CHINA – MEASURES AFFECTING IMPORTS OF AUTOMOBILE PARTS
Document: Reports of the Panel
Date: 18 July 2008
Document codes: WT/DS339/R; WT/DS340/R; WT/DS342/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

Reports of the Panel

I. INTRODUCTION
A. C
OMPLAINTS OF THE EUROPEAN COMMUNITIES, THE UNITED STATES AND CANADA
1.1 On 30 March 2006, the European Communities requested consultations with the People's
Republic of China (hereinafter "China") pursuant to Article 4 of the DSU, Article XXII:1 of the
GATT 1994, Article 8 of the TRIMs Agreement and Articles 4 and 30 of the SCM Agreement
regarding China's imposition of measures that allegedl y adversely affect exports of automobile parts
from the European Communities to China.2
1.2 Consultations were held between the European Communities and China on 11 and
12 May 2006 in Geneva on these and other measures. They did not lead to a satisfactory resolution of
the matter.
1.3 On 30 March 2006, the United States requested consultations with China pursuant to
Articles 1 and 4 of the DSU, Article XXII of th e GATT 1994, Article 8 of the TRIMs Agreement (to
the extent that Article 8 incorporates Article XXII of the GATT 1994), and Articles 4 and 30 of the
SCM Agreement (to the extent that Article 30 incorporates Article XXII of the GATT 1994) with
respect to China's treatment of motor vehicle parts, components, and accessories imported from the
United States.3
1.4 Consultations were held between the United States and China on 11 and 12 May 2006 in
Geneva. However, they did not resolve the dispute.
1.5 On 13 April 2006, Canada requested consultations with China pursuant to Articles 1 and 4 of
the DSU, Article XXII of the GATT 1994, Article 7 of the Agreement on Rules of Origin (ARO),
Article 8 of the TRIMs Agreement, and Articles 4 and 30 of the SCM Agreement with respect to
China's treatment of automobile parts from Canada.
4
1.6 Consultations were held between Canada and China on 11 and 12 May 2006 with a view to
reaching a mutually satisfactory solution. Unfort unately, the consultations failed to resolve the
dispute.
1.7 On 15 September 2006, the European Communities, the United States and Canada each
requested the establishment of a panel. At its meeting on 28 September 2006, the Dispute Settlement
Body deferred the establishments of a panel.
B. ESTABLISHMENT AND COMPOSITION OF THE PANEL
1.8 At its meeting on 26 October 2006, the DSB established a single Panel pursuant to the
requests of the European Communities in documen t WT/DS339/8, the United States in document
WT/DS340/8 and Canada in document WT/DS342/8 in accordance with Article 9.1 of the DSU.5
1.9 At that meeting, the parties to the dispute agre ed that the Panel should have standard terms of
reference. The Panel's terms of reference are, therefore, as follows:

2 WT/DS339/1 of 3 April 2006.
3 WT/DS340/1 of 3 April 2006.
4 WT/DS342/1 of 19 April 2006.
5 WT/DSB/M/221, para. 54.

"To examine, in the light of the relevant provisions of the covered agreements cited
by the European Communities in document WT/DS339/8, the United States in
documents WT/DS340/8 and Canada in doc ument WT/DS342/8, the matter referred
to the DSB by the European Communities, the United States, and Canada in those
documents, and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."
1.10 On 19 January 2007, the European Communities, the United States and Canada requested the
Director-General to determine the composition of the Panel, pursuant to para graph 7 of Article 8 of
the DSU.
1.11 On 29 January 2007, the Director-General accordingly composed the Panel as follows:
6
 Chairman: Mr Julio Lacarte-Muró

 Members: Mr Ujal Singh Bhatia
 Mr Wilhelm Meier

1.12 Argentina, Australia, Brazil, Japan, Mexico, Ch inese Taipei and Thailand have reserved their
rights to participate in the Panel proceedings as third parties.
C. P
ANEL PROCEEDINGS
1.13 The Panel held the first substantive meeting with the parties on 22 and 24 May 2007. The
session with the third parties took place on 23 May 2007. The Panel's second substantive meeting
with the parties was held on 12 and 13 July 2007.
1.14 On 20 September 2007, the Panel issued the descriptive part of its Panel Report. The Panel
submitted its Interim Reports to the parties on 13 February 2008. The Panel submitted its Final
Reports to the parties on 20 March 2008.
II. FACTUAL ASPECTS
A. MEASURES AT ISSUE
2.1 This case concerns China's measures on imports of automobile parts. The European
Communities, the United States and Canada have id entified the following as the measures at issue in
this case:7
(a) Policy on Development of Automotive Indus try (Order of the National Development
and Reform Commission (No. 8)) ("Policy Order 8"), which entered into force on 21
May 2004;
(b) Administrative Rules on Importation of Automobile Parts Characterized as Complete
Vehicles (Decree of the People's Republic of China, No. 125) ("Decree 125"), which
entered into force on 1 April 2005; and

6 WT/DS339/9, WT/DS340/9 and WT/DS342/9 of 30 January 2007.
7 The titles and terms of China's measures used in these reports follow those provided in the texts of the
common translations of the measures as agreed by the parties, attached as Annex E to these reports. See
paras. 2.2-2.4 for procedural aspects of the common translations of China's measures.

