel Reports.

112. China's Schedule of Concessions provides separ ate tariff headings for complete motor
vehicles (headings 87.02, 87.03 and 87.04), certain intermediate categories of auto parts (chassis fitted
with engines under tariff heading 87.06, and bodies for motor vehicles under tariff heading 87.07),
and parts and components of motor vehicles (parts and accessories of motor vehicles under tariff
heading 87.08, and parts that fall under a variety of headings in other chapters, such as engines, which
fall within chapter 84). It is not disputed th at the bound tariff rates in China's Schedule of
Concessions are higher for complete motor vehicles (25 per cent on average) than for other auto parts
and components (10 per cent on average).
138
113. Before the Panel, the complainants argued that the measures at issue encourage the use of
domestic parts in auto part and vehicle manufacturing in China, through the use of (volume or value)
"domestic content" thresholds specified in the measures. 139 China, on the other hand, explained that
the measures ensure "substance over form" in the ad ministration of China's national customs law in
that they allow customs authorities to classify, as complete motor vehicles, groups of auto parts and
components that have the essential character of a complete vehicle, irrespective of how an importer
chooses to structure the importation of these part s. China contended that the measures thereby
prevent the "circumvention" of China' s tariff headings for motor vehicles.
140 In the course of its
analysis under Article XX(d) of the GATT 1994, th e Panel rejected China's arguments relating to
tariff "circumvention" 141, and made certain observations rega rding the operation of the automotive
industry in general. The Panel explained that the evidence before it suggested an increasing
standardization of auto parts, such that many parts can be used interchangeably among different
vehicle models. According to the Panel, ma nufacturers may realize economies of scale by
manufacturing "families" of vehicle models, which sh are platforms, parts, and components, reaching
up to 60 or 70 per cent of common parts. The Pa nel recognized, nonetheless, that some auto parts,
which have a specific function or performance, have more limited interchangeability.142

 138The Panel referred to these tariff rates as 25 per cent and 10 per cent "on average" as there were
some differences in the tariff rates specified in China's Schedule of Concessions for the relevant products. (See
Panel Reports, paras. 7.373 and 7.374 and footnotes thereto)
139Panel Reports, paras. 4.13, 4.39, and 4.96.
140Panel Reports, paras. 4.137-4.139, 4.186-4.189, and 4.534-4.545.
141Panel Reports, para. 7.346. China has not appealed the Panel's finding under Article XX(d).
142Panel Reports, para. 7.362. The Panel proceeded to find, in the context of its Article XX(d) analysis,
that "notwithstanding some variance in the degree of interchangeability, auto parts have been sufficiently
standardized so that identifying a specific vehicle model into which certain auto parts will be incorporated
would prove unnecessarily trade restrictive." (Panel Reports, para. 7.362)

B. The Measures at Issue
114. When an automobile manufacturer within China wants to begin production of a new vehicle
model
143 that will incorporate imported parts a nd be sold in the Chinese domestic market 144, it must,
as a first step, and prior to commencing productio n, conduct a "self-evaluation" of whether the
imported auto parts to be used in that particul ar model have the "essential character" of and thus
qualify as complete vehicles. 145 The measures set out, in Articles 21 and 22 of Decree 125, the
criteria that determine when imported parts used in a particular vehicle model must be deemed to have
the "essential character" of complete vehicles and are thus subject to the 25 per cent charge. These
criteria are expressed in terms of particular combina tions or configurations of imported auto parts or
the value of imported parts used in the production of a particular vehicle model. The use in the
production of a vehicle model of specified combinations of "major parts" or "assemblies"
146 that are
imported requires characterization of all parts imported for use in that vehicle model as complete
vehicles. Various combinations of assemblies will meet the criteria, for example: a vehicle body
(including cabin) assembly and an engine assembly; or five or more assemblies other than the vehicle
body (including cabin) and engine assemblies. 147 The use, in a specific vehicle model, of imported
parts with a total price that accounts for at least 60 per cent of the total price of the complete vehicle148

143The measures at issue also apply to manufacturers that were already producing vehicle models at the
time of entry into force of the measures. See Article 19 of Decree 125 and Article 10 of Announcement 4.
 144The Panel referred to China's explanation that automobile manufacturers operating in the processing
trade, including those located in speci al customs zones such as a "bonded-zone", "export processing zone" or
"other special zones supervised by the customs under Article 30 of Decree 125" are outside the scope of
Decree 125 unless they sell such motor vehicles into the domestic Chinese market. (Panel Reports, para. 7.40
and footnote 213 thereto)
 145Panel Reports, paras. 7.40-7.47. See also Article 7 of Decree 125 and Article 6 of Announcement 4.
 146An "assembly" is defined in Article 4 of Decree 125 to include the vehicle body (including cabin)
assembly, the engine assembly, the transmission assembly, the driving axle assembly, the driven axle assembly,
the frame assembly, the steering system, and the brak ing system. The Panel found that an "assembly"
corresponds roughly to the major parts of a vehicle. (Panel Reports, paras. 7.88 and 7.89).
147The following combinations of "a ssemblies" are specified under Ar ticle 21(2) of Decree 125:
(i) imports of a vehicle body (including cabin) assembly and an engine assembly for the purpose of assembling
vehicles; (ii) imports of a vehicle body (including cabin) assembly or an engine assembly, plus at least three
other assemblies, for the purpose of assembling vehicles; and (iii) imports of at least five assemblies other than
the body (including cabin) and engine assemblies for the purpose of assembling vehicles. (See Panel Reports,
para. 7.32) In turn, the determination of whether auto parts used to produce an assembly will be deemed an
"imported assembly" and therefore count towards the thresholds in Article 21(2) is made based on criteria
specified in Article 22 of Decree 125. These criteria incl ude: (i) a complete set of parts imported to assemble
the assembly; (ii) "key parts" or "sub-assemblies" that reach or exceed specified quantities referred to in
Annexes 1 and 2 to Decree 125; and (iii) the total price of the imported parts accounts for at least 60 per cent of
the total price of that assembly. (See Panel Reports, para. 7.33)

148The entry into force of the "value" criterion specifi ed in Article 21(3) was delayed until 1 July 2008.
According to China, this was "prima rily because of the administrative complexity of implementing this
particular criterion". (Panel Reports, footnote 202 to para. 7.32)

also requires characterization of all imported parts for use in that vehicle model as complete vehicles.
Imports of CKD and SKD kits
149 are also characterized as complete vehicles.
115. The results of the self-evaluation must be subm itted to both the NDRC and to the Ministry of
Commerce. If the automobile manufacturer makes a positive "self-evaluation", that is, determines
that the imported parts to be used in its proposed ve hicle model meet the criteria, then the next step is
to apply to the NDRC for the vehicle model to be listed on the Public Bulletin on On-Road Motor
Vehicle Manufacturers and Products (the "Public Bulletin"), which is required in order to produce
and sell automobiles in China, and to apply to th e Ministry of Commerce for an import licence for the
parts to be used in the vehicle model.150
116. If the automobile manufacturer's self-evaluati on is negative, the Verification Centre will
conduct a simplified or on-site review of whether th e auto parts to be used in the proposed vehicle
model meet the criteria set out in the measures at issue .151 In such circumstances, in order to be listed
on the Public Bulletin, the automobile manufacturer mu st submit the results of its self-evaluation, as
well as the review opinion by the Verification Cent re confirming the negative result. Thereafter, the
manufacturer is not subject to the various procedures outlined below.
117. Once the automobile manufacturer's vehicle m odel is listed in the Public Bulletin, the
manufacturer must then apply to the CGA to register the vehicle model. 152 The CGA distributes the
application to the relevant governme nt departments, including the district customs office in charge of

 149Although CKD and SKD kits are specifically mentioned in Article 21(1) of Decree 125, they are not
defined under the measures at issue. The Panel found that, for purposes of this dispute, CKD and SKD kits refer
to all or nearly all of the auto parts and components n ecessary to assemble a complete vehicle, which must be
packaged and shipped in a single shipment, and which must go through the assembly process to become a
complete vehicle once they have been imported into the importing country. (See Panel Reports,
paras. 7.644-7.647).

150Listing on the Public Bulletin is required for automobile manufacturers to produce and sell motor
vehicles in China; an automatic import licence is also required so that the authorities can monitor the
importation of motor vehicle products. (See Panel Reports, footnote 217 to para 7.45) For those vehicle models
assembled with imported auto parts characterized as comp lete vehicles, the NDRC will mark "Characterized as
Complete Vehicles" in the Public Bulletin and the Ministry of Commerce will mark the same on the Automatic

151Panel Reports, para. 7.44. If the review indicates that the imported parts should be characterized as
complete vehicles, the automobile manufacturer must file a supplementary registration. If not, registration
under the next step of the measures is not necessary. (Panel Reports, para. 7.48)

152Panel Reports, para. 7.48-7.50; and Articles 7-12 of Decree 125. Various documents must
accompany the registration application, including an annual production pl an for the vehicle model to be
registered and a complete list of all the domestic and foreign suppliers that supply auto parts to be used in the
production of that vehicle model. (Panel Reports, para. 7.50, referring to Article 11 of Decree 125).

the area where the manufacturer is located and, provided that the application is complete, the
automobile manufacturer and its vehicle models are re gistered by the district customs authority. At
this stage, the automobile manufacturer must provi de to the district customs office a duty bond (the
"duty bond").
153 The amount of the duty bond is calculated on the basis of the projected quantity and
value of the auto parts that will be imported each month and, in practice, the amount corresponds to
the applicable tariff rate for auto parts (10 per cent on average) applied to the projected monthly
importations of auto parts.154
118. The automobile manufacturer may then begin to import parts to be used in the production of
its new vehicle model. When the auto parts characte rized as complete vehicles for use in a registered
vehicle model are imported into China, they must be imported under an import licence that specifies
that they are "characterized as complete vehicles", separately declared at th e local district customs
office155, and other relevant docum entation must be provided. 156 The auto parts are imported "under
bond", which means that they are subject to a financial guarantee (the duty bond), as well as to
ongoing tracking and reporting requirements imposed on the manufacturer importing those parts. 157

 153Panel Reports, paras. 7.51-7.52; and Article 12 of Decree 125. Third party auto suppliers and auto
part manufacturers are not covered by this requirement, as they are subject to normal customs procedures and
thus pay the import duty at the tariff rate applicable to auto parts at the time of importation. (Panel Reports,
para. 7.51)

154China also explained that, in general, there is no necessary concordance between a bonding rate and
the rate of duty at which the imported good will be assess ed. (Panel Reports, para. 7.52) The bonds remain in
place while the registered vehicle model continues to be manufactured, but their amount may be subject to
adjustment if the manufacturer's importation plans or numbers of registered vehicle models change. (Article 12
of Decree 125)
 155Article 15 of Decree 125. At the oral hearing on appeal, China explained that, for purposes of the
measures, auto parts characterized as complete vehicles must be declared separately, regardless of how they are
shipped into China. In other words, a separate customs declaration form must be filed and submitted for such
parts, even if they arrive along with other parts that are not characterized as complete vehicles, for example
because the latter were intended to be sold as spare parts rather than fo r assembly into a registered vehicle
model. This declaration of the importation of auto parts is to be distinguished from the declaration of duty
payable to customs authorities after imported auto parts have been assembled into a complete vehicle. (See
infra, para. 120)
156Panel Reports, para. 7.53 and Article 14 of Decree 125.
 157See Panel Reports, paras. 7.53-7.55; and generally Articles 13-16 and 27 of Decree 125. The Panel
noted China's explanation that, in the context of the measures, the "bonding" requirements (referred to in
Articles 16 and 27 of Decree 125) relate to the requ irement imposed on automobile manufacturers to provide
bonds for imported auto parts (and not to physical control of the imported auto parts themselves) as well as to
registration (under the measures); the keeping of records of the imported parts and components accounting for
their assembly into registered vehicle models; and the establishment and upkeep of an electronic account. This
electronic account, called the "Q-account", connects the automobile manufacturer to the relevant customs office
via the Internet. Each entry of bond ed auto parts for the registered vehicle model is recorded in the Q-account
which is adjusted as parts and components that entered in bond are assembled into registered vehicle models and
once the charge is paid. (Panel Reports, para. 7.55)

The parts are not, however, subject to any ongoing physical confinement or any other restriction by
customs authorities on their use in the internal market.
158
119. Once production of the relevant vehicle model begins, and within 10 days of production of
the "first batch" of such vehicles, the automobile manufacturer must submit a verification application
to the CGA, which instructs the Verification Centre to conduct a verification and issue a Verification
Report.159 Verification is conducted by a "Special Verification Team" of three or five automobile
experts and involves inspection of the physical vehicle(s) as well as documentary evidence. 160 The
Verification Centre is to conduct the verification and issue a report within one month, although in
practice this process may take from 30 days to a few years.161 The manufacturer may produce and sell
the vehicle model in question while the Verification Report is pending.
120. By the tenth working day of the month following issuance of the Verification Report 162, the
automobile manufacturer must make a declar ation of duty payable, and submit additional
documentation, to the district customs office, in respect of all relevant complete vehicles assembled
from when production of the vehicle model began th rough to the end of the month in which the
Verification Report was issued. 163 The district customs office then 164 proceeds to classify the auto
parts as complete vehicles and to collect the "dut y" and import VAT for all imported auto parts used
in assembling those complete vehicles. 165 It is this "duty" that constitutes the "charge" under the
measures. Thereafter, the automobile manufacturer must, by the tenth working day of each month,
make a declaration of "duty", and submit accompanying documentation 166 in respect of the complete
vehicles of relevant vehicle models that were asse mbled by that manufacturer in the preceding month,

 158Panel Reports, para. 7.209.
 159Panel Reports, paras. 7.56-7.58. See also Artic les 17-26 of Decree 125 and Articles 6-12 of
Announcement 4.
160Panel Report, footnote 205 to para. 7.34. See also Articles 3-5 and 12 of Announcement 4.
 161Panel Reports, para. 7.66. At the oral hearing in this appeal, China confirmed that before the
Verification Report is issued, and prior to the first payment under Article 31 of Decree 125 for auto parts
meeting the criteria, vehicle models that have been regist ered as auto parts characterized as complete vehicles
can nevertheless be sold in China.
162See Article 31 of Decree 125.
163Pursuant to Article 34 of Decree 125, the manufacturer must submit: (i) the Verification Report;
(ii) the quantity of the complete vehicles of relevant vehicle models that were assembled by the manufacturer;
(iii) the list of imported auto parts used in the assembli ng of such complete vehicles; and (iv) other documents
deemed necessary by the customs authorities. (Panel Reports, para. 7.60)
 164The Panel concluded that classification and coll ection occur after declar ation. (Panel Reports,
para. 7.61)

166Supra, footnote 163.

whereupon the district customs office will classify all the parts used in the production of these
vehicles as "complete vehicles" and collect the "duty". This process continues unless and until a
re-verification is requested.
121. When the imported parts used in the production of a specific vehicle model meet the criteria
under the measures at issue, then the 25 per cen t charge and the requirements under the measures
apply in respect of all imported parts assembled into the relevant vehicle model.
167 It is immaterial
whether the auto parts that are "characterized as complete vehicles" were imported in multiple
shipments168—that is at various times, in various ship ments, from various suppliers and/or from
various countries—or in a single shipment. 169 It is also immaterial whether the automobile
manufacturer imported the parts itself or obtained th e imported parts in the domestic market through a
third party supplier such as an auto part manufacture r or other auto part supplier. However, if the
automobile manufacturer purchases imported parts from such an independent third party supplier, the
automobile manufacturer may deduct from the 25 per cen t charge that is due the value of any customs
duties that the third party supplier paid on the importa tion of those parts, provided that the automobile
manufacturer can furnish proof of the payment of such import duties. 170 If optional parts that are
imported are installed on a relevant vehicle model, the manufacturer must report those optional parts
to the Verification Centre, make decl arations at the time of the actual installation of the optional parts
and pay the 25 per cent charge on such optional parts.171
122. There are certain qualifications and exceptions to the operation of the measures at issue
described above. We mention four below.
123. First, an automobile manufacturer may apply for re-verification of a vehicle model if changes
in the configuration or combinations of imported pa rts used in the production of a particular vehicle
model may result in a change in whether that vehi cle model meets the "essential character" criteria in
Articles 21 and 22 of Decree 125, and a Re-Verific ation Report will be issued by the Verification
Centre.172 If the re-verification indicates that the thresholds are no longer met, the relevant vehicle

167In other words, as all participants confirmed at the oral hearing, the charge applies to all imported
parts assembled into the complete vehicles, even parts that were not considered in determining whether the
relevant vehicle model met the thresholds set out in Articles 21 and 22 of Decree 125.
168Panel Reports, paras. 7.35 and 7.69 and footnote 236 thereto.
169Panel Reports, para. 7.35.
 170Panel Reports, paras. 7.36-7.38; Article 29 of Decree 125.

model and any imported parts used to produce it w ill no longer be administered under the measures at
issue. If the re-verification indicates that the thr esholds are met, then the imported parts and relevant
vehicle model will be administered according to th e operation of the measur es outlined above, except
that it is the Re-Verification Report that must be submitted to customs authorities at the time of the
post-assembly "duty" declaration.
124. Secondly, if imported auto parts that were, at the time of importation, declared as complete
vehicles are not used in the production of the releva nt vehicle model within one year, the automobile
manufacturer must declare duty payment within 30 days of the expiry of the one-year period, and the
customs authorities will collect the 10 per cent duty applicable to the imported auto parts.
173
125. Thirdly, when domestic automobile manufacturers or domestic auto part manufacturers
"substantially process" imported auto parts (excluding assemblies and sub-assemblies)174, the resulting
auto parts manufactured by such domestic manufacturers are treated as domestic auto parts and are
therefore not counted toward the thresholds and are not subject to the charge.
126. Fourthly, under Article 2(2) of Decree 125, automobile manufacturers importing CKD and
SKD kits may declare these kits to the customs in charge of the area where the manufacturer is
located and pay duties at the time of importation. Although this provision affords an exemption from
at least some aspects of the measures, the precise scope of that exemption is disputed in this appeal.
Further details regarding the treatment of CKD and SKD kits under the measures at issue can be
found in Section VIII of these Reports, which examines China's appeal of the Panel's finding that the
measures at issue are inconsistent with the commitment in paragraph 93 of China's Accession
Working Party Report.