(c) Rules on Verification of Imported Automobile Parts Characterized as Complete
Vehicles (Public Announcement of the Customs General Administration of the
People's Republic of China, No. 4 of 2005) ("Announcement 4"), which entered into
force on 1 April 2005.
B. T
RANSLATION OF CHINA'S MEASURES
2.2 Regarding China's measures at issue, the European Communities, the United States and
Canada (also "co-complainants" he reinafter) submitted their unofficial translations of the measures
into English as part of the joint exhibits attached to their first written submissions. 8 China also
submitted its own unofficial translations of Chapte r XI of Policy Order 8, of Decree 125 and of
Announcement 4 as part of the exhibits attached to its first written submission.9
2.3 At the second substantive meeting with the parti es, the Panel requested the parties to agree on
one common translated version of China's measure s. Accordingly, on 2 August 2007, the parties
submitted common translations of all provisions of China's measures except for Article 28 of
Decree 125.10
2.4 Upon the complainants' request that the Panel seek the translation of Article 28 of Decree 125
by an independent translator, the Panel sent a lette r to the UNOG requesting the translation by UNOG
Conference Services Section of the concerned provision. 11 On 23 August 2007, the Panel forwarded
the translation by the UNOG to the parties for their comments.
C. REQUEST FOR INFORMATION FROM THE WCO
2.5 On 7 June 2007, the Panel sent a letter to th e WCO requesting its assistance in issues relating
to the HS. 12 The parties were invited to provide their comments on the WCO's reply at the second
substantive meeting with the parties.
2.6 A second letter from the Panel was sent out to the WCO on 16 July 2007, requesting its
further assistance in the same matter. 13 The parties were given the opportunity to provide their
comments on the WCO's second reply.
D. UNITED STATES' REQUEST THAT THE PANEL'S FINDINGS BE PRESENTED AS SEPARATE REPORTS
CONTAINED IN A SINGLE DOCUMENT WITH SEPARATE SECTIONS ON THE PANEL 'S
CONCLUSIONS AND RECOMMENDATIONS FOR EACH COMPLAINING PARTY
2.7 At the second substantive meeting, the United States requested pursuant to paragraph 18 of
the Panel's Working Procedures that the Panel issu e its findings in the form of a single document

8 Exhibit JE-18 (Policy Order 8); Exhibit JE-27 (Decree 125); and Exhibit JE-28 (Announcement 4).
9 Exhibit CHI-2 (Chapter XI of Policy Order 8), Exhibit CHI-3 (Decree 125); and Exhibit CHI-4
(Announcement 4).
10 The texts of the common translations of China's m easures are attached as Annex E to these reports.
In respect of Article 28 of Decree 125, the translation by the UNOG has been inserted.
11 Both English and Chinese are official languages of the United Nations. The Panel's letter to the
UNOG dated 15 August 2007 and the UNOG's reply to the Panel are reproduced in Annex D to these reports.
12 The Panel's letter of 7 June 2007 to the WCO and the WCO's reply dated 20 June 2007 are
reproduced in Annex C to these reports.
13 The Panel's second letter to the WCO and the WCO's reply dated 30 July 2007 are reproduced in
Annex C to these reports.

containing three separate reports with comm on sections on the Panel's conclusions and
recommendations for each complaining party.
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
A. E
UROPEAN COMMUNITIES
3.1 The European Communities requests the Panel to find that China has acted inconsistently
with:14
(a) Article 2.1 and Article 2.2 of the TRIMs Agreement in conjunction with paragraph
1(a) of the Illustrative List annexed to the TRIMs Agreement by applying investment
measures related to trade in goods that are in consistent with the provisions of Article
III or Article XI of GATT 1994 and by applyi ng investment measures related to trade
in goods, compliance with which is necessar y to obtain an advantage, and which
require the purchase or use by an enterprise of products of domestic origin or from
any domestic source, whether specified in te rms of particular products, in terms of
volume or value of products, or in terms of a proportion of volume or value of its
local production. Further, China has acted inconsistently with Ar ticle 2.1 and 2.2 of
the TRIMs Agreement in conjunction with pa ragraph 2(a) of the Illustrative List
annexed to the TRIMs Agreement, by applyi ng investment measures related to trade
in goods that are inconsistent with the pr ovisions of Article III or Article XI of GATT
1994 and by applying investment measures rela ted to trade in goods, compliance with
which is necessary to obtain an advantage, and which restricts the importation by an
enterprise of products used in or related to its local production, generally or to an
amount related to the volume or value of local production that it exports;
(b) its obligations under the Marrakesh Agre ement Establishing the World Trade
Organization, as set out in the Protocol on the Accession of the People's Republic of
China to the WTO, in particular Part I pa ragraph 7.3 of the Protocol of Accession of
China, and in paragraph 203 of the Work ing Party Report on the Accession of China
in conjunction with Part I, paragraph 1.2 of the Protoc ol of Accession of China, and
paragraph 342 of the Working Party Report on the Accession of China by failing,
upon accession, to comply fully with the TRIMs Agreement, without recourse to
Article 5 thereof, and to eliminate local c ontent requirements and to not enforce the
terms of contracts containing such requirements;
(c) Article III:4 of the GATT 1994 by imposing specified thresholds for imported parts in
an assembled vehicle above which an additio nal charge applies on each imported part
included in the vehicle. In addition, as part of the measures, China also imposes
additional administrative requirements on importers and manufacturers that may not
meet the required threshold for domestic content. Thereby, China has failed to accord,
to products of the territory of the European Communities imported into the territory of
China, treatment no less favourable than that accorded to like products of national
origin in respect of all laws, regulations a nd requirements affecting their internal sale,
offering for sale, purchase, transportation, distribution or use;

14 European Communities, Request for the establis hment of a panel, WT/DS339/8 and European
Communities' first written submission, paras. 300-303.

(d) Article III:2 of the GATT 1994 by subjecting the products of the territory of other
Members imported into the territory of China, directly or indirectly, to internal taxes
or other internal charges of any kind in ex cess of those applied, di rectly or indirectly,
to like domestic products. China has also a pplied internal taxes or other internal
charges to imported or domestic products in a manner contrary to the principles set
forth in paragraph 1 of Article III;
(e) Article III:5 of the GATT 1994 by establishi ng and maintaining internal quantitative
regulations relating to the mixture, processing or use of products in specified amounts
or proportions which requires, directly or indirectly, that any specified amount or
proportion of any product which is the subject of the regulation must be supplied from
domestic sources. Moreover, China has app lied internal quantitative regulations in a
manner contrary to the principles set forth in paragraph 1 of Article III; and
(f) its obligations under the WTO Agreement, as set out in the Accession Protocol, in
particular Part I, paragraph 7.2 of th e Accession Protocol, by introducing measures
that are inconsistent with the provisions of the GATT 1994, in particular Article III.
3.2 In the alternative, the Europ ean Communities requests the Panel to find that China has acted
inconsistently with:
(g) Article II:1(a) and (b) of the GATT 1994 by failing to accord to the commerce of
another Member treatment no less favourable than that provided for in the appropriate
Part of the Schedule annexed to the GATT 1994. China has failed to exempt
products, which are the products of te rritories of another Member, on their
importation into China's territory, from ordina ry customs duties in excess of those set
forth and provided in China's Schedule. China has failed to exempt such products
from all other duties or charges of any kind imposed on or in connection with the
importation in excess of those imposed on the date of this Agreement or those directly
and mandatorily required to be imposed th ereafter by legislation in force in the
importing territory on that date; and
(h) Article 3.1(b) together with Article 3. 2 of the SCM Agreement by granting or
maintaining subsidies contingent, in law or in fact, whether solely or as one of several
other conditions, upon the use of domestic over imported goods.
3.3 Furthermore, the European Communities requ ests the Panel to recommend, pursuant to
Article 4.7 of the SCM Agreement, that China wit hdraw its prohibited subsid ies within 90 days after
the DSB adopts its recommendations and rulings in this dispute.
15
B. UNITED STATES
3.4 The United States requests the Panel to find that China has acted inconsistently with:16
(a) Article III:2 of the GATT 1994, by imposing a charge on imported auto parts but not
on domestic auto parts, and otherwise appl ying internal charg es so as to afford
protection to domestic production;

15 European Communities' first written submission, para. 303.
16 United States, request for the establishment of a panel, WT/DS340/8 and Un ited States' first written
submission, paras. 128-129.

(b) Article III:4 of the GATT 1994, by treating imported auto parts less favourably than
like domestic auto parts by imposing additi onal administrative burdens and additional
charges upon manufacturers that use imported parts in excess of specified thresholds,
thereby affecting the internal sale, o ffering for sale, purchase, transportation,
distribution, or use of imported auto parts;
(c) Article 2.1 and paragraphs 1(a) and 2(a) of Annex 1 of the TRIMs Agreement, by
requiring motor vehicle manufacturers in China to purchase or use domestic auto
parts in order to obtain advantages such as the avoidance of administrative burdens
and the payment of additional charges and by imposing restrictions which generally
restrict the importation by a manufacturer of auto parts used in or related to its local
production;
(d) Article III:5 of the GATT 1994, by requiring that a specified amount or proportion of
the auto parts assembled into a complete motor vehicle be supplied from domestic
sources, and otherwise applying internal quantitative regulations so as to afford
protection to domestic production;
(e) Part I, paragraph 7.2 of the Accession Pr otocol, by introducing measures that cannot
be justified under the provisions of the WTO Agreement, particularly with respect to
Articles III and XI of the GATT 1994;
(f) Part I, paragraph 7.3 of the Accession Pr otocol and paragraph 203 of the Working
Party Report, by failing to comply with the TRIMs Agreement and by maintaining
local content requirements made effective through the measures;
(g) Articles 3.1(b) and 3.2 of the SCM Agreement, by exempting domestic auto parts
from charges imposed by the measures, as we ll as exempting imported parts from the
charges if the motor vehicle manufacturer u ses domestic over imported parts in order
to meet the specified thresholds; and
3.5 to the extent that the measures impose a charge on or in connection with the importation of
auto parts,
(h) Article II:1(a) and (b) of the GATT 1994, by according imported auto parts less
favorable treatment than that provided for in its Schedule of Concessions and
Commitments annexed to the GATT 1994 and imposing charges in excess of those set
forth and provided therein;
(i) paragraph 93 of the Working Party Report, by specifically identifying CKD and SKD
kits for motor vehicles and assessing them the tariff for complete vehicles; and
(j) Article XI:1 of the GATT 1994, by constitu ting prohibitions or restrictions on the
importation of auto parts other than in the form of duties, taxes or other charges.
3.6 The United States further requests that the Panel issue the recommendations set out in
Article 4.7 of the SCM Agreement.
17