 173See Article 29, second paragraph, of Decree 125, and United Stat es' response to Panel Question 17,
Panel Reports, Annex A-1, p. A-26.

174Panel Reports, paras. 7.80 and 7.81; and Article 24 of Decree 125. Article 24 does not apply to the
processing of imported assemblies and sub-assemblies themselves, but rather to imported parts incorporated into
assemblies and sub-assemblies. (See also Articles 16-18 of Announcement 4). Whether "substantial processing"
has occurred is determined by reference to criteria set out in China's Regulation on Rules of Origin for Imported
and Exported Goods.

V. Characterization of the Charge Imposed under the Measures at Issue
127. Before the Panel, the complainants challenged th e consistency of the measures at issue with
various provisions of the GATT 1994, the TRIMs Agreement, the SCM Agreement, China's Accession
Protocol and China's Accession Working Party Report.
175 The Panel decided to begin its analysis
with the claims under Article III of the GATT 1994. 176 Before proceeding to examine the substance
of these Article III claims, the Panel stated that it would "preliminarily determine" whether, as
contended by the complainants, the charge impo sed on automobile manufacturers under the measures
at issue constitutes an "internal charge" under Artic le III:2, or, as contended by China, an "ordinary
customs duty" under Article II:1(b). 177 The Panel observed that "a char ge cannot be at the same time
an 'ordinary customs duty' under Article II:1(b) of the GATT 1994 and an 'internal tax or other
internal charge' under Article III:2 of the GATT".178
A. The Panel's Findings on the Preliminary Issue of Whether the Charge Imposed Under
the Measures at Issue is an Internal Charge or an Ordinary Customs Duty
128. The Panel saw its task of resolv ing this threshold issue as ne cessarily involving interpretation
of both the terms "internal charges" in Article III:2 and "ordinary customs duties" in Article II:1(b).
Beginning with the former, the Panel looked at its ordinary meaning 179, the immediate context
provided by the term "imported into the territory" in Article III:2 180 and the context provided by the
Ad Note to Article III. 181 The Panel also referred to GA TT and WTO jurisprudence which it
considered to be supportive of its interpretation. 182 Turning to the term "ordinary customs duties" in
Article II:1(b), the Panel examined its ordinary meaning 183, the immediate context supplied by the
term "on their importation" in the first sentence of Article II:1(b) 184, and the context provided by the

175Panel Reports, paras. 7.96-7.101. Specifically, the complainants made claims under Article II:1(a)
and (b), Article III:2, 4 and 5, Article XI:1 and Article XXIII:1(b) of the GATT 1994; Article 2 of the
TRIMs Agreement and paragraphs 1(a) and 2(a) of Annex 1 thereto; Articles 3.1(b) and 3.2 of the SCM
Agreement; Part I, paragraphs 1.2, 7.2, and 7.3 of China's Accession Protocol; and paragraphs 93, 203 and 342
of China's Accession Working Party Report. (Supra, paras. 3-5)

176Panel Reports, para. 7.100.
177Panel Reports, para. 7.105.
 178Panel Reports, para. 7.105.
 179Panel Reports, paras. 7.127 and 7.128.
 180Panel Reports, para. 7.129.
 181Panel Reports, para. 7.133.
 182Panel Reports, paras. 7.130-7.132 (referring to GATT Panel Report, Belgium – Family Allowances
(allocations familiales), para. 2; GATT Panel Report, Canada – Gold Coins (unadopted), para. 50; and Panel
Report, Argentina – Hides and Leather, para. 11.145)
 183Panel Reports, paras. 7.139-7.142.
 184Panel Reports, paras. 7.154-7.166.

phrase "on or in connection with the importation"—r elating to "other duties or charges"—in the
second sentence of Article II:1(b).
185 The Panel also opined that China had not established any
relevant subsequent practice, within the meaning of Article 31(3)(b) of the Vienna Convention, that
would support its interpretation of the term "ordinary customs duties".186
129. The Panel then juxtaposed its interpretations of the relevant terms in Articles II:1(b) and III:2,
respectively, as follows:
[T]he ordinary meaning of "on thei r importation" in Article II:1(b),
first sentence, of the GATT 1994, co nsidered in its context and in
light of the object and purpose of the GATT 1994, contains a strict
and precise temporal element which cannot be ignored. This means
that the obligation to pay ordinary customs duties is linked to the
product at the moment it enters the territory of another Member ... It
is at this moment, and this moment only, that the obligation to pay
such charge accrues. ... And it is based on the condition of the good
at this moment that any contemporaneous or subsequent act by the
importing country to enforce, assess or reassess, impose or collect
ordinary customs duties should be carried out.
187 (original emphasis;
footnotes omitted)
In contrast to ordinary customs duties, the obligation to pay internal
charges does not accrue because of the importation of the product at
the very moment it enters the territory of another Member but
because of the internal factors (e .g., because the product was re-sold
internally or because the product was used internally), which occurs
once the product has been imported into the territory of another
member. The status of the imported good, which does not
necessarily correspond to its status at the moment of importation,
seems to be the relevant basis to assess this internal charge.
188
(original emphasis)
130. The Panel determined that its interpretations of "ordinary customs duties" and "internal
charges" were consistent with each other, as we ll as with the approach of the GATT panel in EEC –
Parts and Components.189 As a last step, the Panel observed that, to achieve the object and purpose of

185Panel Reports, paras. 7.175-7.178.
 186Panel Reports, para. 7.182.
 187Panel Reports, para. 7.184.
 188Panel Reports, para. 7.185.
 189Panel Reports, paras. 7.184 and 7.185.

Articles II and III of the GATT 1994 and the WTO Agreement, Members must respect the boundaries
between Article II and Article III.
190
131. The Panel then summarized its understanding of "ordinary customs duties" and "internal
charges" as follows:
[I]f the obligation to pay a charge does not accrue based on the
product at the moment of its importation, it cannot be an "ordinary
customs duty" within the meaning of Article II:1(b), first sentence of
the GATT 1994: it is, instead, an "internal charge" under
Article III:2 of the GATT 1994, which obligation to pay accrues
based on internal factors.
191
132. Next, the Panel identified certain characteristi cs of the charge imposed under the measures at
issue as having particular significance for legal char acterization purposes. The Panel highlighted that
the obligation to pay the charge accrues internally after the auto parts have been assembled into motor
vehicles within China.192 The Panel also attached importance to the fact that the charge is imposed on
automobile manufacturers rather than on importers in general, and to the fact that the imposition of
the charge on specific imported parts is based upon what other imported or domestic parts are used
together with those imported parts in assembling a vehicle model, rather th an upon the specific parts
at the moment of importation. 193 In addition, the Panel considered significant the fact that identical
imported parts imported at the same time in the same container or vessel can be subject to different
charge rates depending on whether or not the vehicle model into which they are later assembled meets
the criteria set out in the measures.194
133. Based on these characteristics of the measures at issue, the Panel concluded that the charge
imposed on automobile manufacturers is an internal charge within the meaning of Article III:2 of the
GATT 1994.195 The Panel excluded from the scope of this finding the "charge" imposed on CKD and

 190Panel Reports, paras. 7.198-7.202. For the Panel, Article II reflects the objective of preserving the
value of negotiated tariff concessions that are bound in a Member's Schedule of Concessions, while Article III
aims to avoid protectionism in the application of internal taxes and regulatory measures. The Panel considered
that the disciplines in these provisions also promote an overall objective of the WTO Agreement, namely,
ensuring "the security and predictability of the reciprocal and mutually advantageous arrangements directed to
the substantial reduction of tariffs and other barriers to trade." (Panel Reports, para. 7.201 (quoting Appellate
Body Report, EC – Chicken Cuts, para. 243))
 191Panel Reports, para. 7.204.
192Panel Reports, para. 7.205.
193Panel Reports, para. 7.207.
194Panel Reports, para. 7.207.
 195Panel Reports, para. 7.212.

SKD kits imported under Article 2(2) of Decree 125, which it considered to be an ordinary customs
duty.
196
B. China's Appeal
134. China appeals the Panel's characterization of th e charge imposed under th e measures at issue.
In China's view, the Panel reached its finding on the basis of an erroneous interpretation of the first
sentence of Article II:1(b) of the GATT 1994, whic h failed to take into account the context provided
by the rules of the Harmonized Commodity Description and Coding System (the "Harmonized
System"). China asserts, in particular, that Rule 2(a) of the General Rules for the Interpretation of the
Harmonized System ("GIR 2(a)")
197 enables national customs authorities to classify unassembled auto
parts as a complete motor vehicle, including in the situation where auto parts that are related through
their subsequent common assembly arrive in multiple shipments.
135. China points out that Article II:1(b) requires customs authorities to determine, first, what the
"product" is and, secondly, to apply the corresponding ordinary customs duty to that product. China
emphasizes that, because the Harmonized System provides the rules by which Members determine the
"condition" or "status" of a product at the moment of importation, these classification rules cannot be
separated from the question of whether the measures at issue in this dispute impose ordinary customs
duties. In China's view, this means that the Pa nel erred in separating the threshold question of
whether the charge imposed under the measures is an ordinary customs duty from the question of
whether the Harmonized System allows China to apply GIR 2(a) to multiple entries of auto parts, and
in its evaluation of the nature of the charge im posed on imported auto parts under the measures at
issue. China considers that only by evaluating whether the charge imposed under the measures at
issue is related to a valid classification of the products under the Harmonized System could the Panel
properly have determined whether the charge is an ordinary customs duty or an internal charge.

 197The text of GIR 2(a) provides:
Any reference in a heading to an article shall be taken to include a reference
to that article incomplete or unfinish ed, provided that, as presented, the
incomplete or unfinished article has th e essential character of the complete
or finished article. It shall also be taken to include a reference to that
article complete or finished (or falling to be classified as complete or
finished by virtue of this Rule), presented unassembled or disassembled.

136. Canada, the European Communities and the Unite d States (the "appellees") all consider that
the Panel correctly dealt with the issue of the characterization of the charge imposed under the
measures at issue as a threshold issue; properly inte rpreted the scope of Article II:1(b), first sentence,
and Article III:2 of the GATT 1994; and rightly characterized the charge imposed under the measures
at issue as an internal charge. The appellees s uggest that accepting China's approach would "blur"
198
or "confuse" 199 the threshold issue of which provision of the GATT 1994 applies to the charge
imposed under the measures with the distinct issue of whether the measures are consistent with that
provision, and would imply putting the "cart before the horse" 200, that is, presuming that the charge is
an ordinary customs duty when this is the very question that needs to be analyzed. 201 The European
Communities and Canada add that, even if the Appella te Body were to consider that the Panel should
have taken some account of the rules of the Harm onized System in its interpretation of the first
sentence of Article II:1(b), this would not imply that the Panel's interpretation of the term "ordinary
customs duties" was wrong, nor would it require re versal of the Panel's ultimate finding that the
charge imposed under the measures at issue is an internal charge falling within the scope of
Article III:2.
137. We are of the view that China's appeal calls for us to assess the Panel's resolution of the
threshold issue, including: (i) certain aspects of the analytical approach that the Panel adopted;
(ii) the Panel's interpretation of the term "ordinary customs duties" in Article II:1(b) and of the term
"internal charges" in Article III:2 of the GATT 1994; and (iii) the Panel's evaluation of the charge
under the measures at issue in this dispute in the light of those interpretations.
1. The Panel's Analytical Approach
138. As indicated, the Panel explained that, before it could examine the substance of the claims
under Article III:2 or the alternative claims under Arti cle II:1(b), "as panels be fore us have similarly
decided, we must first decide which of these two provisions is applicable to the charge under the
measures."202 The Panel also expressed the view that, in resolving this issue as a first step in its
analysis, it would be fulfilling its duty under Article 11 of the DSU to determine the applicability of
the provisions invoked by the complainants as the basi s for their claims with respect to the measures

 199Canada's appellee's submission, paras. 44, 46, and 65.
202Panel Reports, para. 7.105 (referring in footnote 269 to GATT Panel Report, EEC – Parts and
Components, para. 5.4; GATT Panel Report, Greece – Import Taxes , para. 5; GATT Panel Report, Canada –
Gold Coins (unadopted), para. 49; and Panel Report, Argentina – Hides and Leather, para. 11.139).

at issue.
203 The Panel then set out the analytical appr oach that it intended to use in deciding the
threshold question of whether the charge imposed under the measures at issue constituted an "internal
charge" under Article III:2 or an "ordinary customs duty" under Article II:1(b). In the Panel's view, in
order to answer this question it sufficed "to examin e the elements that differentiate these two kind of
charges" and "then apply these elements to the sp ecific aspects of the charge under the measures to
determine under which provision it should fall."204
139. In its appeal, China challenges the Panel's deci sion to analyze the threshold issue separately
from the issue of the consistency of the measures with Article II:1(b) of the GATT 1994. Yet, as the
Appellate Body has previously observed, the "f undamental structure and logic" of a covered
agreement may require panels to determine whether a measure falls within the scope of a particular
provision or covered agreement before proceeding to assess the consistency of the measure with the
substantive obligations imposed under that provision or covered agreement.205 We consider this to be
just such a case, particularly in the light of the Panel's observation—with which China expressly
agrees—that "a charge cannot be at the same time an 'ordinary customs duty' under Article II:1(b) of
the GATT 1994 and an 'internal tax or other inte rnal charge' under Article III:2 of the GATT". 206 If,
as the Panel considered, the charge imposed on auto mobile manufacturers could fall within the scope
of either the first sentence of Article II:1(b) or Article III:2, then the Panel had to begin its analysis by
ascertaining which of these provisions applied in the circumstances of this dispute.
140. In explaining its approach to the threshold issue, the Panel noted that "the parties do not
dispute that the charge imposed under the measures is not covered by the term 'all other duties and
charges of any kind imposed on or in connection with the importation' within the meaning of
Article II:1(b), second sentence, of the GATT 1994". Th e Panel also remarked that it did not need to
"delineate 'ordinary customs duties' under the firs t sentence of Article II:1(b) of the GATT 1994 from
'all other duties and charges of any kind' under the second sentence" of Article II:1(b). 207 W e
understand the Panel to have meant by th is that it did not need to define exhaustively all of the
contours of that line. In fact, the Panel did cons ider the second sentence of Article II:1(b), albeit in

203Panel Reports, footnote 270 to para. 7.105.
 204Panel Reports, footnote 270 to para. 7.105.
 205Appellate Body Report, Canada – Autos , para. 151 (quoting Appellate Body Report, US – Shrimp,
para. 119). See also Appellate Body Report, US – Gasoline, p. 22, DSR 1996:I, 3, at 20.
 207Panel Reports, footnote 270 to para. 7.105. The Panel explained that it did not need to do so because
"the parties do not dispute that the ch arge imposed under the measures is not covered by the term 'all other
duties and charges of any kind imposed on or in connection with the importation' within the meaning of
Article II:1(b), second sentence, of the GATT 1994". (original emphasis)

discussing the "context" that it provided for the te rm "ordinary customs duties" within the first
sentence of Article II:1(b).
208
141. It seems to us that an examination of whether a particular charge is an internal charge or a
border measure involves consideration of all three types of charges, that is: ordinary customs duties
under the first sentence of Article II:1(b); othe r duties and charges under the second sentence of
Article II:1(b)209; and internal charges and taxes under Article III:2. 210 This should assist a panel in
understanding the relationship among these fundament al GATT provisions. In this case the Panel
could have undertaken a more complete analysis of the architecture of Article III:2 and both sentences
of Article II:1(b) of the GATT 1994. However, its resolution of the threshold question was not
affected by the fact that the Panel did not do so. We note that China has re corded "0" in the "Other
Duties and Charges" column of its Schedule of Concessi ons in respect of the products at issue in this
dispute.211
142. Having thus considered the Panel's analytical a pproach, we are of the vi ew that the Panel did
not err in considering the threshold issue separately from and prior to its analysis of the consistency of
the charge imposed under the measures at issue with China's obligations under the GATT 1994.
2. The Panel's Interpretation of the Te rms "Ordinary Customs Duties" in
Article II:1(b) and "Internal Charges" in Article III:2 of the GATT 1994
143. Although the Panel began its analysis of the thr eshold issue with Article III:2, we shall look
first to Article II:1(b), because China's appeal focuses on the Panel's allegedly erroneous interpretation
of this provision. We recall the Panel's explan ation, noted above, that the first sentence of
Article II:1(b) contains a "strict and precise tempor al element" and that, if the obligation to pay a

 208Panel Reports, paras. 7.175 and 7.178.
 209We are also mindful that such duties and charges are permitted only when their nature and level are
recorded in a Member's Schedule, they do not exceed the level recorded in such Schedule, and they existed on
the relevant date specified in the Understanding on Article II:1(b) of the General Agreement on Tariffs and
Trade 1994.
 210We note, in this connection, th at the Appellate Body recently obs erved in paragraph 157 of its
Report in India – Additional Import Duties that:
[w]hile both sentences of Article II:1(b) relate to duties or charges applied
"on the importation" of certain products, the second sentence of
Article II:1(b) also uniquely covers charges imposed "in connection with the
importation" of such products.
211China made a commitment in paragraph 96 of its Accession Working Party Report, "to bind at zero
other duties and charges in its Schedule of Concessions and Commitments".

charge does not accrue based on the product at the moment of its importation, such charge cannot be
an "ordinary customs duty".
212
144. China asserts that, in its interpretation of Article II:1(b), first sentence, the Panel failed to take
into account the context provided by the rules of th e Harmonized System. In China's view, the Panel
could have determined whether the charge is an ordinary customs duty only by evaluating whether the
charge imposed under the measures is related to a va lid classification of the product under the rules of
the Harmonized System.
145. Under Article 3.2 of the DSU, panels are bound to interpret provisions of the covered
agreements in accordance with the customary rules of interpretation of public international law, as
codified in Articles 31 and 32 of the Vienna Convention . We understand China to argue that the
Panel's alleged interpretative error lay in its failure to take proper account of the term "product" in
Article II:1(b), along with the rules of the Harmon ized System, in interpreting the term "ordinary
customs duties" in Article II:1(b) of the GATT 1994.
146. In EC – Chicken Cuts, the Appellate Body considered the issue of whether the Harmonized
System could constitute context for the interpre tation of a term in the European Communities'
Schedule of Concessions. The Appellate Body poin ted out that, although the Harmonized System is
not formally part of the WTO Agreement, there is nonetheless a close link between that System and
the covered agreements.213 The Appellate Body explained that:
... prior to, during, as well as afte r the Uruguay Round negotiations,
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 "agr eement" between WTO Members
"relating to" the WTO Agreement that was "made in connection with
the conclusion of" that Agreement, within the meaning of
Article 31(2)(a) of the Vienna Convention. As such, this agreement
is "context" under Article 31(2)(a) for the purpose of interpreting the
WTO agreements, of which the EC Schedule is an integral part. In
this light, we consider that the Harmonized System is relevant for
purposes of interpreting tariff commitments in the WTO Members'
Schedules.
214 (original emphasis)

 212Panel Reports, paras. 7.184 and 7.204. See supra, para. 129.
 213Appellate Body Report, EC – Chicken Cuts, para. 198.
 214Appellate Body Report, EC – Chicken Cuts, para. 199.