17 United States' first written submission, para. 128.

C. C
ANADA
3.7 Canada requests the Panel to find that China has acted inconsistently with:18
(a) Article III:2 of the GATT 1994 because the measures result in charges on imported
parts related to their use in manufacturing in China, while such charges are not
imposed on domestically-produced parts. Ch ina also imposes internal taxes or other
charges to imported products in a manner contrary to Article III:1;
(b) Article III:4 of the GATT 1994 because th e measures result in less-favourable
treatment for imported parts than for domes tic parts. The less-favourable treatment
includes the effect of additional charg es on, more burdensome regulation of, and
specified thresholds for the use of imported parts;
(c) Article III:5 (and also Article III:1) of the GATT 1994 because the measures
constitute an internal quantitative regulati on which requires specified proportions of
domestic content;
(d) Article 2.1 of the TRIMs Agreement, in conjunction with paragraph 1(a) of the
Agreement's Illustrative List, because the measures constitute measures requiring the
purchase or use by domestic enterprises of products of domestic origin;
(e) Part I, paragraph 7.2 of the Accession Prot ocol, through measures inconsistent with
the provisions of the GATT 1994, in particular Article III; and
(f) Part I, paragraphs 1.2 and 7.3 of the Pr otocol, and paragraphs 203 and 342 of the
Working Party Report, through measures that establish and maintain local content
requirements.
3.8 Alternatively, Canada requests the Panel to find that China has acted inconsistently with:
(g) Article II:1(a) and (b) of the GATT 1994, because the charges imposed on imported
parts, if they are properly characterized as tariffs, are higher than those set out in
China's Schedule of Concessions and Commitments, and therefore contrary to China's
commitments on joining the WTO.
3.9 Canada also requests that the Panel find that China's measures nullify or impair benefits, as
understood under GATT Article XXIII:1(b) of the GATT 1994, accruing to Canada in respect of
CKD and SKD kits for motor vehicles. In particular , China has nullified or impaired benefits related
to paragraphs 93 and 342 of the Working Party Report , in conjunction with Part I, paragraph 1.2 of
the Accession Protocol, through applying tariffs ex ceeding 10 per cent on imports of CKD and SKD
kits for motor vehicles.
3.10 Further, Canada requests that the Panel recommend China to bring its measures into
conformity with its WTO obligations, including by removing domestic-content thresholds and

18 Canada, request for the establishment of a panel, WT/DS342/8 and Canada's first written submission,
paras. 159-160.

eliminating the discriminatory internal charge app lied in excess of the comm itments set out in its
Schedule.
19
D. CHINA
3.11 China requests that:20
(a) the Panel reject the claims raised by th e European Communities, the United States,
and Canada; and
(b) in the event that the Panel finds that one or more aspects of the challenged measures
is inconsistent with Article II or Artic le III of the GATT, China has provisionally
demonstrated that any inconsistency be tween the challenged measures and China's
GATT obligations is subject to the general exception under Article XX(d).
IV. ARGUMENTS OF THE PARTIES
4.1 The arguments presented by the parties in thei r written submissions and oral statements are
reflected below. 21 The parties' responses to questions and comments on each other's responses are
reproduced in Annex C.
A. FIRST WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES
1. Introduction
4.2 China, as a WTO Member, has undertaken to comp ly with the obligations set out in the WTO
Agreement. It has undertaken to open its markets, in part through the reduction of tariffs on auto parts
and by eliminating its domestic -content requirements. Despite commitments made during WTO
accession, China introduced measures imposing disc riminatory internal charges on imported auto
parts if vehicles manufactured in China exceed certain maximum thresholds of imported auto parts.
The measures also include burdensome record-keepi ng, reporting and verification requirements that
apply only to imported auto parts. The measures make imported auto parts more expensive and less
competitive than like domestic auto parts and, thus, encourage investment in local part manufacture.
2. The measures
4.3 The measures are contained in three documents:
• Policy Order 8;
• Decree 125; and
• Announcement 4.

19 Canada's first written submission, para. 160.
20 China's first written submission, paras. 214-215.
21 The summaries of the parties' arguments are based on the execu tive summaries submitted by the
parties to the Panel. Footnotes in this section are those of the parties.