147. China points to this statement in support of its position that the Harmonized System is also
context for the interpretation of the first sentence of Article II:1(b). The appellees disagree, pointing
out that the Harmonized System is only relevant contex t, if at all, for the interpretation of Members'
Schedules.
148. We turn to the text of the first sentence of Article II:1(b) of the GATT 1994, which provides:
The products described in Part I of the Schedule relating to any
contracting party, which are the products of territories of other
contracting parties, shall, on their importation into the territory to
which the Schedule relates, and subj ect to the terms, conditions or
qualifications set forth in that Schedule, be exempt from ordinary
customs duties in excess of those set forth and provided therein.
149. The negotiators of the WTO Agreement used the Harmonized System as the basis for
negotiating Members' Schedules of Concessions, and included express references to the Harmonized
System in certain covered agreements for purposes of defining product coverage of those agreements
or specific provisions thereof.
215 It follows that the Harmonized System is context for purposes of
interpreting the covered agreements, in particular for the classification of products under Schedules of
Concessions and for defining the product coverage of certain covered agreements. This is what the
Appellate Body found in EC – Chicken Cuts. Yet this does not answer the question of whether the
Harmonized System is context that is relevant to th e determination of whether a charge is an ordinary
customs duty or an internal charge.

 215In EC – Chicken Cuts, the Appellate Body observed that:
[a] number of WTO agreements that resulted from the Uruguay Round
negotiations use the Harmonized Syst em for specific purposes; the
Agreement on Rules of Origin (in Article 9), the Agreement on Subsidies
and Countervailing Measures (in Article 27), and the Agreement on Textiles
and Clothing (in Article 2 and the Annex thereto) refer to the Harmonized
System for purposes of defining product coverage of the agreement or the
products subject to particular provisions of the agreement.
(Appellate Body Report, EC – Chicken Cuts, para. 197) In paragraph 195, the Appellate Body did not exclude
that the Harmonized System could also fall within the scope of Article 31(2)(b) or Article 31(3)(c) of the Vienna
Convention.

150. We recall that Article 31(2) of the Vienna Convention provides:
2. The context for the purpose of the interpretation of a treaty shall
comprise, in addition to the text, including its preamble and annexes:
 (a) any agreement relating to the treaty which was made
between all the parties in conn ection with the conclusion of
the treaty;
 (b) any instrument which was made by one or more parties in
connection with the conclusion of the treaty and accepted by
the other parties as an instrument related to the treaty.
151. We have already stated that the task of the tr eaty interpreter is to ascertain the meaning of
particular treaty terms using the tools set out in Articles 31 and 32 of the Vienna Convention. The
realm of context as defined in Article 31(2) is broad. "Context" includes all of the text of the treaty—
in this case, the WTO Agreement—and may also extend to "any agre ement relating to the treaty which
was made between all the parties in connection with the conclusion of the treaty" and "any instrument
which was made by one or more parties in connection with the conclusion of the treaty and accepted
by the other parties as an instrument related to the treaty". Yet context is relevant for a treaty
interpreter to the extent that it may shed light on the interpretative issue to be resolved, such as the
meaning of the term or phrase at issue. Thus, for a particular provision, agreement or instrument to
serve as relevant context in any given situation, it must not only fall within the scope of the formal
boundaries identified in Article 31(2), it must also have some pertinence to the language being
interpreted that renders it capable of helping th e interpreter to determine the meaning of such
language. Because WTO Members' Schedules of Concessions were constructed using the
nomenclature of the Harmonized System, the Harmonized System is apt to shed light on the meaning
of terms used in these Schedules. It does not, ho wever, automatically follow that the Harmonized
System was context relevant to the interpretative qu estion faced by the Panel in its analysis of the
threshold issue in this dispute.
152. If the question before the Panel were whether au to parts could, consistently with China's
Schedule of Concessions, be classified as complete motor vehicles, then the Panel would have been
required to interpret the relevant entries in Chin a's Schedule, and the Harmonized System would have
been context relevant to that task. However, this was not the question before the Panel, at least not at

this stage of its analysis.
216 Rather, in dealing with the threshol d question, the interpretative task of
the Panel was to identify the scope and meaning of Article II:1(b) and Article III:2 of the GATT 1994,
including ascertaining the meaning of the term "ord inary customs duties" in order to appreciate the
types of charges that can constitute such ordinary customs duties.
153. The other terms contained in the first sentence of Article II:1(b) shed some light on the scope
and meaning of "ordinary customs duties" and indicate, for example, that an ordinary customs duty is
a charge imposed on products, on their importation. The Panel recognized both of these elements as
immediate context for the term "ordinary customs du ties" in the first sentence of Article II:1(b), and
attached particular significance to the second of these elements. Thus, the Panel emphasized the
temporal limits of the first sentence of Article II:1(b), and underlined that a key criterion for a charge
to constitute an ordinary customs duty under Artic le II:1(b) is that it accrue at the moment of
importation.217
154. China does not dispute that the moment of importation is relevant to determining whether a
charge is an ordinary customs duty. According to China, however, it is also relevant that, to be an
ordinary customs duty, a charge must be based on the "condition" or "status" of the product at the
moment it enters the customs territory. China ar gues that the rules of the Harmonized System are
necessary, for example, to determine the condition or status of a completely unassembled motor
vehicle at the moment it enters the customs territory, and in particular to dete rmine the "condition" or
"status" of auto parts that "are demonstrably related to each other through their common assembly into
the same motor vehicle".218
155. We have some difficulties with this argument. The Harmonized System categorizes products,
and the characteristics of particular products are re levant to how they are categorized. We recognize,
as China argues, that classification, and hence the ta riff rate applied, might, in some circumstances,
vary depending on the condition of goods at the moment of importation. Since different categories of

216Indeed, the Panel relied on the context provided by the Harmonized System in making its alternative
findings under Article II:1(a) and (b) of the GATT 1994 and in its findings with respect to the consistency of
China's tariff treatment of CKD and SKD kits with Article II:1(b). (See Panel Reports, paras. 7.389-7.451,
7.662-7.667, and 7.677-7.697)

217Panel Reports, para. 7.184.
218China's appellant's submission, para. 12. At the oral hearing in this appeal, China submitted that the
"objective characteristics" that determine classification at the moment of importation include the accompanying
documentation presented with the product, in this case the declaration made upon importation that the auto parts
are "characterized as complete vehicles".

products are subject to different bound and applied ta riff rates, the classification of a given product
may affect the amount of the duty imposed. Accordingly, classification issues have some bearing on
the question of whether a Member applying such a dut y is in conformity with its obligation, under
Article II:1(b), not to impose duties in excess of th e bound rate set out in the Member's Schedule for
the product concerned. Yet this issue (whether a duty applied to a product by virtue of its
classification is consistent with Article II:1(b)) is separate from the issue of whether a charge falls
under the first sentence of Article II:1(b) at all (as op posed to under Article III:2). It is not evident to
us how classification rules are relevant to the latter issue. While it is true, as China argues, that the
"classification of the product necessarily precedes the determination of which 'ordinary customs duty'
applies"
219, it is not the case that classification of the product (even if properly done) necessarily
precedes a determination of whether the charge that applies is an ordinary customs duty.
156. We understand China's argument regarding the c ontext that the Harmonized System allegedly
provides to be based on one of the General Rules for the Interpretation of the Harmonized System,
namely, GIR 2(a), which provides:
Any reference in a heading to an article shall be taken to include a
reference to that article incomplete or unfinished, provided that, as
presented, the incomplete or unfinished article has the essential
character of the complete or finished article. It shall also be taken to
include a reference to that article complete or finished (or falling to
be classified as complete or finished by virtue of this Rule),
presented unassembled or disassembled.
157. China points out that GIR 2(a) allows national customs authorities to classify unassembled
parts and components as the complete article, even though the assembly of the parts into the complete
article will necessarily occur after the parts enter the customs territory of the importing country.
China submits that a country may apply GIR 2(a) not only to auto parts that arrive in a single
shipment, but also to parts that arrive in multiple shipments. In both cases, assembly must necessarily
occur after entry of the parts into the customs territory and, in both cases, contends China, the charges
are ordinary customs duties, because they are based on a proper determination of the product that is
subject to the duty.
158. Yet we fail to see how the Panel erred in not re lying on GIR 2(a) in resolving the threshold
issue of whether the charge imposed under the measur es at issue is an ordinary customs duty or an
internal charge. The right of a WTO Member to impose a customs duty, and the obligation of an

importer to pay such a duty, accrue at the very moment the product enters the customs territory of that
Member and by virtue of the event of importation.
220 In contrast, the classification rules according to
which customs authorities determine under which ta riff heading the "product" concerned falls,
depending on its "status" or "condition", are not relevant to the nature of the "duty" itself because they
do not determine the moment at which the obligation to pay accrues, but only the amount of that duty.
Similarly, as all of the participants agree, the moment at which a charge is collected or paid is not
determinative of whether it is an ordinary custom s duty or an internal charge. Ordinary customs
duties may be collected after the moment of importation, and internal charges may be collected at the
moment of importation. 221 For a charge to constitute an ordinary customs duty, however, the
obligation to pay it must accrue at the moment and by virtue of or, in the words of Article II:1(b),
"on", importation.
159. Although China does not, in its appeal, explicitl y call into question the Panel's interpretation
of the term "internal charges" in Article III:2 of the GATT 1994, we consider that we cannot conclude
our review of the Panel's disposition of the threshol d issue without, as the Panel did, juxtaposing, that
is, considering side-by-side, the first sentence of Ar ticle II:1(b) and Article III:2. The Panel adopted
an analytical approach that required it to ex amine the respective scope of application of both
provisions, and we have already expressed our approval of that approach.
160. Article III:2 of the GATT 1994 provides:
The products of the territory of any contracting party imported into
the territory of any other contracting party shall not be subject,
directly or indirectly, to internal taxes or other internal charges of any
kind in excess of those applied, directly or indirectly, to like domestic
products. Moreover, no contracting party shall otherwise apply
internal taxes or other internal charges to imported or domestic
products in a manner contrary to the principles set forth in
paragraph 1.

 220Panel Reports, para. 7.184.
221As regards the collection of internal charges, the Ad Note to Article III of the GATT 1994 provides:
Any internal tax or other internal charge, or any law, regulation or
requirement of the kind referred to in paragraph 1 which 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 time or point of
importation, is nevertheless to be regarded as an internal tax or other
internal charge, or a law, regulation or requirement of the kind referred to in
paragraph 1, and is accordingly subject to the provisions of Article III.

161. Like the Panel, we consider that the adjectives "internal" and "imported" suggest that the
charges falling within the scope of Article III are ch arges that are imposed on goods that have already
been "imported", and that the obligation to pay them is triggered by an "internal" factor, something
that takes place within the customs territory.
222 Further, the second sentence of Article III:2 expressly
refers to the principles set forth in Article III:1. 223 The Appellate Body has stated that Article III:1
articulates a general principle, that informs all of Article III, that internal measures should not be
applied so as to afford pr otection to domestic production. 224 We note that, in addition to laws,
regulations and requirements affecting, inter alia, the use and sale of imported goods on the internal
market, the first paragraph of Article III also spec ifically mentions "internal quantitative regulations
requiring the ... use of products in specified am ounts or proportions" as among the types of measures
that should not be applied so as to afford prot ection to domestic production, and such measures are
subject to the specific disciplines of Article III:5, which also serves as relevant context.
162. As already mentioned, in examining the scope of application of Article III:2, in relation to
Article II:1(b), first sentence, the time at which a char ge is collected or paid is not decisive. In the
case of Article III:2, this is explicitly stated in the GATT 1994 itself, where the Ad Note to Article III
specifies that when an in ternal charge is "collect ed or enforced in the cas e of the imported product at
the time or point of importation", such a charge "is ne vertheless to be regarded" as an internal charge.
What is important, however, is that the obligation to pay a charge must accrue due to an internal
event, such as the distribution, sale, use or transportation of the imported product.225
163. This leads us, like the Panel, to the view that a key indicator of whether a charge constitutes
an "internal charge" within the meaning of Article III:2 of the GATT 1994 is "whether the obligation

 222Panel Reports, paras. 7.128 and 7.129.
 223Article III:1 of the GATT 1994 provides:
The Members recognize that internal taxes and other internal charges, and
laws, regulations and requirements aff ecting the internal sale, offering for
sale, purchase, transportation, distribution or use of products, and internal
quantitative regulations requiring the mixture, processing or use of products
in specified amounts or proportions, should not be applied to imported or
domestic products so as to afford protection to domestic production.

224Appellate Body Report, Japan – Alcoholic Beverages II, p. 18, DSR 1996:I, 97, at 111.
 225The Panel referred to the Panel Report in Argentina – Hides and Leather in support of this
proposition. In that case, the panel found that a requirement to pre-pay value-added tax (VAT) at the border fell
within the scope of Article III:2, first sentence, beca use the measure applied to "definitive import transactions,
but only if the products imported were subsequently re-sold in the internal Argentinean market", that is, only on
the basis of the internal sale of the imported products. (Panel Reports, para. 7.131 (quoting Panel Report,

to pay such charge accrues because of an internal factor (e.g., because the product was re-sold
internally or because the product was used internally), in the sense that such 'internal factor' occurs
after the importation of the product of one Member into the territory of another Member."
226 We also
observe that the Harmonized System does not serve as relevant context for the interpretation of the
term "internal charges" in Article III:2.
164. In sum, we see the Harmonized System as cont ext that is most relevant to issues of
classification of products. The Harmonized System complements Members' Schedules and confirms
the general principle that it is "the 'objective char acteristics' of the product in question when presented
for classification at the border" 227 that determine their classification and, consequently, the applicable
customs duty. The Harmonized System, and the product categories that it contains, cannot trump the
criteria contained in Article II:1(b) and Article III:2, which distinguish a border measure from an
internal charge under the GATT 1994. Among WT O Members, it is these GATT provisions that
prevail, and that define the relevant characteris tics of ordinary customs duties for WTO purposes.
Thus, even if the Harmonized System and GIR 2( a) would allow auto parts imported in multiple
shipments to be classified as complete vehicles based on subsequent common assembly, as China
suggests, this would not per se affect the criteria that define an ordinary customs duty under
Article II:1(b). In any case, the Panel did not accept the broad interpretation of GIR 2(a) suggested by
China.
228 Rather, the Panel remarked that its findings on the meaning of "as presented" in GIR 2(a)
did not appear to contradict its finding as to the meaning of "on their importation" in Article II:1(b).229
165. In our view, accepting that a charge imposed on auto parts following, and as a consequence
of, their assembly into a complete motor vehicl e can constitute an ordinary customs duty would
significantly limit the scope of "internal charges" th at fall within the scope of Article III:2 of the
GATT 1994. We also share the concerns expressed by the Panel to the effect that the security and
predictability of tariff concessions would be undermined if ordinary customs duties could be applied
based on factors and events that occur internally, rather than at the moment and by virtue of
importation, and that this, in turn, would upset the carefully negotiated and balanced structure of key
GATT rights and obligations, including the different disciplines imposed on ordinary customs duties
and internal charges.230

 226Panel Reports, para. 7.132. (original emphasis)
228Panel Reports, paras. 7.451 and 7.611.
 229Panel Reports, footnote 396 to para. 7.188.
230Panel Reports, paras. 7.186 and 7.211.