4.4 Policy Order 8 was issued on 21 May 2004 by China's National Development and Reform
Commission. Decree 125 and Announcement 4, both ma de effective on 1 April 2005, implement and
administer the Automotive Policy Order.
(a) Substantive criteria for determining the imposition of internal charges at the "Whole Vehicle"
rate
4.5 If a vehicle model is manufactured using imported parts that exceed specified quantity or
value thresholds, all imported parts are considered to be "automobile parts characterized as complete
vehicles" and assessed a charge based on the whole vehicle rate, typically 25 per cent of the value of
the imported parts. Imported parts will be automob ile parts characterized as complete vehicles if any
of the following three tests are met (Article 21 of Decree 125):
• As of 1 April 2005, when complete CKD or SKD kits are imported to assemble a
vehicle.
• As of 1 April 2005, if a sufficient number of Deemed Imported Assemblies are used
in manufacturing the vehicle. Imported parts will be characterized as complete
vehicles if the following combinations of assemblies are "Deemed Imported":
ο the two main assemblies (the vehicle body and engine);
ο either of the two main assemblies as well as three or more other assemblies; or
ο five or more assemblies, other than the main assemblies.
• As of 1 July 2006, when the aggregate price of imported parts reaches 60 per cent or
more of the price of all parts used in a ve hicle. However, this aspect of the measures
was suspended by Customs Joint Bulletin 38, dated 5 July 2006, until 1 July 2008.
4.6 An assembly will be "Deemed Imported" and th us count against the thresholds if the
aggregate price of imported parts is 60 per cent or more of the total price of the assembly, or if it uses
more than a specified number of "key parts", or if it is assembled from a complete set of imported
parts (Article 22 of Decree 125).
4.7 If the vehicle manufacturer produces a vehicle that uses imported parts that are automobile
parts characterized as complete vehicles, the manufacturer will be required to pay a charge on all
imported parts incorporated into the vehicle (i.e . not just the imported parts used in the Deemed
Imported Assembly). This charge generally equates to a 10 per cent tariff on the auto parts and an
additional 15 per cent internal charge. Charges under the measures are levied, not at the border, but at
a later date after the goods have been incorporat ed into manufactured vehicles, and, as described
above, depending on the use to which the parts are put into China.
(b) Administrative requirements imposed on vehi cle and auto parts manufacturers when any
imported parts are used
4.8 Any use of imported parts in vehicle manufacturing will subject a manufacturer to the
burdensome administrative regime under the measures. The administrative requirements do not apply
to vehicle manufacturers that use solely domestic pa rts. This may result in significant delays in
receiving and using imported auto parts and affect s a manufacturer's ability to source imported parts
not included in a registered vehicle plan.

4.9 The administrative burden requires vehicle ma nufacturers using imported parts, among other
things, to:
(a) perform a self-evaluation on proposed vehicle models to determine if the quantity or
value of imported parts to be used in manufacturing the vehicle renders those parts
characterized as complete vehicles;
(b) file documents with Customs showing th e quantity and value of imported parts
actually used in manufacturing a vehicle model;
(c) apply for and undergo verification by Cust oms of self-evaluation (if imported parts
are not characterized as complete vehicles) or of the first batch of vehicles produced
(if imported parts are characterized as complete vehicles);
(d) prior to import provide the district cust oms office in charge of the area where the
manufacturer is located with a general duty guarantee where a vehicle model uses
parts that are characterized as complete vehicles;
4.10 Another administrative burden on the face of the measures comes from deeming imported
parts to be "in bond". To date, that deeming is a fi ction. Imported auto parts have not been subject so
far to Chinese bonding requirements and are used freely at the manufacturing sites of vehicle and auto
parts manufacturers. But, if and when applied, this would add substantia l complication (such as
special record-keeping, restrictions on entry and ex it including special passes for personnel, Customs
approval for moving parts out of the bonded areas ...).
4.11 The measures also impose specific administrativ e requirements when modifications are made
to the vehicle model using imported parts rather than domestic parts. This goes from the obligation to
report to Customs when imported optional parts are fitted on the vehicle model to repeating all the
administrative hurdles to register and import parts. The effect is to limit the ability of vehicle
manufacturers to freely source imported auto parts.
4.12 The measures also require manufacturers to tr ack down the chain of supply to determine
whether individual assemblies and key parts are to be treated as imported for purposes of the
measures. As a result, parts manufacturers and supp liers that use imported parts have to maintain
records of the quantity, type and cost of importe d parts used in any parts incorporated into a
manufactured vehicle. The parts manufacturers and suppliers do this in order to meet their contractual
obligations to vehicle manufacturers and guarantee to them that they meet the domestic content
requirements of the measures.
(c) Impact of the measures
4.13 The overall impact of the measures is to discriminate against imported auto parts by
encouraging the use of domestic parts in auto part s and vehicle manufacturing in China. Due to the
price-sensitivity of the Chinese market, vehicle and au to part manufacturers would be "priced out" of
the Chinese marketplace if they passed on the additional 15 per cen t internal charge to their
customers, and they would suffer a loss if they ab sorbed the cost themselv es. The result is that
manufacturers are forced to meet the domestic content thresholds under the measures. This also
serves to devalue the investment of foreign vehicle and auto parts manufacturers that had invested in
China on the premise they would be able to import auto parts at the 10 per cent rate to which China
bound itself in its Schedule of Concessions.

3. Legal argument
(a) The violation of the TRIMs Agreement and th e Accession Protocol relating to the TRIMs
Agreement
4.14 The European Communities considers that the meas ures are inconsistent with Article 2 of the
TRIMs Agreement in conjunction with paragraphs 1(a) and 2(a) of the Illustrative List.
4.15 The measures are "investment measures" because they are aimed at encouraging the
development of a local manufacturing capability for finished motor vehicles and parts for motor
vehicles in China. Inherent to this objective is that these measures necessarily have a significant
impact on investment in these sectors. The whole investment strategy of both local and foreign
vehicle and part manufacturers is governed by the constraints laid down by these measures.
4.16 The measures are "trade-related" because they apply and relate onl y to imported parts.
Furthermore, local content requirements are necessarily "trade-related" because such requirements, by
definition, always favour the use of domestic produ cts over imported products, and therefore affect
trade.
4.17 The measures fall squarely within the scope of paragraphs 1(a) and 2(a) of the Illustrative List
to the TRIMs Agreement as (i) they require compli ance with local content thresholds to obtain a
number of advantages (lower charges and procedural advantages) and (ii) since such local content
requirements have, by definition, considerable eff ects on the importation of products used or related
to local production.
4.18 As China has specifically undertaken to comply with the TRIMs Agreement in its Accession
Protocol, the measures are consequently also inconsistent with its obligations under the WTO
Agreement, as set out in the Accession Protocol (Part I, Article 7.3 and paragraph 203 of the Working
Party Report in conjunction with Part I, Article 1.2 and paragraph 342 of the Working Party Report).
(b) The violation of Article III of the GATT 1994 and China's Accession Protocol relating to
Article III of the GATT 1994
4.19 The application of the measures is triggered by the actual manufacturing process taking place
in China. Therefore, the measures are "internal" measures. Indeed, it is only once the imported parts
have been assembled and processed into a complete ve hicle that the internal charge is imposed if the
domestic content is insufficient.
(i) Article III:4 of the GATT 1994
4.20 The measures are inconsistent with Article III:4 of the GATT 1994 because all the three
elements for a finding of inconsistency there under are fulfilled.
4.21 The imported and domestic automobile parts are "like products" because the measures
themselves treat domestic and imported parts as "like" . The only distinction is made on the basis of
the origin of the products.
4.22 The measures constitute "laws, regulations or requirements affecting the internal sale,
offering for sale, purchase, transportation, distribut ion, or use" of the imported like products since
they impose very strict procedural and administrativ e rules and a possibly 15 per cent internal charge

and thus adversely modify the conditions of co mpetition between the domestic and imported products
on the internal market.
4.23 Finally, the imported automobile parts a nd components are accorded "less favourable"
treatment than that accorded to like domestic products since car manufacturers are not free to
purchase imported parts in excess of a certain proportion without heavy consequences. These
consequences consist of an additi onal charge and the obligation to comply with additional procedural
requirements.
(ii) Article III:2 of the GATT 1994
4.24 The measures also violate Article III:2, first sentence. Imported and domestic auto parts are
"like products" because the measures only apply to imported, and not to domestic auto parts. Imported
auto parts identical in all respects to domestic auto parts, except for their origin, will – depending on
the amount of local content in the assembled vehicl e – be subject to internal charges. As these
internal charges do not apply to domestic auto part s, the charges applied to imported auto parts are
necessarily "in excess of" the charges applied to like domestic products.
4.25 In the alternative, the measu res are inconsistent with Ar ticle III:2, second sentence in
conjunction with the relevant Ad Article. As th e measures discriminate between auto parts on the
basis of their origin, imported and domestic au to parts are necessarily "directly competitive or
substitutable". They are "not similarly taxed" since the internal charges are only imposed on imported
auto parts. The protective application within the meaning of Article III:1 follows from the fact that
the differential in charges is significantly above the de minimis level, from the discriminative
structure of the measures and the stated goal of the measures to protect domestic production.
(iii) Article III:5 of the GATT 1994
4.26 Furthermore, the measures violate Article III:5, first sentence. First, they constitute an
"internal regulation" since they are authoritative rules from Chinese authorities on the administrative
and fiscal treatment of imported auto parts. Secondly, they are "quantitative … relating to the mixture,
processing or use of products in specified amounts or proportions" because they are concerned with
the amounts and proportions of domestic or impor ted auto parts in assembled vehicles and their
assemblies. The measures set out maximum amounts and proportions of imported auto parts which
must not be surpassed when using them in the assembl y of vehicles. Thirdly, the measures "requir[e],
directly or indirectly, that any specified amount or proportion of any product which is the subject of
the regulation must be supplie d from domestic sources". If vehicle manufacturers do not use
sufficient domestic parts to remain within the maxi mum thresholds of imported parts set out in the
measures, all imported parts assembled in that vehicle are categorized "automobile parts characterized
as complete vehicles" and charged according to the duty rate for complete vehicles.
4.27 In the alternative, the Europ ean Communities demonstrates that the measures are inconsistent
with Article III:5, second sentence because they are applied "so as to afford protection to domestic
production". The factors indicating protective app lication under Article III:2, second sentence above
also lead to the conclusion of inconsistency with Article III:5, second sentence.
(iv) Accession Protocol
4.28 As demonstrated above, the measures are inconsis tent with Article III, paragraphs 2, 4 and 5
of the GATT 1994 and China in its Accession Protocol has undertaken to implement inter alia
Article III without introducing, re-introducing or ap plying non-tariff measures that cannot be justified