166. Based on all of the above, we consider that a determination of whether a particular charge
falls under Article II:1(b) or Article III:2 of the GATT 1994 must be based on a proper interpretation
of these two provisions. The Harmonized System does not provide context that is relevant to the
threshold question or to the assessment of the re spective scope of application of "ordinary customs
duties" in the first sentence of Article II:1(b) and "internal charges" in Article III:2 of the GATT 1994
that must be undertaken in answering that question. It follows that the Panel did not err in interpreting
the term "ordinary customs duties" in the first sentence of Article II:1(b) of the GATT 1994 without
relying on the rules of the Harmonized System, in general, or GIR 2(a), in particular.
3. The Panel's Evaluation of the Charge under the Measures in the Light of its
Interpretation of the Terms "Ordinary Customs Duties" and "Internal
Charges"
167. Having interpreted the terms "internal charges" in Article III:2 and "ordinary customs duties"
in Article II:1(b), the Panel applied these interpreta tions to the "charge" imposed on imports of auto
parts under the measures at issue. To do so, the Pane l identified various characteristics of that charge.
The Panel explained why it considered that cer tain characteristics were significant for the
determination of whether the charge falls within the scope of Article III:2 or Article II:1(b). The
Panel also acknowledged other ch aracteristics of the charge imposed under the measures and
explained why these were not determinative of the nature of that charge.
168. The Panel then found:
In sum, based on the above elements considered as a whole, in
particular the fact that the charge under the measures relates to the
internal assembly of auto parts into motor vehicles, we conclude that
the charge is an internal charge w ithin the meaning of Article III:2 of
the GATT 1994.
231
169. In its appeal, as indicated above, China argues that the Panel erred in finding that the charge
imposed under the measures at issue is an internal charge rather than an ordinary customs duty. China
emphasizes, in this connection, that "the fact that the assembly of parts into the complete article will
necessarily occur after the parts have entered the customs te rritory does not mean that a charge
assessed on this basis is an 'internal charge'".232

 231Panel Reports, para. 7.210.
 232China's appellant's submission, para. 39. (original emphasis)

170. We therefore next consider whether the Panel properly evaluated the nature of the charge
imposed in this case, in the light of the meaning of "ordinary customs duties" and "internal charges".
171. We consider that a panel's determinati on of whether a specific charge falls under
Article II:1(b) or Article III:2 of the GATT 1994 must be made in the light of the characteristics of the
measure and the circumstances of the case.
233 In many cases this will be a straightforward exercise.
In others, the picture will be more mixed, and the challenge faced by a panel more complex. A panel
must thoroughly scrutinize the measure before it, both in its design and in its operation, and identify
its principal characteristics. Having done so, the pane l must then seek to identify the leading or core
features of the measure at issue, those that define its "centre of gravity" for purposes of characterizing
the charge that it imposes as an ordinary customs duty or an internal charge. It is not surprising, and
indeed to be expected, that the same measure may exhibit some ch aracteristics that suggest it is a
measure falling within the scope of Article II:1(b), and others suggesting it is a measure falling within
the scope of Article III:2. In making its ob jective assessment of the applicability of specific
provisions of the covered agreements to a measu re properly before it, a panel must identify all
relevant characteristics of the measure, and recognize which features are the most central to that
measure itself, and which are to be accorded the most significance for purposes of characterizing the
relevant charge and, thereby, properly determini ng the discipline(s) to which it is subject under the
covered agreements.
172. We understand the Panel to have adopted just su ch an approach to the measures at issue in
this case. The Panel identified the following char acteristics of the charge as having particular
significance for legal characterization purposes: (i) th e obligation to pay the charge accrues internally
after auto parts have entered the customs territory of China and have been assembled/produced into
motor vehicles; (ii) the charge is imposed on au tomobile manufacturers rather than on importers in
general; (iii) the charge is imposed based on how the imported auto parts are used, that is, not based
on the auto parts as they enter, but instead based on what other parts from other countries and/or other
importers and/or domestic parts are subsequently used, together with those imported parts, in
assembling a vehicle model; and (iv) the fact that identical auto parts imported at the same time in the
same container or vessel can be subject to differe nt charge rates depending on which vehicle model
they are assembled into.
234

 233In India – Additional Import Duties , the Appellate Body made a similar observation with respect to
the issue of whether a measure fa lls under Article II:2(a) or the Ad Note to Article III. (Appellate Body Report,
India – Additional Import Duties, footnote 304 to para. 153)
234Panel Reports, paras. 7.205 and 7.207.

173. We agree with the Panel as to the legal signifi cance of these features of the measures at issue.
Furthermore, there are additional characteristics of the charge im posed under the measures that the
Panel recognized, and that support its characterizati on of that charge as an internal charge falling
within the scope of Article III:2 of the GATT 1994. Foremost among these is the fact that it is not the
declaration made at the time of importation, bu t rather the declaration of duty payment made
subsequent to the assembly/production of complete motor vehicles, that determines whether the
charge will be applied.
174. That the declaration made at the time of importation does not control or necessarily affect
whether the charge under the measures will ultimat ely be applied to specific imported parts is
illustrated most prominently in the scenario where an automobile manufacturer does not import parts
directly, but instead purchases them from an independent third party supplier with in China. In such
circumstances, the third party supplier imports and d eclares those auto parts at the border and pays a
10 per cent duty. Yet those same parts may subsequently be subject to the 25 per cent
charge
235─imposed after assembly—if they are sold to an automobile manufacturer and assembled
into a vehicle model that meets the thresholds set out in the measures at issue.
175. In addition, there are at least two circumstan ces in which imported auto parts that are not
characterized as complete vehicles or declared as su ch at the moment of importation will nonetheless
be subject to the charge under the measures at i ssue following vehicle assembly: (i) when imported
auto parts are installed on a vehicle as options (that is, such parts were not mentioned in the
self-evaluation or Verification Report because they are not installed on the baseline models of the
particular vehicle model in question), the manufacturer must report the options to the Verification
Centre and make declarations for purposes of paying the charge at the time of the actual installation of
the optional parts236; and (ii) when, following re-verification due to an increase in the combinations or
value of imported parts vis-à-vis domestic parts, a vehicle model that previously did not meet the
criteria under the measures at issue is determined to meet those criteria, the imported parts used in the
production/assembly of that model must be declared after assembly, and will then be subject to the
charge.237

 235The automobile manufacturer is, in principle, liabl e to pay a 25 per cent charge. If the automobile
manufacturer purchases imported parts from an independent supplier, the automobile manufacturer may deduct
from the 25 per cent charge the value of any customs duties that the third party supplier paid on those parts,
provided that the automobile manufacturer can furnish proof of the payment of such import duties. (S upra, 121,
Panel Reports, paras. 7.36-7.38; and Article 29 of Decree 125 .

236Panel Reports, para. 7.58 (referring to the first paragraph of Article 20 of Decree 125).
237Panel Reports, para. 7.241.

176. There are also at least two circumstances in which auto parts that are characterized as
complete vehicles and declared as such at the time of importation will not attract the 25 per cent
charge under the measures at issue, namely: (i ) when imported parts that are characterized as
complete vehicles in the declaration made at the time of importation are not assembled/produced into
complete vehicles within 12 months, they must be declared within 30 days of the expiration of the
12-month period and will be subject to a 10 per cent charge, rather than the 25 per cent charge that
would otherwise apply under the measures at issue
238; and (ii) when, following re-verification due to
a decrease in the combinations or value of imported parts vis-à-vis domestic parts, a vehicle model
that previously met the criteria under the measures at issue is determined no longer to meet those
criteria, the imported parts used in the assembly/pr oduction of that model will not be subject to the
charge under the measures at issue.239
177. In contrast, regarding the characteristics of the measures at issue that might suggest that the
charge imposed thereunder is an ordinary cust oms duty, the Panel expressly acknowledged the
following: (i) the measures at issue use language typically reserved for references to "ordinary
customs duties"240; (ii) China's explanation of the policy pur pose of the measures, and that the charge
imposed thereunder "objectively relate[s] to the administration and enforcement of China's tariff
provisions for motor vehicles" 241; (iii) China's view that parts imported directly by an automobile
manufacturer remain subject to customs control until after assembly/production of the relevant vehicle
model242; and (iv) the measures at issue and the charge imposed thereunder are administered
primarily by China's customs authorities. 243 Ultimately, the Panel considered that none of these
factors, nor all of them taken together, was determinative of the issue of the legal characterization of
the charge imposed under the measures at issue in this case.
178. We see no error in the Panel's approach. Taking each of these criteria in turn, we first observe
that the way in which a Member's domestic law characterizes its own measures, although useful,

238See the second paragraph of Article 29 of Decree 125.
239Panel Reports, para. 7.57 (referring to the second paragraph of Article 20 of Decree 125).
 240Panel Reports, para. 7.190. The measures at issu e refer to, for example, "customs duties", "the
tariff", "tariff rates", "duty bonds", "declaration of duty payable", "dutiable prices", "duty collection", "duty
calculation", "duty rates", "duty deferral", "tariff classification" and "tariff experts".
241Panel Reports, para. 7.208.
242Panel Reports, paras. 7.208 and 7.209.
243Panel Reports, para. 7.190.

cannot be dispositive of the characteriz ation of such measures under WTO law.
244 Secondly, "the
intent, stated or otherwise, of the legislators is not conclusive" as to such characterization. 245 Thirdly,
with respect to the alleged "ongoing customs cont rol" over imported parts subject to the charge under
the measures at issue, the Panel acknowledged that parts imported by automobile manufacturers are
deemed to remain under bond and, to that extent, s ubject to ongoing customs control. Yet the Panel
also found that there is no physical confinement or any other restriction by customs authorities on the
use of these auto parts in the in ternal market so that the bond re quirement is in the nature of a
financial guarantee.246 Lastly, with respect to the administra tion of the measures at issue by customs
authorities, we recall that, in addition to the C GA, other agencies within the Chinese Government
have a role under those measures. For example, the NDRC, the Ministry of Commerce, and the
Ministry of Finance are assigned some responsibilities in the administration of the measures at
issue.
247 In addition, as the Panel recognized, and as is the case with all of the criteria we have just
mentioned, a degree of caution must be exercised in attributing decisive weight to characteristics that
fall exclusively within the control of WTO Memb ers, "because otherwise Members could determine
by themselves which of the provisions would apply to their charges."248
179. We also note that some of China's arguments on appeal obscure what the Panel found and
what the Panel did not find with respect to the measures at issue in this dispute. The Panel did not,
as China suggests, find that the mere fact that th e assembly of parts into a complete vehicle will
necessarily occur after the parts have entered the customs te rritory means that a charge assessed
on this basis is an internal charge. The Panel did, however, find "the obligation to pay the
charge accrues internally after auto parts enter into the cust oms territory of China and are

 244The Appellate Body has previously observed that "municipal law classifications are not
determinative of issues raised in WTO dispute settlement proceedings." (Appellate Body Report, US –
Softwood Lumber IV (Article 21.5 – Canada), para. 82 (referring to Appellate Body Report, US – Softwood
Lumber IV, para. 56))
 245Appellate Body Report, US – Offset Act (Byrd Amendment), para. 259.
 246Panel Reports, para. 7.209. China explained that the "bonding requirements" under the measures at
issue also require automobile manufacturers to register the vehicle models which will use imported auto parts
that have the essential character of a complete vehicle; to keep accurate records of the pa rts and components
that it imports in bond and account fo r their assembly into registered ve hicle models; and to establish an
Internet account with the relevant customs office recording entries of parts and making adjustments as parts that
entered in bond are assembled into registered vehicle models and duties are paid. (Panel Reports, para. 7.55)
 248Panel Reports, para. 7.190 (referring in footnote 398 thereto to GATT Panel Report, EEC – Parts
and Components, paras. 5.6 and 5.7; Panel Report, US – 1916 Act (Japan), paras. 6.58, 6.63, 6.134 and 6.152(a)
and footnotes 461, 464, 504 and 518, respectively, thereto).

assembled/produced into motor vehicles."
249 China has not appealed this finding. China has also not
challenged certain other findings made by the Panel with respect to the operation of the measures at
issue, including: (i) that the measures at issue ar e the source of the legal obligation to pay the 25 per
cent charge250; and (ii) that the 25 per cent charge im posed under the measures at issue is the same
charge whether it is imposed upon automobile ma nufacturers purchasing imported parts from third
party suppliers within China, or on automobile manufacturers importing parts directly.251
180. In sum, we consider that the Panel correctly id entified those characteristics of the measures at
issue that were relevant to the characterization of the charge imposed thereunder as either an ordinary
customs duty within the meaning of Article II:1(b) or an internal charge within the meaning of
Article III:2. The Panel did not err in its appreci ation of the relative weight and significance to be
accorded to those various characteristics, nor in its characterization of the charge as an "internal
charge".
4. Conclusion
181. We consider that the Panel committed no error in its analytical approach to the threshold issue
or in its interpretation of the term "ordinary cust oms duties" in Article II:1(b). Nor do we see any
error in the Panel's related interpretation of the term "internal charges" in Article III:2 and its
understanding of the key criteria that distinguish or dinary customs duties from internal charges. We
have determined that the Panel did not err in appl ying its interpretations to the measures at issue and
in relying on the characteristics of the measures that it had identified as relevant to the legal
characterization of the charge.

 249Panel Reports, para. 7.205. (emphasis added; footnote omitted) The Panel referred, in particular, to
Articles 5 and 28 of Decree 125 as support for this find ing, and noted that, by the "charge" it meant the charge
paid by manufacturers both when they had imported the parts themselves and when they had purchased such
parts from third party suppliers. (Panel Reports, paras. 7.205 and 7.206)

250The Panel found that "the measures do impose both the charge and the administrative procedures
attached to the charge." (Panel Reports, para. 7.19 (footnotes omitted)) At the oral hearing in this appeal, China
stated that, except with respect to CKD and SKD kits, it was not appealing this finding of the Panel.
 251The Panel found that, under the measures, "there is only one charge, which is ultimately triggered by
the application of the thresholds after the assembly of the imported parts into complete vehicles in China."
(Panel Reports, para. 7.115) At this stage of the analysis, the Panel was not examining the charge applied to
imports of CKD and SKD kits pursuant to Article 2(2) of Decree 125. The Panel dealt with CKD and SKD kits
separately, and some of its findings in this regard are subject to appeal by China. See infra, Section VIII.

182. For these reasons, we uphold the Panel's resolution of the threshold issue and its finding that
"the charge under the measures is an internal charge under Article III:2 of the GATT 1994".
252
VI. Consistency of the Measures at Issue with Article III of the GATT 1994
A. Article III:2 of the GATT 1994
183. Having resolved the threshold issue and found that the charge imposed under the measures is
an internal charge falling within the scope of Article III:2 of the GATT 1994, the Panel went on to
examine the consistency of the measures at issue with that provision. The Panel determined that: (i)
"auto parts of domestic and foreign origin are like products within the meaning of Article III:2 of the
GATT 1994"253; and (ii) "imported auto parts are subject to an internal charge in excess of those
applied to domestic products within the meaning of Article III:2 of [the] GATT 1994". 254 As a result,
the Panel concluded that:
... the charge under the measures is inconsistent with the first
sentence of Article III:2 of the GATT 1994.255
184. On appeal, China does not contend that the Panel erred in finding that the products upon
which the measures impose a charge are "like" domestic products, or in finding that the charge is "in
excess" of that applied to like domestic products. Instead, China's claim of error is dependent upon its
claim that the Panel erred in finding the charge im posed under the measures to be an internal charge
rather than an ordinary customs duty. In this connection, China expresses agreement with the Panel
that a charge cannot be at the same time an or dinary customs duty and an internal charge. 256 China

252Panel Reports, para. 7.212. (original emphasis; footnote omitted) In footnote 431 thereto, the Panel
qualified this finding by noting that it did not encompass the charge levied on the importation of CKD and SKD
kits under the optional provision of Ar ticle 2(2) of Decree 125. We deal with China's appeal relating to the
charge imposed on the importation of such kits infra,Section VIII.
253Panel Reports, para. 7.217. The Panel st ated that, because "under the measures origin is the sole
criterion distinguishing the imported and domestic parts, it is correct to treat such products as like products
within the meaning of Article III:2 of the GATT 199 4." (Panel Reports, para. 7.216; (original emphasis)
(referring to Panel Report, Canada – Autos, para. 10.74, and Panel Report, India – Autos, paras. 7.174-7.176))
254Panel Reports, para. 7.222. The Panel found that, because domestic products are not subject to any
charge under the measures, it could determine that the charge imposed on imported products was in excess of
those applied to domestic products without answering "the question of whether the precise amount of this
internal charge is equivalent to an ad valorem rate of 25 per cent or only 15 per cent over the imported part."
(Panel Reports, para. 7.221)
255Panel Reports, para. 7.223. (footnote omitted) In footnote 445 thereto, the Panel qualified the scope
of this finding, noting that it did not encompass the "o rdinary customs duties" levi ed under Article 2(2) of
Decree 125. We deal with China's appeal relating to the charge imposed on imports of CKD and SKD kits
under Article 2(2) of Decree 125 infra, Section VIII.

acknowledged at the oral hearing in this appeal th at, if we uphold the Panel's finding that the charge
imposed under the measures is an internal charge fa lling within the scope of Article III:2, we must
also uphold the Panel's finding that the charge is in consistent with China's obligations under the first
sentence of Article III:2 of the GATT 1994.
185. The appellees point out that the "sole basis"
257 of China's appeal rega rding the consistency of
its measures with Article III:2 is that the Panel erred in finding that the charge imposed under the
measures at issue is an internal ch arge rather than an ordinary cu stoms duty, and that China has not
appealed the Panel's findings regarding the "actual features of the measures". 258 They contend that
China's appeal on this ground should be rejected for the same reasons that its appeal of the Panel's
resolution of the threshold issue should be rejected.
186. In view of the above, since we have upheld the Panel's finding that the charge imposed under
the measures at issue is an internal charge falling within the scope of Article III:2 of the GATT, we
also uphold the Panel's finding that:
Policy Order 8, Decree 125 and A nnouncement 4 are inconsistent
with Article III:2, first sentence of the GATT 1994 in that they
subject imported auto parts to an internal charge in excess of that
applied to like domestic auto parts.259
B. Article III:4 of the GATT 1994
187. In its analysis of the claims raised by th e complainants under Article III:4 of the GATT 1994,
the Panel found that: (i) "auto parts of domestic an d foreign origin are like within the meaning of
Article III:4"260; (ii) the measures at issue are laws, regulations and requirements within the meaning
of Article III:4 261; (iii) "the measures affect 'the inte rnal sale, offering for sale, purchase,
transportation, distribution or use' of imported auto parts, within the meaning of Article III:4" 262; and

257Canada's appellee's submission, para. 66. See also United States' appellee's submission, para. 32.
258European Communities' appelllee's submission, para. 101. See also United States' appellee's
submission, para. 32.
259Panel Reports, Section VIII:A(a)(i); Section VIII:B(a)(i); Sectio n VIII:C(a)(i). See also Panel
Reports, para. 7.223. In footnote 445 to this paragraph, the Panel expressly excluded the charge levied on the
importation of CKD and SKD kits under Article 2(2) of Decree 125 from the scope of this finding. We deal
with China's appeal relating to the charge imposed on imports of CKD and SKD kits under Article 2(2) of
Decree 125 infra, Section VIII.
260Panel Reports, para. 7.235.
261Panel Reports, para. 7.243.
262Panel Reports, para. 7.257.

(iv) the measures accord less favourable treatment to imported auto parts than to domestic auto
parts.
263 Based on these findings, the Panel concluded that:
China's measures, which fall within the scope of Article III:4, are
inconsistent with its obligations under Article III:4 of the
GATT 1994 to afford no less favourab le treatment to like imported
products.
264
188. On appeal, China contends that the Panel's fi nding that the measures fall within the scope of
Article III:4 was "premised upon" 265 its finding that the charge imposed under the measures is an
internal charge. Because, in China's view, the la tter finding is in error, the Panel's findings under
Article III:4 must also be reversed. China adds that, because the measures impose ordinary customs
duties, the administrative procedures associated with those duties under the measures should be
viewed as "customs measures that implement a va lid method of classification under the rules of the
Harmonized System" 266 and that these procedures do not, ther efore, fall within the scope of
Article III:4 of the GATT 1994.
189. The first part of China's appeal under Article III:4 is linked to and de pendent upon its appeal
relating to the Panel's determination that the char ge imposed under the measures is not an ordinary
customs duty, but is instead an internal charge falling within the scope of Article III:2 of the
GATT 1994. In paragraph 182 above, we upheld the Panel's resolution of this threshold issue.
Accordingly, we must reject China's appeal of th e Panel's finding under Article III:4 to the extent that
it is premised upon China's appeal of the threshold issue.
190. However, China also makes another argument in support of its appeal of the Panel's finding
under Article III:4. Specifically, China contests the Panel's finding that the measures at issue
"influence[] an automobile manufacturer's choice be tween domestic and imported auto parts and thus
affect[] the internal use of imported auto parts." 267 China contends that the Panel erred in making this
finding because, according to China, any "influence" that the meas ures may have on an automobile
manufacturer's decision to use domestic over imported auto parts is attributable to the structure of the
tariff rates bound in China's Schedule of Concessions, wh ich are 10 per cent for auto parts and 25 per
cent for complete vehicles. Thus, according to Ch ina, any incentives created are "inherent in China's

263Panel Reports, para. 7.271.
264Panel Reports, para. 7.272. See also Panel Reports , Section VIII:A(a)(ii); Section VIII:B(a)(ii);
Section VIII:C(a)(ii).
267Panel Reports, para. 7.256.

permissible duty rates".
268 This means, in China's view, that the Panel erred in using the incentives
created by the differential rates in China's Schedule to find a violation of Article III:4 when the Panel
itself recognized that "the discrimination inherent in a customs duty that a Member validly imposes is
not a form of discrimination that is prohibited under Article III".269
191. Both the United States and the European Communities point out that the difference in bound
rates for auto parts and motor vehicles in China's Schedule of Concessions is not the "discrimination"
relied upon by the Panel in finding that the measures at issue are inconsistent with Article III:4 of the
GATT 1994. In their view, the Panel relied instead upon its finding that the measures at issue,
including the administrative requirements that th ey impose upon manufacturers of vehicles meeting
the criteria under the measures, influence a manufact urer to choose domestic auto parts over imported
auto parts.
192. With respect to this issue, we observe, first, that China made an argument before the Panel
very similar to the one it raises on appeal. The Pa nel stated that China a ppeared to "misunderstand"
the claim made by the complainants with respect to this element of Article III:4:
The complainants do not challenge the fact that China's tariff
structure creates an incentive to import auto parts instead of motor
vehicles but, instead, they challenge th e alleged incentive created by
the criteria under the measures to use domestic auto parts instead of
imported auto parts.270 (original emphasis)
193. In examining this "alleged incentive", the Panel reasoned that, in order to avoid the charge
imposed under the measures at issue, automobile ma nufacturers must ensure that imported auto parts
used in the assembly of a given vehicle model do not meet any of the criteria set out in the measures.
Producing vehicles that meet the criteria in the meas ures implies not only attracting the charge, which
is imposed subsequent to assembly, but also th e tracking and reporting of auto parts imported in
multiple shipments. The Panel considered th at these aspects of the measures "inevitably
influence[]"271 an automobile manufacturer's choice between domestic and imported auto parts and
thus affect the internal use of imported auto parts.

269Panel Reports, footnote 495 to paragraph 7.256 (quoting China's response to Panel Question 85,
Panel Reports, Annex A-1, p. A-84).
270Panel Reports, para. 7.256.
271Panel Reports, para. 7.256.

194. In its reasoning on this issue, the Panel re ferred to certain other disputes, including US – FSC
(Article 21.5 – EC). We recall that the Appellate Body determined that a 50 per cent "fair market
value" rule under the measure at issue in that case "affected" the internal use of imported products
because it created an incen tive for a manufacturer not to use imported input products.
272 Similarly,
the Panel in India – Autos found that "indigenization requirements" (requirements to use a minimum
amount of domestically produced parts) and "trade balancing requirements" (requirements to export
products of an equivalent value to the impor ted products) created incentives for automobile
manufacturers to purchase Indian parts and compone nts rather than imported parts and components
and, thereby, "affected" the internal sale, offe ring for sale, purchase and use of imported parts and
components in the Indian market within the meaning of Article III:4 of the GATT 1994. 273 That panel
also observed that "[t]he fact that a provision is not necessarily primarily aimed at regulating the
offering for sale or use of the product on the domestic market is ... not an obstacle to its 'affecting'
them."274
195. Returning to the circumstances of this case, we note that the measures at issue set out specific
thresholds for determining when imported auto part s will be characterized as complete vehicles. The
use by an automobile manufacturer, in a given vehicle model, of certain key assemblies or
combinations of assemblies that are imported means that a higher (25 per cent) charge will be payable
on all imported parts than would be the case if t hose combinations of imported assemblies were not
used and the thresholds were not met, in which case any imported parts used in the vehicle model
would be subject to only a 10 per cent duty. This creates an incentive for manufacturers to limit their

272At paragraph 212 of its Report in US – FSC (Article 21.5 – EC), the Appellate Body explained:
A manufacturer's use of imported inpu t products always counts against the
50 percent ceiling in the fair market value rule, while in contrast, the same
manufacturer's use of like domestic input products has no such negative
implication.
273That panel reasoned that, in order to meet the "indigenization requirements", automobile
manufacturers had to buy Indian parts and components rather than imported ones. As for the trade balancing
requirements, the panel saw these as imposing an additional burden on car manufacturers importing parts (an
obligation to export goods of equivale nt value). The panel took the view that because a manufacturer's use of
domestic parts would carry no such burden, the trade balancing requirement created an incentive to use domestic
parts. (Panel Report, India – Autos, paras. 7.195-7.198 and 7.307-7.309)
274Panel Report, India – Autos, para. 7.305.

use of imported parts relative to domestic parts.
275 In addition, the measures at issue in this dispute
impose administrative procedures, and associated delays, on automobile manufacturers using
imported parts, which could be avoided entirel y if a manufacturer were to use exclusively domestic
auto parts. These incentives "affect" the conditi ons of competition for imported auto parts on the
Chinese internal market.
196. On the basis of these elements of the measures at issue, and with reference to previous panel
and Appellate Body decisions, the Panel found that "the administrative procedures imposed on any
auto manufacturer using imported auto parts as well as the criteria set out in the measures, combined
with the assessment of the charge which is based on the final assembly internally, create an incentive
for auto manufacturers to use domestic auto parts instead of imported auto parts." 276 We see no error
in this finding, which also served as the basis for the Panel's finding that the measures at issue "affect
'the internal sale, offering for sale, purchase, transportation, distribution or use' of imported auto parts,
within the meaning of Article III:4 of the GATT 1994." 277 Furthermore, China has presented no
challenge to, and we see no error in, the Panel' s other findings under Article III:4, namely that
imported auto parts are "like" domestic auto parts 278; that the measures at issue are laws, regulations
and requirements within the meaning of Article III:4 279; and that the measures accord less favourable
treatment to imported auto parts than to domestic auto parts.280
197. Accordingly, we uphold the Panel's finding that:
Policy Order 8, Decree 125 and A nnouncement 4 are inconsistent
with Article III:4 of the GATT 1994 in that they accord imported
auto parts less favourable treatment than like domestic auto parts.
281

275Similar incentives are created by virtue of Article 21(3) of Decree 125. This provision deems all
imported auto parts used in a vehicle model to have th e essential character of a complete vehicle when the
vehicle model incorporates imported part s with a total price that accounts for 60 per cent or more of the total
price of the complete vehicle. We note that this "value" criterion was originally scheduled to take effect on
1 July 2006, but its entry into force was postponed until 1 July 2008 because of "the administrative complexity
of implementing this particular criterion". (See Panel Reports, para. 7.32 and footnote 202 thereto)
276Panel Reports, para. 7.257.
277Panel Reports, para. 7.257.
278Panel Reports, para. 7.235.
279Panel Reports, para. 7.243.
280Panel Reports, para. 7.271.
281Panel Reports, Section VIII:A(a)(ii) ; Section VIII:B(a)(ii); Secti on VIII:C(a)(ii). See also Panel
Reports, para. 7.272.

VII. The Panel's "Alternative" Findings under Article II:1(a) and (b) of the GATT 1994
198. Having found that the charge under the measures at issue falls within the scope of, and is
inconsistent with, Article III:2, first sentence, and that China had not demonstrated that the measures
are justified under Article XX(d) of the GATT 1994
282, the Panel reached the "alternative" claim
raised by the complainants under Article II of the GATT 1994. The complainants claimed that, in the
event that the Panel were to consider that th e charge under the measures constituted an ordinary
customs duty, then such ordinary customs duty woul d be inconsistent with China's obligations under
Article II:1(a) and (b) because it was imposed in excess of the bound tariff rates for auto parts in
China's Schedule of Concessions. The Panel decided to analyze this alternative claim, and set out
several reasons for doing so 283, including to assist the Appellate Bo dy in completing the analysis in
the event that the Appellate Body were to disagree with the Panel's resolution of the threshold issue
and its characterization of the charge as an internal charge falling within the scope of Article III:2.

282The Panel's finding at Panel Reports, para. 7.365 that China's measures are not justified under
Article XX(d), is not appealed.
283In footnote 641 to para. 7.371 of its Reports, the Panel set out the following reasons for deciding to
examine the alternative claims:
(i) all the complainants made an alternative claim under Article II of the
GATT 1994; (ii) the complainants and China disagree on whether the
measures are consistent with Article II of the GATT 1994 in the event the
charge would fall within the scope of Ar ticle II of the GATT 1994; (iii) the
precise borderline between Articles III:2 and II of the GATT 1994 may not
always be clear-cut; (iv) if our finding under Article III:2 would be
reversed, the Appellate Body could be called upon to examine the claims
made under Article II, which would require a complex factual assessment
and the weighing of evidence submitted by the parties to this dispute, an
exercise which could go beyond the jurisdiction of the Appellate Body and
make it impossible for the DSB to provide recommendations and rulings on
all legal claims within the time-frame prescribed by the DSU; (v) if the
DSB adopts our findings on Article III, the DSU's declared objectives of
"prompt settlement" of disputes (Article 3.3 of the DSU), of a "satisfactory
settlement of the matter in accordance w ith the rights and obligations under
[the DSU] and the covered agreements" (Article 3.4 of the DSU), of "a
positive solution to a dispute" (Article 3.7 of the DSU) and of "effective
resolution of disputes to the benefit of all Members" (Article 21.1), may be
facilitated if the parties would have at their disposal the Panel's examination
of the matter under Article II of the GATT 1994.

199. In examining this alternative claim, the Panel found that:
... the tariff provisions for motor vehicles (87.02-87.05) of China's
Schedule of Concessions do not include in their scope auto parts
imported in multiple shipments based on their assembly into a motor
vehicle. Accordingly, to the extent the measures could be considered
as falling within the scope of Article II of the GATT 1994, China's
measures have the effect of imposing ordinary customs duties on
imported auto parts in excess of the concessions contained in the
tariff headings for auto parts under its Schedule, inconsistently with
its obligations under Article II:1(a) and (b) of the GATT 1994.
284
200. This finding, regarding the interpretation of "motor vehicles" in China's Schedule of
Concessions, was one of two findings upon which the Panel based its ultimate conclusion with respect
to the "alternative" claims raised. The other finding on which its conclusion was based was that
certain aspects of "the criteria for the essential character determination under Article 21(2) and (3) and
Article 22 of Decree 125 ... necessarily lead to a vi olation" of Article II:1(a) and (b) of the
GATT 1994.285
201. These two findings led the Panel to conclude as follows:
In the alternative, assuming that the measures fall within the scope of
the first sentence of Article II:1(b) of the GATT 1994, with respect to
imported auto parts in general ...
(i) Policy Order 8, Decree 125 and Announcement 4 are inconsistent
with Article II:1(a) and Article II:1(b), first sentence of the
GATT 1994 in that they accord imported auto parts treatment less
favourable than that provided for in the appropriate Part of China's
Schedule of Concessions.
286 (original italics)
202. China's appeal mainly concerns the first alternative finding above, namely the Panel's
interpretation of the term "motor vehicles" in Chin a's Schedule of Concessions. This part of China's
appeal is linked to its claim that we should reve rse the Panel's finding that the charge imposed under

284Panel Reports, para. 7.523.
285Panel Reports, para. 7.612. In this regard, the Panel found for example that, to the extent that
Article 21(2) of Decree 125 has an element that would ne cessarily lead to "a chassis fitted with engine" being
classified and assessed as a complete motor vehicle notwithstanding that China's Schedule of Concessions has a
specific tariff heading, 87.06, for "chassis fitted with engines", Article 21(2) is inconsistent with China's
Schedule of Concessions. (See Panel Reports, para. 7.588)
286Panel Reports, Section VIII:A(b)(i) , Section VIII:B(b)(i), and Section VIII:C(b)(i). The Panel also
found that the measures at issue are "not justified under Article XX(d) of the GATT 1994 as measures that are
necessary to secure compliance with laws or regula tions which are not inconsistent with the GATT 1994".
(Panel Reports, Section VIII:A(b)(ii), VIII:B(b)(ii) and VIII:C(b)(ii))

the measures at issue is an intern al charge within the meaning of Article III:2 of the GATT 1994 and
find, instead, that the charge imposed under the meas ures at issue is an ordinary customs duty. China
considers that the Panel should not have examined GIR 2(a) and its application to multiple shipments
"in the alternative", but as part of its examination of the threshold issue. A ccordingly, China requests
us to examine this part of the "alternative" anal ysis of the Panel, including its interpretation of
GIR 2(a) and China’s Schedule of Concessions, in or der to determine that the charge imposed under
the measures at issue is properly characterized as an ordinary customs duty. China argues that we
should also find that the ordinary customs duties imposed under the measures are based upon a valid
classification of related shipments of parts as "mot or vehicles", and that, because such duties are not
in excess of the relevant tariff bindings under China's Schedule of Concessions, there is no
inconsistency with Article II:1(a) or (b). In the ev ent that we reverse the Panel on the threshold issue,
China does not appeal the Panel's finding regarding the "essential character" criteria under
Article 21(2) and (3) and Article 22 of Decree 125.
287
203. If, however, we uphold the Panel's finding that th e charge under the measures is an internal
charge within the meaning of Article III:2 of the GAT T 1994, then China requests us to "find that the
Panel's alternative reasoning and findings ... as well as the alternative conclusions and
recommendations set forth in Section VIII of its Reports, are moot and of no legal effect." 288 In other
words, China requests us to declare both of these findings made by the Panel, as well as its ultimate
conclusion, to be moot and of no legal effect. Th is is, explains China, because both of these findings,
as well as the conclusion, were based on the Panel' s "alternative assumption that the charge imposed
under the challenged measures is an ordinary customs duty".289
204. As indicated above, the appellees all request us to uphold the Panel's finding that the charge
imposed under the measures at issue is an internal charge within th e meaning of Article III of the
GATT 1994. They all agree, as well, that if we uphold this finding, we should not accept China's
request to declare the Panel's alternative findings to be moot and of no legal ef fect. Yet the appellees
do not appear to share the same position on the ques tion of whether we could or should examine the
Panel's alternative findings under Article II:1(b) of the GATT 1994 in the event that we uphold the
Panel's findings under Article III:2.

287Panel Reports, para. 7.612.
288China's appellant's submission, para. 49. In other words, China's request that we declare the Panel's
alternative findings to be moot and of no legal effect encompasses even those findings that it has not specifically
appealed, including "the Panel's findings concerning the a pplication of the 'essential character' test set forth in
Section VII.D.3 of its Reports". (China's appellant's submission, footnote 91 to para. 116)
289China's appellant's submission, footnote 91 to para. 116.