under the WTO Agreement. By adopting the measur es China has introduced non-tariff measures that
cannot be justified under the provisions of the WTO Agreement. Clearly, China cannot implement
Article III of the GATT 1994 by introducing measures that are inconsistent with that provision
without violating the commitments it has taken under the terms of its accession to the WTO.
Consequently, China has acted inconsistently with its obligations under the WTO Agreement, as set
out in the Accession Protocol, (Part I, paragraph 7.2).
(c) Article II:1 (a) and (b) of the GATT 1994
4.29 Alternatively the European Communities consider s that the measures are inconsistent with
Article II:1 (a) and (b) of the GATT 1994. Under Article II China has committed to treat imports no
less favourably than provided for in its Schedule. In particular, ordinary customs duties must not be
applied in excess of the bound rates provided for in China's Schedule.
4.30 There are four different general categories of automotive products relevant for this case under
the nomenclature of the Chinese tariff schedule, namely
1. complete vehicles
 (headings 87.01 to 87.05 of which headings 87.02 to 87.04 are
most relevant in view of the scope of th e measures – bound rate of duty of typically
25 per cent;
2. intermediate products such as the body and the chassis with engine (a combination of
vehicle elements and/or parts fitted and/or equipped together without being complete
vehicles (headings 87.06, 87.07) – bound rate of duty of typically 10 per cent;
3. parts and accessories of Chapter 87 (heading 87.08) – bound rate of duty of typically
10 per cent or less;
4. parts and accessories of motor vehicles classi fied elsewhere than Chapter 87 (tyres,
engines, accumulators) – bound rate of duty of typically 10 per cent or less.
4.31 The Chinese tariff schedule provides for separate tariff lines for complete motor vehicles on
the one hand, and parts and accessories of such motor vehicles on the other hand. However, the
measures are not consistent with these tariff lines a nd the bound rates of duty provided for in China's
Schedule.
4.32 Under the measures, automotive parts are cla ssified (or "deemed") as complete or whole
vehicles and are imposed duties accordingly. Already on the basis of the ordinary meaning of the
terms "whole" or "complete" motor vehicle as compared with "part" of motor vehicles this is not only
a manifest error but a contradiction in terms.
4.33 Even when the ordinary meanings of "whole or complete motor vehicles" as compared with
"part(s)" of such vehicles are examined in their cont ext, there is nothing that supports the view that
parts or some parts for motor vehicles could be classifiable under the relevant headings covering
complete motor vehicles. In particular, the measu res classify parts of products as complete products
in a context where China's tariff schedules provide for a clear separation between the products and
parts thereof:
• "a chassis fitted with engines" are deem ed a "whole vehicle" and subject to the
generally 25 per cent duty for complete vehicles despite the specific heading (87.06)
and the final bound duty rate of typically 10 per cent;

• the imported vehicle body and the engine are deemed a "whole vehicle" and subject to
the generally 25 per cent duty for complete vehicles despite the specific headings
(87.07, 84.07 and 84.08) and the final boun d rate of duty of typically 10 per cent or
less;
• the tariff of complete vehicles is imposed on SKD and CKD kits instead of the lower
tariff for the relevant automotive parts and components;
• Imported parts in any random configuration are classified as complete or whole
vehicles as long as their aggregate price attains 60 per cent or more of the complete
vehicle price.
4.34 The measures also provide for considerable unpr edictability in terms of when a part of a
product is "deemed" to be the complete product and subject to a much higher tariff. Therefore the
measures fundamentally undermine the object a nd purpose of the WTO Agreement and the GATT
namely "the security and predictability of the reci procal and mutually advantageous arrangements
directed to the substantial reduction of tariffs and other barriers to trade".
(d) Article 3 of the SCM Agreement
4.35 Should the Panel find that the Chinese measures are border charges and, secondly, that China
is entitled to accord to the imports of auto parts th e treatment it provides for vehicles in its Schedule,
quod non, then the measures would in any case be a prohibited subsidy pursuant to Articles 3.1(b) and
3.2 of the SCM Agreement.
4.36 First, the measures constitute a financial c ontribution since "government revenue that is
otherwise due is foregone or not collected" (Artic le 1.1(a)(1)(ii) of the SCM Agreement). The
appropriate benchmark for comparis on is the revenue that China raises through duties on imports of
auto parts that are automobile parts characterized as complete vehicles. China has established a duty
rate which typically amounts to 25 per cent of the va lue of the parts. If the local content requirements
of the measures are not satisfied, this duty would be paid on imports of auto parts. If the imports, on
the other hand, satisfy the local content requireme nts, China has given up an entitlement to raise
revenue that it could "otherwise" have raised. By charging this second category of parts imports with
duties of typically only 10 per cent, China has i gnored the normative benchmark that it established for
the first category of parts imports and, thus, has forgone "government revenue that is otherwise due".
4.37 Secondly, the measures confer a benefit within the meaning of Article 1.1(b) of the SCM
Agreement. Vehicle manufacturers which satisfy the local content requirements of the measures are
financially "better off" than those which do not. They do not have to pay the higher import duties for
parts of typically 25 per cent and are instead only charged at 10 per cent.
4.38 Thirdly, the measures are contingent upon the use of domestic over imported goods within the
meaning of Article 3.1(b) of the SCM Agreement. Th e benefit of the lower duty rate of typically 10
per cent is only conferred if vehicle manufacturers satisfy the local content requirements of the
measures. Consequently, they are deemed to be specific pursuant to Article 2.3 of the SCM
Agreement.