205. At the oral hearing in this appeal, the Eur opean Communities invited us to address some of
the troubling elements of the arguments made by Ch ina under Article II, so as to leave no doubt about
the serious systemic implications of China's positi on, or as to the inconsistency of the measures at
issue with WTO law from all possible angles. To do so would, in the estimation of the European
Communities, help to secure a positive solution to th e dispute in accordance with Article 3.7 of the
DSU.
206. Canada highlights that the reasoning used by the Panel to reach its alternative findings reveals
that certain elements of the m easures, such as the "essential character" criteria contained therein
could, under a modified measure, be applied to auto parts at the border. Canada explained at the oral
hearing that, for this reason, it would be useful for us to examine the alternative findings made by the
Panel. Canada believes that maintaining the Pane l's findings under Article II would assist in securing
prompt settlement and a positive solution to this dispute, and in preventing or resolving any
disagreement as to the measures that China might take to comply with its WTO obligations.
207. The United States considers that, if we uphold the finding of the Panel that the charge
imposed by China's measures is an internal charge , we need not examine the alternative findings of
the Panel. At the oral hearing in this appeal, the United States agreed with the European Communities
and Canada that the arguments made by China ar e troubling and would, if accepted, pose significant
systemic concerns, but also pointed out that the Panel's alternative findings were expressly
conditioned on an assumption that the charge is an ordi nary customs duty. If we were to find that this
assumption is false, then the Panel's alternative findings would no longer remain in place. The United
States adds that the Panel nonetheless made a numbe r of significant findings regarding Article II:1(b)
of the GATT 1994 in its analysis of the threshold issue, and that these findings would remain in place
if we uphold the Panel's resolution of the threshold issue.
208. After finding that the charge imposed under the measures at issue is, indeed, an internal
charge within the meaning of Article III:2, the Panel went on to make alternative findings on the
assumption that the charge imposed under the measures at issue is an ordinary customs duty within
the meaning of Article II:1(b). We note that none of the participants have appealed the Panel's
decision to make these alternative findings, or suggested that the Panel acted inappropriately in doing
so. It is not unprecedented for panels to make alternative findings
290, and indeed this may be useful in

290See, for instance, Panel Report, India – Patents (US), paras. 6.11, 6.12 and 7.44-7.50; Panel Report,
Canada – Dairy, para. 7.119; Panel Report, EC – Bed Linen (Article 21.5 – India) , paras. 6.234-6.246; Panel
Report, US – Corrosion-Resistant Steel Sunset Review , paras. 7.172-7.184; and Panel Report, EC – Approval
and Marketing of Biotech Products, paras. 7.1612 and 7.1618-7.1626.

resolving a dispute, particularly when, on appeal, the Appellate Body reverses other findings made by
a panel.
291
209. The only issue before us is whether we should examine the Panel's alternative findings. The
Panel made these findings on the assumption that it had erred in finding the charge to be an internal
charge. Yet we have found that it made no such error. To the contrary, the Panel properly
characterized the charge imposed under the measures at issue as an internal charge, and properly
found the measures at issue to be inconsistent w ith China's obligations under the first sentence of
Article III:2 of the GATT 1994. In these circumst ances, we see no reason to examine the Panel's
alternative findings under Article II:1(a) and (b). Nor do we see any reason to accede to China's
request to declare them to be "moot and of no legal effect".
VIII. The Panel's Findings with respect to Paragra ph 93 of China's Accession Working Party
Report
A. Introduction
210. This Section of our Reports deals with the Pane l's findings with respect to the treatment of
CKD and SKD kits under the measur es at issue. CKD and SKD kits are a sub-set of all of the
products covered by the measures. The Panel found, and it is undisputed, that the reference to CKD
and SKD kits under the measures at issue is a referen ce to all, or nearly all, of the auto parts and
components necessary to assemble a complete vehicl e, which must be packaged and shipped in a
single shipment, and which must go through the assembly process to become a complete vehicle after
they have been imported into the importing country.292
211. Before the Panel, the complainants claimed th at, under the measures at issue, China's tariff
treatment of imports of CKD and SKD kits was inc onsistent with Article II:1(b) of the GATT 1994.
The Panel found that the complainants had not established these claims of inconsistency with

 291The Appellate Body has stated that "panels may choose to use assumptions in order to facilitate
resolution of a particular issue or to enable themselves to make additional and alternative factual findings and
thereby assist in the resolution of a dispute should it proceed to th e appellate level" (Appellate Body Report,
Canada – Wheat Exports and Grain Imports , para. 126); and that "panels so metimes make alternative factual
findings that serve to assist the Appellate Body in completing the legal analysis should it disagree with legal
interpretations developed by the panel" (Appellate Body Report, US – Softwood Lumber IV, para. 118).

292See Panel Reports, paras. 7.644-7.647.

Article II:1(b) of the GATT 1994, and that CKD and SKD kits could, in principle, be classified as
motor vehicles.
293 These findings are not appealed.
212. The United States and Canada 294 also claimed that, under the m easures at issue, China's tariff
treatment of imports of CKD and SKD kits was inc onsistent with the commitment made by China in
paragraph 93 of its Accession Working Party Report. That provision reads as follows:
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 such tariff lines, the
tariff rates would be no more than 10 per cent. The Working Party
took note of this commitment.
213. At the outset of its analysis of the claims raised by Canada and the United States under
paragraph 93 of China's Accession Working Party Report, the Panel stated:
All parties agree that China's commitments under its Working Party
Report are enforceable in WTO dispute settlement proceedings. The
Accession Protocol is an integral part of the WTO Agreement
pursuant to Part I, Article 1.2 of the Accession Protocol. In turn,
paragraph 342 of China's Working Party Report incorporates China's
commitments under its Working Party Report, including
paragraph 93, into the Accession Protocol. Therefore, China's
commitment in paragraph 93 of the Working Party Report is also an
integral part of the WTO Agreement.
Accordingly, the Panel will interpret China's commitment under
paragraph 93 of the Working Party Report in accordance with the
interpretative rules of the Vienna Convention to determine whether
China has acted inconsistently with commitments under paragraph 93
of the Working Party Report.
295 (footnotes omitted)

293Panel Reports, para. 7.736. In the course of a detailed analysis of this issue the Panel examined the
context relevant to the term "motor vehicles" in China's Schedule of Concessions, including the context
provided by the Harmonized System, and found, inter alia, that "the context of the term 'motor vehicles', in
particular GIR 2(a), suggests that CKD and SKD kits coul d in principle be classified as complete vehicles".
(Panel Reports, para. 7.697)
294The European Communities did not make a clai m under paragraph 93 of China's Working Party
Report.
295Panel Reports, paras. 7.740 and 7.741.

214. The Panel proceeded, therefore, on the basi s that the commitment made by China in
paragraph 93 of its Accession Wo rking Party Report is enforceab le in WTO dispute settlement
proceedings and should be interpreted in accordan ce with the customary rules of interpretation as
codified in Articles 31 and 32 of the Vienna Convention . Neither of these propositions has been
disputed at any point in these proceedings, including in this appeal.
215. After examining the claims raised by the United States and Canada, the Panel found that:
China has violated its commitment under paragraph 93 of China's
Working Party Report, which is an integral part of the
WTO Agreement, that it will apply tariff rates of no more than 10 per
cent to CKD and SKD kits if China creates tariff lines for CKD and
SKD kits.
296 (footnote omitted)
216. China appeals this finding on several grounds. China makes two allegations of a preliminary
nature: first, that the Panel erred in constr uing the measures at issue as imposing a charge on
importers of CKD and SKD kits w ho declare and pay duties at the border; and, secondly, that the
Panel erred in ruling on a claim for which a prima facie case had not been established by either the
United States or Canada. In addition, and in the alte rnative, China claims that the Panel erred in its
substantive finding that the measures are inconsistent with the commitment in paragraph 93 of China's
Accession Working Party Report. We consider these elements of China's appeal below.
B. Applicability of the Measures at Issue to Imports of CKD and SKD Kits
217. The first ground upon which China alleges that th e Panel erred in reaching its findings under
paragraph 93 of China's Accession Working Party Re port is that the Panel erred in construing the
measures at issue as imposing a "charge" or "duty" on importers of CKD and SKD kits who exercise
the option provided under Article 2(2) of Decree 125 to declare these kits and pay duties at the border.
Before examining the substance of this claim of er ror, we first set out relevant provisions of the
measures at issue, and then identify key elements of the Panel's analysis of this issue.
1. Relevant Provisions of the Measures at Issue
218. Three provisions of the measures at issue expressly refer to CKD and SKD kits. Article 2(2)
of Decree 125 provides:

296Panel Reports, para. 7.758.

Automobile manufacturers importing completely knocked-down
(CKD) or semi-knocked-down (SKD) kits may declare such
importation to the Customs in charge of the area where the
manufacturer is located and pay duties, and these Rules shall not
apply.
297
Article 21(1) of Decree 125 provides:298
Imported automobile parts shall be characterized as complete
vehicles if one of the following applies:
(1) imports of CKD or SKD kits for the purpose of assembling
vehicles.
Article 56 of Chapter XI of Policy Order 8 provides:
Auto parts shall be determined to have the character of a complete
assembly in the following cases: complete assemblies imported in
their constituent parts (completely knocked-down), or assemblies
and/or systems imported dismantled into several key parts (semi-
knocked-down). Whenever imported key parts attain or exceed the
stipulated quantity they shall be characterized as Imported
Assemblies.
2. The Panel's Analysis

219. The Panel dealt with the scope and meaning of the provisions of Decree 125 applicable to
CKD and SKD kits as part of its description of th e measures at issue and, in particular, of the
"[e]xceptions under the measures".299 The Panel found that Article 2(2) "is a provision that gives auto
manufacturers an option to have their CKD or SKD kit[s] im ports excluded from the 'administrative
procedures' under the measures and to import th em under regular customs procedures and pay the
duties applicable to motor vehicles at the time of importation." 300 The Panel opined that the language

297Panel Reports, para. 7.72. Before the Panel, it was undisputed that, since the enactment of the
measures, all imports of CKD and SKD kits have been made under Article 2(2).
298See also Article 13(1) of Announcement 4.
299See the heading to Section VII:A.1(c) of the Panel Reports, p. 164. At the outset of its discussion of
the measures at issue, the Panel stated, at paragraph 7.2 of its Reports, that:
[a]lthough we are mindful that the meas ures are part of the domestic law of
China, we will be required to determine the meaning of particular provisions
of the measures if interpretations of such provisions are contested by the
parties. Our examination in such cases will be for the sole purpose of
determining the conformity of the measures with relevant obligations under
the WTO covered agreements ... .
300Panel Reports, para. 7.77. (emphasis added)

in Article 2(2) that "these Rules shall not apply" relieves importers of CKD and SKD kits only of their
obligations to comply with the various administ rative requirements under the measures. The Panel
found that Article 2(2) does not, however, exempt importers of CKD and SKD kits from the "charge"
imposed under the measures at issue. In so finding, the Panel relied upon the "substantive" criteria in
Article 21(1), which it found provided the basis for the imposition of a charge on imports of CKD and
SKD kits.
301 Reading the two provisions of Decree 125 together, the Panel determined that the
exemption provided to CKD and SKD kit importers under Article 2(2) did not alter the fact that "their
obligation to pay the charge under the measures for CKD and SKD kits arises from Article 21(1) of
Decree 125."302
220. This finding had several consequences for the Panel's analysis of the measures at issue and the
charge imposed thereunder. As we explained in Section V above, the Panel determined that the
charge imposed under the measures at issue accrued after the assembly of the imported auto parts into
complete vehicles. Relying, in particular, on this element, the Panel character ized that charge as an
internal charge falling within the scope of the fi rst sentence of Article III:2 of the GATT 1994.
However, the Panel clarified that its finding with respect to this "internal charge" did not extend to the
"charge" imposed on importers of CKD and SKD kits who, pursuant to Article 2(2) of Decree 125,
declare their goods and pay the 25 per cent "charge" at the moment of importation. That latter
"charge" was, in the view of the Panel, differe nt in nature from the ch arge that accrues following
assembly of parts into complete vehicles. Specifically, the Panel found that:
... to the extent the importation of CKD and SKD kits is exempted by
Article 2(2) of Decree 125 from the administrative procedures under
the measures and subject to China's regular customs procedures,
including automatic issuance of an import licence, the imposition of
the charge on CKD and SKD kits can be considered as an ordinary
"customs duty" ... under Article II:1(b), first sentence of the
GATT 1994.
303
221. Thus, the Panel found that the 25 per cent "charg e" imposed under the measures at issue upon
importers of CKD and SKD kits under Article 2(2) of Decree 125 is an "ordinary customs duty". This
finding in turn served as a basis for the Panel' s ultimate finding that the measures at issue are

301Panel Reports, para. 7.77.
302Panel Reports, para. 7.78.
303Panel Reports, para. 7.636. See also Panel Reports, footnote 244 to para. 7.77. The Panel ultimately
rejected, however, the complainants' claims that China's tariff treatment of CKD and SKD kits was inconsistent
with China's obligations under Article II:1(b) of the GATT 1994. (Panel Reports, para. 7.736)

inconsistent with the commitment set out in para graph 93 of China's Accession Working Party Report
to apply a duty of no more than 10 per cent to imports of CKD and SKD kits.
3. The Treatment of CKD and SKD Kits under Decree 125

222. China appeals the Panel's finding that Article 2(2) of Decree 125 excludes the application of
only the administrative procedures, and not the charge, under the measu res. China argues that, read
properly, Article 2(2) exempts altogether imports of CKD and SKD kits from the measures at issue,
that is, it exempts them from both the administrative procedures and the charge imposed thereunder.
Imports of CKD and SKD kits under Article 2(2) are, according to China, subject to import duties
under China's regular customs laws, and not to a charge under the measures at issue. Because the
measures impose no charge or duty on such imports of CKD and SKD kits, it follows, in China's
view, that the Panel erred in finding that the measur es at issue are inconsiste nt with paragraph 93 of
China's Accession Working Party Report. China a dds that the Panel's finding that the "charge"
imposed on CKD and SKD kits imported under Article 2(2) is an ordinary customs duty cannot be
reconciled with the Panel's resolution of the thres hold issue and finding that the charge imposed by
the measures is an internal charge falling under Article III of the GATT 1994.
223. Canada and the United States agree with the Pa nel that Article 2(2) must be read in
conjunction with Article 21(1) of Decree 125. These provisions together clarify that the charge under
the measures applies to all imports of CKD and SKD kits, although its characterization as a charge
under either Article II or Article III depends on the import procedures used by automobile
manufacturers importing these kits (that is, whether or not they invoke Article 2(2) of Decree 125).
Canada and the United States challenge China's argumen ts that Article 2(2) somehow leaves intact a
set of "regular customs procedures" with respect to imports of CKD and SKD kits. In their view,
Article 2(2) was likely included in Decree 125 simp ly to expedite customs treatment of CKD and
SKD kits, which are more easily verifiable as comp lete vehicles under the measures. Canada and the
United States reject the notion that Article 2(2) w as intended to exclude comp letely imports of CKD
and SKD kits from the measures at issue, dependi ng on the customs procedures chosen by importers
of these kits.
224. In examining this issue, we first note that the participants appear to disagree on the standard
of review that we should apply to the Panel' s findings regarding the scope and meaning of
Articles 2(2) and 21(1) of Decree 125. China submits that the Panel's finding as to the applicability of
the charge imposed under the measures at issue to im ports of CKD and SKD kits is a matter of legal

interpretation.
304 The United States, on the other hand, c onsiders that a panel's "constructions of
municipal law are factual determinations in WTO dispute settlement". 305 This means, for the United
States, that the Appellate Body may not review such findings de novo, but must accord them the
"same deference as other types of factual findings made by panels in WTO dispute settlement
proceedings".306
225. The Appellate Body has explicitly stated that the municipal law of WTO Members may serve
not only as evidence of facts, but also as evidence of compliance or non-compliance with international
obligations.307 When a panel examines the municipal law of a WTO Member for purposes of
determining whether the Member has complied with its WTO obligations, that determination is a legal
characterization by a panel, and is therefore subj ect to appellate review under Article 17.6 of the
DSU.308 The Appellate Body has reviewed the meaning of a Member's municipal law, on its face, to
determine whether the legal characterization by the pa nel was in error, in particular when the claim
before the panel concerned whether a specific instru ment of municipal law was, as such, inconsistent
with a Member's obligations. 309 We recognize that there may be instances in which a panel's
assessment of municipal law will go beyond the text of an instrument on its face, in which case further
examination may be required, a nd may involve factual elements. 310 With respect to such elements,
the Appellate Body will not lightly interfere with a panel's finding on appeal.
226. China's appeal regarding the Panel's assessment of how imports of CKD and SKD kits are
treated under Decree 125 requires us to examine th e Panel's construction of certain provisions of
Decree 125. In doing so, we are mindful of the scope and standard of review set out above.

304China's appellant's submission, para. 140 (referring to Appellate Body Report, US – Section 211
Appropriations Act, para. 105).
306United States' appellee's submission, para. 83. Canada expressed a similar view at the oral hearing in
this appeal, stating that a panel's interpretation of municipa l law is a matter of fact an d is subject to the standard
of review to be accorded to factual findings.
307Appellate Body Report, US – Section 211 Appropriations Act , para. 105. See also Appellate Body
Report, India – Patents (US), paras. 65-66 and 68.
308Appellate Body Report, US – Section 211 Appropriations Act, para. 105.
309See, for instance, Appellate Body Report, US – Section 211 Appropriations Act, para. 106.
310The Appellate Body in US – Corrosion-Resistant Steel Sunset Review stated that "[i]f the meaning
and content of the measure are clear on its face then the consistency of the measure can be assessed on that basis
alone. If, however, the meaning … is not evident on its face, further examination is required." (Appellate Body
Report, US – Corrosion-Resistant Steel Sunset Review , para. 168) See also Appellate Body Report, US –
Carbon Steel, paras. 156 and 157.

227. China asserts that the Panel's assessment of Article 2(2) of Decree 125 is inconsistent with the
plain meaning of that provision. In China's view , the two paragraphs of Article 2, read together,
define: on the one hand, the circumstances in whic h the rules set forth in Decree 125 are applicable
(in respect of auto parts that have the "essential char acter" of a motor vehicle and are characterized as
complete vehicles following vehicle assembly); and, on the other hand, the circumstances in which
those rules "shall not apply" (when CKD and SKD kits are imported under China's regular customs
procedures and duties are paid upon importation). Fo r China, Article 2(2) allows importers of CKD
and SKD kits to be entirely exempt from the measures and, instead to declare CKD and SKD kits, and
pay duties, by virtue of the application of China's customs law, and not by virtue of Decree 125.
228. Both the United States and Canada argue that, as a whole, the measures at issue create a new
customs regime for the importation of auto parts ch aracterized as complete vehicles into China, and
that Article 2(2) merely sets up a special procedure within that regime for the payment of the charge
under the measures. The United States asserts that, as a result of the adoption of Decree 125, an
importer of a CKD or SKD kit can follow one of two paths set out in Decree 125: pay the charge
upon importation as a customs duty; or subject the kit to the detailed internal requirements set out in
Decree 125. At the oral hearing in this appeal, Canada suggested that, looking beyond Decree 125 to
Chapter XI of Policy Order 8—pursuant to which Decree 125 was implemented—it is clear that the
measures were intended to alter th e normal procedures for all imports of auto parts characterized as
complete vehicles.
311 Canada notes that Chapter XI refers specifically to CKD and SKD kits as being
covered by the measures, and provides no exception fo r them. According to Canada, therefore, when
Policy Order 8 and Decree 125 are read together, it is cl ear that the charge applies even to automobile
manufacturers that import CKD and SKD kits under Article 2(2).
229. China's appeal calls for us to consider whet her the Panel erred in construing Decree 125 to
mean that: (i) automobile manufacturers that import CKD and SKD kits under Article 2(2) are
exempt from the administrative procedures, but not fr om the charge, under the measures at issue; and
(ii) the charge that the measures impose on such imports is an ordinary customs duty paid on
importation.

 311In particular, Canada considers that Article 53 of Chapter XI of Policy Order 8 illustrates that the
measures at issue modify the procedures for declaring auto parts at the border. Article 53 provides:
Any vehicle manufacturers using importe d parts characterized as complete
vehicles to produce vehicles should report this factually to the Ministry of
Commerce, the Customs and NDRC. The imported parts for the vehicle
models in question must all be declared for duty payment to the Customs
office under whose jurisdiction the enterprise falls, so as to enable the
relevant departments to exercise effective management.

230. We begin our analysis with the text of Article 2 of Decree 125 which, in its entirety, provides:
These Rules are applicable to the supervision and administration of
the importation of automobile parts characterized as complete
vehicles used to produce/assemb le vehicles by automobile
manufacturers approved by or registered with relevant state
authorities.
Automobile manufacturers importing completely knocked-down
(CKD) or semi-knocked-down (SKD) kits may declare such
importation to the Customs in charge of the area where the
manufacturer is located and pay duties, and these Rules shall not
apply. (footnote omitted; emphasis added)
231. We note first that Article 2(2) provides that "t hese Rules shall not apply" to those automobile
manufacturers importing CKD and SKD kits under this provision that opt to declare and pay duties on
importation. The reference to "these Rules" in both the first and second paragraphs of Article 2 seems
in both instances to be an abbreviated reference to Decree 125 itself, which is entitled "Administrative
Rules on Importation of Automobile Parts Characterized as Complete Vehicles".
312 There is no
textual limitation in Article 2(2) on the "Rules" that shall not apply. In particular, Article 2(2) does
not indicate that importers of CKD and SKD kits are exempted from only the administrative
procedures, while remaining subject to the charge, under the measures.
232. On its face, Article 2(2) provides an option to automobile manufacturers who import CKD
and SKD kits to declare such importation and pay duties. There is no indication of what such
"declaration" entails 313, nor of the legal basis for the "duti es" to be paid by the automobile
manufacturers importing CKD and SKD kits under this provision. Thus, we do not see a textual basis
for reading Article 2(2) as establishing a new or special customs procedure for those importers that
avail themselves of that provision. If anything, th e language used in Article 2(2) seems typical of
language that would be used to describe standard customs procedures at the time of importation, in
that it refers to a declaration of importation and to the payment of duties.

312Emphasis added.
313Article 2(2) specifies that the declaration to be made thereunder must be made to the district customs
office for the area where the manufacturer is located. At the oral hearing in this appeal, China explained that
this is somewhat more restricted than China's regular customs procedures, which allow an importer the option of
declaring imported goods either at its district customs office or at the port of entry of the goods. For imports of
CKD and SKD kits under Article 2(2), only the former option is available.

233. As already explained, we read the references in Article 2 to "these Rules" as references to all
of Decree 125. The Rules of Decree 125 do not app ear to contemplate the type of separation of the
charge under the measures from the administrative pro cedures associated with it that the Panel found
to have been accomplished by virtue of Articles 2( 2) and 21(1). This is because, as we have seen
314,
Decree 125 sets out a number of procedural steps that precede or accompany the imposition of the
charge under the measures at issue. These include: an automobile manufacturer's self-evaluation;
requirements regarding the declaration to be made at the time of importation; bonding requirements,
including tracking and reporting requirements; verification; and requirements in respect of the
monthly declaration of duty payment that must be made by the automobile manufacturer using auto
parts that are characterized as complete vehicles under the measures at issue. The provisions of
Decree 125 never refer to any "charge" or "duty" in isolation, but only in connection with one or more
of the procedural elements set out therein.
234. Furthermore—and leaving aside the possible impor t of Article 2(2)—the "charge" that is
referred to throughout Decree 125
315 is a charge that is imposed following both assembly of the
complete motor vehicles and verification. 316 Indeed, in describing the measures at issue, the Panel
itself explained that the charge unde r the measures is not triggered until after assembly and after
verification.317 The Rules of Decree 125 also consistently make clear that it is the "characterization"
of auto parts as "complete vehicles" that results in the imposition of the charge, and that such
characterization occurs at the stage when the vehicles are assembled , as opposed to the time of
importation.318

314Supra, paras. 114-126.
315As explained at supra, footnote 127, the measures at issue do not use the word "charge", but instead
use "tariff" or "duty".
316This is illustrated by, for example, the text of Artic le 17 of Decree 125, which stipulates, in relevant
part, that "customs shall determine the applicable tariff rates and the dutiable prices, and shall handle the duty
collection based upon the Verification Report issued by the Verification Center." Similarly, Article 31 makes
clear that automobile manufacturers are to make a declaration of duty payment in respect of auto parts that have
already been assembled into a vehicle model in respect of which a Verification Report has been issued, and that
imposition of the charge occurs upon such declaration.
317The Panel explained, in paragraph 7.69 of its Reports:
[T]o determine the applicability of the charge, customs officials wait
pursuant to Article 28 of Decree 125 until automobile manufacturers finish
assembling auto parts into motor vehicles and then the Verification Centre
finishes its verification of whether the imported auto parts used in the
assembly of a certain vehicle model should be characterized as complete
motor vehicles within the meaning of the measures.
318Article 5 provides, in relevant part: "The refere nce to 'automobile parts characterized as complete
vehicles' in these Rules shall mean that the imported automobile parts should be characterized as complete
vehicles at the stage when complete vehicles are assembled." (emphasis added)

235. Taken together, all of the provisions of Decree 125 seem therefore to set up a seamless regime
for both the administrative procedures and the charge that are applied in respect of auto parts
characterized as complete vehicles. Given the many ways in which the administrative procedures and
the charge are intertwined under Decree 125, we have some difficulty understanding how the Panel
could read Article 2(2) to mean that CKD and SKD k its that are declared and paid for at the border,
prior to assembly, and that are not subject to verifi cation or other procedural steps under the measures
at issue, can nonetheless be subject to the charge under the measures at issue.
236. The Panel's view that the measures impose a charge on CKD and SKD kits imported under
Article 2(2) of Decree 125 rested in particular on its reading of this provision in conjunction with
Article 21(1).
319 Accordingly, we turn to consider the latter provision.
237. Article 21 of Decree 125 lists the criteria fo r the imported auto parts that must be
characterized as complete vehicles under the me asures. The first paragraph of Article 21
characterizes as complete vehicles: "imports of CKD or SKD kits for the purpose of assembling
vehicles." According to the Panel, this provisi on is the legal basis for the obligation to pay the
"charge" on CKD and SKD kits. We do not see why the Panel was of the view that Article 21(1)
served this function. On its face, it seems to us to be a definitional provision that identifies one sub-
set of the imported auto parts used in a particular vehicle model that must be "characterized as
complete vehicles" under the measures at issue. Article 21 appears to im plement and reflect the
content of Article 56 of Chapter XI of Policy Or der 8, which serves a similar definitional purpose. 320
Unlike other provisions of Decree 125, Article 21 cont ains no reference to any "duty", "tariff" or
"charge". In addition, the Panel's reliance on Article 21(1) of Decree 125 as the source of the
obligation to pay the charge on imports of CKD and SKD kits under Article 2(2) is difficult to square
with its identification of the source of the charge imposed on imported auto parts in general under the

319We recall that the Panel considered, in particular, that, "although importers of CKD or SKD kits can
opt in accordance with Article 2(2) of Decree 125 to be exempted from 'the administrative procedures' under the
measures, their obligation to pay the charge under the measures for CKD and SKD kits arises from Article 21(1)
320Article 56 of Chapter XI of Policy Order 8 provides:
Auto parts shall be determined to have the character of a complete assembly
in the following cases: complete assemblies imported in their constituent
parts (completely knocked-down), or assemblies and/or systems imported
dismantled into several key parts (semi-knocked-down). Whenever
imported key parts attain or exceed th e stipulated quantity they shall be
characterized as Imported Assemblies.

measures. In explaining that "the measures do im pose ... the charge", the Panel referred to various
provisions of Decree 125, but not to Article 21.
321
238. Thus, we do not see how the text of Article 2(2) and the overall structure and logic of
Decree 125, including Article 21(1), would render it possible to separate the charge from the
administrative procedures associated with the imposition of that charge. It follows that the "duties"
referred to in Article 2(2), which are to be declar ed and paid upon importation, are not duties imposed
under Decree 125. Consequently, the Panel's cons truction of Article 2(2), read together with
Article 21(1), amounts in our view to legal error.
239. Although we do not accept the Panel's construction of Article 2(2), we nonetheless agree with
the Panel that this provision affords automobile manufacturers importing CKD and SKD kits an
option.
322 Where we differ from the Panel is with respect to the scope of that option. In our view, the
option provided to automobile manufacturers is an option to declare imports of CKD and SKD kits
upon importation and, thereby, remove themselves from the application of the Rules of Decree 125,
including from the charge imposed thereunder. 323 Should that option not be exercised 324, then the
Rules apply, in their entirety. In other words, automobile manufacturers importing such kits would be
subject to the administrative procedures under the meas ures at issue, the criteria in Article 21(1) of
Decree 125, and the charge imposed post-assembly and post-verification.
240. It is this charge, accruing after assembly, that the Pa nel characterized as an internal charge
within the meaning of Article III:2 of the GATT 1994. Yet, in the context of its construction of
Article 2(2), the Panel also said that "[t]o the extent that an importer exercises the option provided in
Article 2(2) of Decree 125 and imports CKD or SK D kits under the regular customs procedures ... the
treatment of CKD and SKD kits imports under th e measures (i.e. imposition of the charge on CKD
and SKD kits) falls under the disciplines of Article II, not Article III of the GATT 1994."325

321Panel Reports, para. 7.19. In footnote 188 thereto, the Panel referred to "the second sentence of
Article 28 of Decree 125 ... ('... the customs ... shall base both the tariff and the import VAT on rates applicable
to ...') ... Article 13(1) of Decree 125 ('... an automobile manufacturer ... shall ... pay duties ...'); Article 28(1)
('... Customs shall ... proceed with ... duty collection. '); Article 31(1) of Decree 125 ('An automobile
manufacturer shall declare duty payment ...'); and Article 34 ( '... declaration for duty payment ...')".
322Panel Reports, para. 7.77. China has not appealed this aspect of the Panel's findings.
323We also note that, elsewhere in its Reports, th e Panel found that, both prior to and following
accession, and before adoption of the measures at issue, China classified CKD and SKD kits as motor vehicles.
(Panel Reports, para. 7.735)
324The Panel found that all imports of CKD and SKD kits had been made under Article 2(2) of
325Panel Reports, footnote 244 to para. 7.77.

241. We recall that China emphasizes that the Pane l's finding with respect to the meaning of
Article 2(2) and the Panel's finding on the threshol d issue are irreconcilable because the Panel also
found that the measures impose "one charge", and a charge cannot be simultaneously both a border
charge and an internal charge.
326
242. Although, based on our reasoning above, it may no t be necessary for us to consider this
argument by China, we wish to make certain observa tions with respect to the Panel's approach. The
Panel's statement that there is "one charge" unde r the measures at issue was made in response to
China's arguments that the charge imposed upon auto mobile manufacturers that import parts directly
was different from the "charge" imposed on auto mobile manufacturers that purchase imported parts
from independent third party suppliers within China.327 At that stage of its analysis, the Panel was not
concerned with the charge applied to C KD and SKD kit importers under Article 2(2) 328, which the
Panel dealt with in an entirely separate section of its Reports.329
243. Thus, it appears to us that the Panel considered that there were distinct charges imposed under
Decree 125, and that it could characterize the "cha rge" imposed on imports of CKD and SKD kits
under Article 2(2) of Decree 125 differently, as an ordinary customs duty. However, the Panel did not
explain why this was so. Earlier in our analysis, we expressed the view that, in dealing with the
threshold issue, the Panel properly scrutinized th e key characteristics of the charge, evaluated the
significance of those charact eristics, and determined that the charge imposed under the measures at
issue was an internal charge. In contrast, the Pa nel did not explain how or why the characteristics of
the "charge" imposed on imports of CKD and SKD k its under Article 2(2) differed from those that it
had earlier identified in its resolution of the th reshold issue. Nor did it explain why such
characteristics required characterization of the "charge" imposed on CKD and SKD kits imported
under Article 2(2) as an ordinary customs duty. This does not seem to us to have been a proper
approach to the characterization of this "charge".

326China's appellant's submission, paras. 157 and 158 (referring to Panel Reports, paras. 7.105 and
7.115).
327The Panel rejected this argument and explained that "there is only one charge, which is ultimately
triggered by the application of the thresholds after the assembly of the imported parts into complete vehicles in
China". (Panel Reports, para. 7.115)
328The Panel specifically exempted the charge applied to CKD and SKD kit importers under
Article 2(2) from the scope of its findings on the thresh old issue (that there is only one charge: an internal
charge) and with respect to the consistency of the intern al charge with Article III:2 of the GATT 1994. (Panel
329Panel Reports, Section VII:F.

244. For the reasons set out above, we find that the Panel erred in construing Decree 125 to mean
that:
[the] exemption provided for CKD and SKD kits in Article 2(2) of
Decree 125 is limited to the ad ministrative procedures under the
measures, not the substantive criteria under Article 21(1) of
Decree 125. ... although importers of CKD or SKD kits can opt in
accordance with Article 2(2) of Decree 125 to be exempted from "the
administrative procedures" under the measures, their obligation to
pay the charge under the measures for CKD and SKD kits arises
from Article 21(1) of Decree 125.
330
245. The Panel's subsequent finding, that the measures at issu e are inconsistent with China's
conditional commitment in paragraph 93 of its A ccession Working Party Report, was premised upon
this erroneous view that the measures at issue im pose a charge that is an ordinary customs duty on
CKD and SKD kits imported under Article 2(2) of Decree 125. The United States and Canada did not
contend, nor do we see how they could have, that the charge imposed under the measures at issue
could, as an internal charge within the meaning of Article III:2, somehow have violated China's
commitment regarding its tariff treatment of CK D and SKD kits in paragraph 93 of its Accession
Working Party Report. It follows that we must reverse the Panel's finding regarding such
commitment, namely, that:
Policy Order 8, Decree 125 and A nnouncement 4 are inconsistent
with China's commitment under paragraph 93 of China's Working
Party Report, which is an integral part of the WTO Agreement.
331
C. Whether the United States and Canada Failed to Establish a Prima Facie Case
246. China argues that the Panel acted contrary to Article 11 of the DSU by ruling on a claim that
neither the United States nor Canada had advanced, and for which they had both failed to establish a
prima facie case of inconsistency. Specifically, China argues that Canada and the United States failed
to make out a prima facie case in respect of the applicability of the measures at issue to imports of
CKD and SKD kits imported under Article 2(2) of Decree 125, and/or that the charge under the
measures could be simultaneously an internal charge and an ordinary customs duty. Having reversed
the Panel's finding with respect to the applicabilit y of the measures at issue to CKD and SKD kits
imported under Article 2(2) of Decree 125, we n eed not consider whether the United States and
Canada failed to make out a prima facie case in this regard.

331Panel Reports, Section VIII:B(c)(ii) and Section VIII:C(c)(i). See also Panel Reports, para. 7.758.

D. Consistency of the Measures at Issue with Paragraph 93
247. We turn to China's conditional appeal relati ng to China's Accession Working Party Report,
paragraph 93 of which provides:
Certain members of the Working Party expressed particular concerns
about tariff treatment in the auto sector. In response to questions
about the tariff treatment for kits for motor vehicles, the
representative of China confirmed that China had no tariff lines for
completely knocked-down kits for motor vehicles or semi-knocked
down kits for motor vehicles . If China created such tariff lines, the
tariff rates would be no more than 10 per cent . The Working Party
took note of this commitment. (emphasis added)
248. As stated above, the Panel found that:
China has violated its commitment under paragraph 93 of China's
Working Party Report, which is an integral part of the
WTO Agreement, that it will apply tariff rates of no more than 10 per
cent to CKD and SKD kits if China creates tariff lines for CKD and
SKD kits.
332 (footnote omitted)
249. The Panel found that China had violated this commitment based on two earlier findings that
the Panel had made in the course of its analysis , namely, that "under the circumstances surrounding
the measures at issue in this dispute, a tariff line for CKD and SKD kits can be deemed created
through the measures since China effectively classi fies such a kit under specific tariff lines and
applies the tariff rates applicable unde r such tariff lin es under the measures" 333, and that "China ...
created separate tariff lines for CKD and SKD kits in its tariff schedule at the ten-digit level and thus
has met the condition under paragraph 93."334
250. China challenges both of these findings 335 in the event that we do not reverse the Panel's
finding that the measures are inconsistent with paragraph 93 of China's Accession Working Party
Report on the grounds that either: the Panel misconstrued Article 2(2) of Decree 125 and erred in
finding that the measures at issue impose a duty on imports of CKD and SKD kits under that

332See Panel Reports, para. 7.758.
333Panel Reports, para. 7.755.
334Panel Reports, para. 7.752.
335China challenges the substance of both findings and, as regards the Panel's finding that China created
separate tariff lines for CKD and SKD kits at the ten-digit level, China also requests us to find that the Panel
acted outside of its terms of reference since neither the United States nor Canada identified the alleged ten-digit
tariff lines in its request for establishment of the panel.

provision; or the Panel ruled on a claim for whic h Canada and the United St ates had failed to make
out a prima facie case.
251. We have reversed the Panel's finding with respect to paragraph 93 of China's Accession
Working Party Report on the grounds that the Panel erred in construing Artic les 2(2) and 21(1) of
Decree 125 to mean that the measures at issue impose a charge on CKD and SKD kits imported under
Article 2(2) of Decree 125. Thus, the condition on which China's substantive appeal of the Panel's
findings under paragraph 93 is predicated is not sa tisfied, and we need not consider these alternative
grounds of appeal. We note, in this regard, that at the oral hearing in this appeal, the United States
and Canada agreed that, if we reversed the Panel' s finding that Article 2(2) of Decree 125 exempts
importers of CKD and SKD kits from the administrative procedures, but not from the charge, imposed
under the measures at issue, we wo uld also have to reverse the Panel's finding that, through the
measures at issue, China has acted inconsistently with the commitment in paragraph 93 of its
Accession Working Party Report.
252. We nevertheless observe, as did the Panel, that the commitment made by China in the
penultimate sentence of paragraph 93 is a conditional one, which becomes operative only "upon the
creation of separate tariff lines for CKD and SKD k its, which did not exist at the time of China's
accession to the WTO."
336 Given the way in which China has framed its appeal, we do not need to
rule on the meaning of the condition set out in paragraph 93. We also need not decide whether a tariff
line can be "deemed" created nor whether China cr eated separate tariff lines for CKD and SKD kits at
the ten-digit level.

336Panel Reports, para. 7.743.

 Page EC-105

IX. Findings and Conclusions in the Appellate Body Report WT/DS339/AB/R
(European Communities)
253. In the appeal of the Panel Report,
(Complaint by the European Communities , WT/DS339/R) (the "EC Panel Report"), and with respect
to Policy Order 8, Decree 125 and Announcement 4 (the "measures at issue"), for the reasons set forth
in this Report, the Appellate Body:
(a) upholds the Panel's finding, in paragraph 7.2 12 of the EC Panel Report, that the
charge imposed under the measures at issue is an internal charge within the meaning
of Article III:2 of the GATT 1994, and not an ordinary customs duty within the
meaning of Article II:1(b);
(b) upholds
 the Panel's finding, in paragraph 7. 223 and Section VIII:A(a)(i) of the
EC Panel Report, that, with respect to impor ted auto parts in general, the measures at
issue are inconsistent with Article III:2, fi rst sentence, of the GATT 1994 in that they
subject imported auto parts to an internal charge that is not applied to like domestic
auto parts;
(c) upholds the Panel's finding, in paragraph 7. 272 and Section VIII:A(a)(ii) of the
EC Panel Report, that, with respect to impor ted auto parts in general, the measures at
issue are inconsistent with Article III:4 of the GATT 1994 in that they accord
imported auto parts less favourable treatment than like domestic auto parts; and
(d) finds
 it unnecessary to rule on the Panel's "altern ative" finding in Section VIII:A(b)(i)
of the EC Panel Report, that, with respect to imported auto parts in general, the
measures at issue are inconsistent with Article II:1(a) and (b) of the GATT 1994.
254. The Appellate Body recommends
 that the DSB request China to bring its measures, found in
this Report, and in the EC Panel Report as upheld by this Report, to be inconsistent with the
GATT 1994, into conformity with its obligations under that Agreement.

Page EC-106

Signed in the original in Geneva this 25th day of November 2008 by:

 Lilia Bautista
 Presiding Member

 _________________________ _________________________
 Jennifer Hillman Giorgio Sacerdoti
 Member Member

 Page US-105

IX. Findings and Conclusions in the Appellate Body Report WT/DS340/AB/R
(United States)
253. In the appeal of the Panel Report, China – Measures Affecting Im ports of Automobile Parts
(Complaint by the United States , WT/DS340/R) (the "US Panel Report" ), and with respect to Policy
Order 8, Decree 125 and Announcement 4 (the "measures at issue"), for the reasons set forth in this
Report, the Appellate Body:
(a) upholds the Panel's finding, in paragraph 7.212 of the US Panel Report, that the
charge imposed under the measures at issue is an internal charge within the meaning
of Article III:2 of the GATT 1994, and not an ordinary customs duty within the
meaning of Article II:1(b);
(b) upholds
 the Panel's finding, in paragraph 7. 223 and Section VIII:B(a)(i) of the
US Panel Report, that, with respect to impor ted auto parts in general, the measures at
issue are inconsistent with Article III:2, fi rst sentence, of the GATT 1994 in that they
subject imported auto parts to an internal charge that is not applied to like domestic
auto parts;
(c) upholds the Panel's finding, in paragraph 7. 272 and Section VIII:B(a)(ii) of the
US Panel Report, that, with respect to impor ted auto parts in general, the measures at
issue are inconsistent with Article III:4 of the GATT 1994 in that they accord
imported auto parts less favourable treatment than like domestic auto parts;
(d) finds
 it unnecessary to rule on the Panel's "altern ative" finding in Section VIII:B(b)(i)
of the US Panel Report, that, with respect to imported auto parts in general, the
measures at issue are inconsistent with Article II:1(a) and (b) of the GATT 1994; and
(e) finds that the Panel erred, in paragraphs 7.77 and 7.78 of the US Panel Report, in
construing the measures at issue as imposi ng a charge on completely knocked down
(CKD) and semi-knocked down (SKD) kits imported under Article 2(2) of
Decree 125, and consequently reverses the Panel's finding in paragraph 7.758 and
Section VIII:B(c)(ii) of the US Panel Report that, with respect to their treatment of
imports of CKD and SKD kits, the measures at issue are inconsistent with the
commitment in paragraph 93 of China's Accession Working Party Report.
254. The Appellate Body recommends
 that the DSB request China to bring its measures, found in
this Report, and in the US Panel Report as modified by this Report, to be inconsistent with the
GATT 1994, into conformity with its obligations under that Agreement.

Page US-106

Signed in the original in Geneva this 25th day of November 2008 by:

 Lilia Bautista
 Presiding Member

 _________________________ _________________________
 Jennifer Hillman Giorgio Sacerdoti
 Member Member

 Page CDA-105

IX. Findings and Conclusions in the Appellate Body Report WT/DS342/AB/R (Canada)
253. In the appeal of the Panel Report,
(Complaint by Canada , WT/DS342/R) (the "Canada Panel Report"), and with respect to Policy
Order 8, Decree 125 and Announcement 4 (the "measures at issue"), for the reasons set forth in this
Report, the Appellate Body:
(a) upholds the Panel's finding, in paragraph 7.212 of the Canada Panel Report, that the
charge imposed under the measures at issue is an internal charge within the meaning
of Article III:2 of the GATT 1994, and not an ordinary customs duty within the
meaning of Article II:1(b);
(b) upholds the Panel's finding, in paragraph 7. 223 and Section VIII:C(a)(i) of the
Canada Panel Report, that, with respect to imported auto parts in general, the
measures at issue are inconsistent with Article III:2, first sentence, of the GATT 1994
in that they subject imported auto parts to an internal charge that is not applied to like
domestic auto parts;
(c) upholds the Panel's finding, in paragraph 7. 272 and Section VIII:C(a)(ii) of the
Canada Panel Report, that, with respect to imported auto parts in general, the
measures at issue are inconsistent with Ar ticle III:4 of the GATT 1994 in that they
accord imported auto parts less favourable treatment than like domestic auto parts;
(d) finds it unnecessary to rule on the Panel's "altern ative" finding in Section VIII:C(b)(i)
of the Canada Panel Report, that, with resp ect to imported auto parts in general, the
measures at issue are inconsistent with Article II:1(a) and (b) of the GATT 1994; and
(e) finds that the Panel erred, in paragraphs 7.77 and 7.78 of the Canada Panel Report, in
construing the measures at issue as imposi ng a charge on completely knocked down
(CKD) and semi-knocked down (SKD) kits imported under Article 2(2) of
Decree 125 and, consequently reverses the Panel's finding in paragraph 7.758 and
Section VIII:C(c)(i) of the Canada Panel Re port that, with respect to their treatment
of CKD and SKD kits, the measures at issue are inconsistent with the commitment in
paragraph 93 of China's Accession Working Party Report.
254. The Appellate Body recommends that the DSB request China to bring its measures, found in
this Report, and in the Canada Panel Report as modifi ed by this Report, to be inconsistent with the
GATT 1994, into conformity with its obligations under that Agreement.

Page CDA-106

Signed in the original in Geneva this 25th day of November 2008 by:

 Lilia Bautista
 Presiding Member

 _________________________ _________________________
 Jennifer Hillman Giorgio Sacerdoti
 Member Member

ANNEX I

22 September 2008

(08-4387)
 Original: English

Notification of an Appeal by the People's Republic of China

under Article 16.4 and Article 17 of the Understanding on Rules
and Procedures Governing the Settlement of Disputes (DSU),
and under Rule 20(1) of the Working Procedures for Appellate Review

 The following notification, dated 15 Septembe r 2008, from the Delegation of the People's
Republic of China, is being circulated to Members.

 Pursuant to Article 16.4 and Article 17 of the Understanding on Rules and Procedures
Governing the Settlement of Disputes ("DSU") and Rule 20 of the Working Procedures for Appellate
Review, China hereby notifies its decision to appeal to the Appellate Body certain issues of law
covered in the Panel Reports in China – Measures Affecting Im ports of Automobile Parts
(WT/DS339/R, WT/DS340/R, WT/DS342/R, and Add. 1 & 2), and certain legal interpretations
developed by the Panel in those Reports.
1

1. China seeks review by the Appellate Body of the following errors of law and legal
interpretation contained in Panel Report:
a. The Panel incorrectly interpreted and applied the term "ordinary customs
duties" in Article II:1(b), first sentence, of the General Agreement on Tariffs
and Trade 1994 ("GATT 1994"). The Panel's errors principally arise from its
failure to take into account the context provided by the Harmonized
Commodity Description and Coding System ("Harmonized System") as the
basis upon which national customs author ities identify the "product" that is
subject to the assessment of ordinary customs duties.
2

1 The Panel presented its findings as separate Reports contained in a single document, with separate
sections on the Panel's conclusions and recommendations for each complaining party. For ease of reference,
China hereafter refers to these Reports as the “Panel Report”.
2 See, e.g., Panel Report, paras. 7.166, 7.184 – 7.188, 7.192, 7.204 – 7.207, 7.209 – 7.210.

b. As a consequence of its erroneous inte rpretation and application of the term
"ordinary customs duty" in Article II:1(b) of the GATT 1994, the Panel erred
in its finding that the charge imposed under the measures challenged in this
dispute is an "internal tax or other internal charge" within the meaning of
Article III:2 of the GATT 1994, and in its finding that the measures affect
"the internal sale, offering for sale, purchase, transportation, distribution or
use" of imported products within th e meaning of Article III:4 of the
GATT 1994.
3
c. In its "alternative" findings set forth in Section VII.D of the Panel Report, the
Panel erred in its interpre tation and application of th e term "motor vehicles"
in China's Schedule of Concessions. The Panel's errors principally arise from
(i) its misinterpretation of General Interpretative Rule 2(a) of the Harmonized
System ("GIR 2(a)"), which provides context for the interpretation of the
term "motor vehicles" in China's Schedule of Concessions; (ii) its
misinterpretation of a prior decision of the Harmonized System Committee of
the World Customs Organization ("WCO" ) concerning the interpretation of
GIR 2(a); and (iii) its failure to take into account the specific guidance
provided by the WCO in response to questions from the Panel.
4
d. In its "alternative" findings set forth in Section VII.D of the Panel Report, the
Panel acted inconsistently with Article 3.2 and Article 11 of the DSU by
purporting to resolve a known question of interpretation within the
Harmonized System, a non-covered agreement, and by adopting an
interpretation of Harmonized System that is contrary to the interpretation
held by the WCO, the internati onal organization responsible for
administering and interpreting the Harmonized System.
5
e. The Panel erred in its interpretation that the challenged measures apply to
importers who import completely kno cked-down ("CKD") or semi-knocked
down ("SKD") kits of motor vehicles under China's regular customs
procedures, and who pay duties under China's regular procedures for the
payment of customs duties. On the basi s of this erroneous interpretation of
the challenged measures, the Panel erred in its conclusion that the challenged
measures violate paragraph 93 of the Report of the Working Party on the
Accession of China (WT/ACC/CHN/49) ("Working Party Report"), as
incorporated into the WTO Agreement through the Protocol on the Accession
of the People's Republic of China (WT/L/432).
6
f. The Panel acted inconsistently with Ar ticle 11 of the DSU by making certain
findings and conclusions concerning th e inconsistency of the challenged
measures with paragraph 93 of the Working Party Report , in the absence of

3 See, e.g., Panel Report, paras. 7.204 – 7.212, 7.256 – 7.258.
4 See, e.g., Panel Report, paras. 7.412 – 7.415, 7.435 – 7.436, 7.439 – 7.441, 7.445 – 7.446. China does
not raise specific claims of error in respect of the Pane l's findings, set forth in Section VII.D.3 of the Report,
concerning the “essential character” test under General Interpretative Rule 2(a) of the Harmonized System.
However, in the event that the Appellate Body affirms the Panel's finding that the charge imposed under the
challenged measures is an internal tax or charge subject to Article III of the GATT 1994, China requests that the
Appellate Body find all of the Panel's “alternative” findings in Section VII.D of the Report, and the related
conclusions and recommendations of the Panel, to be moot and of no legal effect.
5 See, e.g., Panel Report, paras. 7.412 – 7.415, 7.435 – 7.436, 7.439 – 7.441, 7.445 – 7.446.
6 See, e.g., Panel Report, paras. 7.75 – 7.78, 7.636, 7.648, 7.688, 7.737, 7.754, 7.757 – 7.758.

evidence or legal arguments presented by the complainants to support a
prima facie case that the challenged measures apply to importers who import
CKD or SKD kits of motor vehicles under China's regular customs
procedures, and who pay duties under China's regular procedures for the
payment of customs duties.
7
2. Conditionally, in the event that the Appellate B ody does not sustain either of China's claims
of error set forth in paragraphs 1(d) and 1(e) above, China seeks review by the Appellate Body of the
following additional errors of law and legal interpretation contained in Panel Report:
a. The Panel erred in finding that the challenged measures "de facto" create
"tariff lines" for CKD or SKD kits of motor vehicles with rates of duty in
excess of 10 per cent. The Panel's erro r of legal interpretation principally
relates to the inconsistency of this fi nding with the ordinary meaning of the
term "tariff lines", as identified by the Panel itself. China further considers
that, by purporting to modify the condition under which the commitment that
China made in paragraph 93 of the Working Party Report would arise, the
Panel acted inconsistently with Article 3.2 of the DSU.8
b. The Panel erred in finding that certain ten-digit statistical annotations for
CKD/SKD kits found in China's custom s nomenclature constitute "tariff
lines" within the meaning of paragraph 93 of the Working Party Report. The
Panel's errors of legal interpretation prin cipally relate to (i) the inconsistency
of this finding with the Panel's interp retation of the term "tariff lines" in
paragraph 93 of the Working Party Report ; and (ii) the Panel's failure to
interpret the term "tariff lines" in the context of the Working Party Report .9
China considers that the Panel's errors could also be considered a failure to
make an objective assessment of the fact s, in contravention of Article 11 of
the DSU.
c. The Panel acted inconsistently with Artic le 6.2, Article 7.1, and Article 11 of
the DSU by finding that China violated paragraph 93 of the Working Party
Report through the creation of ten-digit statistical annotations for CKD/SKD
kits in its customs nomenclature, when neither the statistical annotations nor
the tariff rates associated with these pu tative "tariff lines" were within the
terms of reference of these disputes.10