B. F
IRST WRITTEN SUBMISSION OF THE UNITED STATES
1. Introduction
4.39 China has adopted measures that favor domestic auto parts over imported parts, so as to
afford protection to the domestic production of auto pa rts. These measures include an internal charge
of 25 per cent that China imposes on imported auto parts, with no comparable charge on domestic
auto parts. The measures provide that the charge only applies if domestically-produced autos include
an amount (in volume or value) of imported auto pa rts that exceeds specified thresholds. And the
measures include extensive record-keeping, reporting, and verification requirements that apply if and
only if domestic automobile manufacturers make use of imported auto parts.
4.40 These measures amount to clear and straightforw ard inconsistencies with China's national
treatment obligations under Article III of th e GATT 1994". In particular, these measures
impermissibly result in internal charges on imported parts in excess of those applied on domestic parts
(Article III:2); the measures accord treatment less favorable to imported parts with respect to
requirements affecting internal sale, purchase, dist ribution, and use (Article III:4); and the measures
directly or indirectly require that specified amounts or proportions of auto parts used in vehicle
manufacturing must be supplied from domestic sources (Article III:5).
4.41 Before proceeding with a de tailed factual and legal analysis, the United States would
emphasize the following two points. First, the me asures are subject to Article III even though China
has labelled them as "customs duties". China's meas ures are not applied at the border; rather, they are
internal measures that apply charges and procedural requirements based on the specific details of the
auto manufacturing processes that occur within China. It is not the label that a Member applies to its
measure that determines whether an obligation under a covered agreement applies; rather it is the
substance of the measure that matters. Othe rwise the GATT 1994's core national treatment
obligations under Article III would be eviscerated. Second, although the detailed operation of China's
measures on auto parts contain considerable comple xity, the analysis of those measures under Article
III is neither ambiguous nor complex. Rather, despit e the complexity of China's auto parts scheme,
the results of an analysis under the text of Artic le III, as clarified by prior GATT panel and WTO
panel and Appellate Body reports, is clear – namely , China's measures are inconsistent with China's
obligations under Article III.
2. Argument
(a) The disciplines of Article III of the GATT 1994 apply to the measures
4.42 Article III of the GATT 1994 ensures that "inter nal taxes and other internal charges ...
affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products"
are not applied in a manner so as to afford protec tion to domestic production. China's Policy Order 8,
Decree 125, and Announcement 4 together establish in ternal charges and burdensome procedures that
apply only to foreign goods and that indeed afford protection to domestic production.
4.43 Although China's measures label the 25 per cent charge as an "import duty," the name
assigned to the charge is not determinative in decidi ng whether the charge is an internal one – thus
subject to the disciplines of Article III – or an import duty subject to tariff bindings under Article II of
the GATT 1994. Rather, it is necessary to examine wh ether the charge is based on the internal use
and/or sale of the product, or if the charge is in stead a border measure. In this dispute, China's
measures apply after importation of the product, and cannot be considered border measures.

4.44 The distinction between internal charges a nd customs duties had been addressed in prior
panels under the GATT 1947. In one of the first GATT 1947 reports, Belgian Family Allowances, the
panel examined whether a particular charge should be treated as an "internal charge" within the scope
of Article III:2 of the GATT 1994 or an "import ch arge" within the scope of Article II. Belgium
imposed the charge at issue on imported goods purch ased by public bodies when the goods originated
in a country whose system of family allowances failed to meet specific requirements. The panel
concluded that because the charge (a) "was collected only on products purchased by public bodies for
their own use and not on imports as such" and (b) "was charged, not at the time of importation, but
when the purchase price was paid by the public bo dy," the charge constituted an internal charge. In
other words, because the charge depended on the in ternal use of the pro duct, it could not be
considered a border charge.
4.45 The issue was again addressed in EEC – Parts and Components . In that dispute, the
GATT 1947 Panel examined whether charges imposed to allegedly prevent the circumvention of anti-
dumping duties should be analysed as customs du ties or internal charges. In making its
determination, the Panel focused on "whether the char ge is due on importation or at the time or point
of importation or whether it is collected internally." The Panel noted that the duties were levied on
finished products assembled or produced in the EEC and were not imposed "conditional upon the
importation of a product or at the time or point of importation." Accordingly, the Panel concluded
that the EEC charges qualified as "internal charges" under Article III.
4.46 As in Belgian Family Allowances and EEC – Parts and Components , China's measures at
issue in this dispute are internal ones, not border measures. China's charges are not imposed at the
time of, or as a condition to, the entry of the parts into China. Indeed, the measures at issue do not
impose charges on all imported parts, but only on pa rts used by manufacturers in the assembly of new
vehicles that exceed the thresholds established by Decree 125.
4.47 Instead of being border measures, China's meas ures at issue in this dispute are internal
measures, the application of which turns on the details of the manufactur ing operations conducted
within China. All of the following factors lead to this conclusion:
− The determination of whether imported parts constitute "features of a complete
automobile" is made at the time the parts ar e used in the assembly process rather than
at the time the parts enter the territory to which China's Schedule relates.
− Under the measures, all of the parts of a completed vehicle are combined for the
determination of whether the 25 per cent ch arge applies, regardless of where those
parts originate, when or where they entere d the territory of China, or who imported
them. Even if a part has been imported by a supplier, and even if the supplier has
already paid customs fees and duties, the part is nonetheless grouped together with
parts imported by the manufacturer itself when making the determination.
− The 25 per cent charge is imposed not on the importer, but on the manufacturer –
whether or not the manufacturer is actually the importer of the part in question.
−
 Official verification is performed by the Chinese authorities at the manufacturer's site,
not at the border. And, this determina tion is not made by China Customs through
normal customs procedures, but by a special administrative body pursuant to
measures developed by agencies with industrial policy functions.

4.48 In short, the measures are not focused on importation, but rather on the internal use of
imported parts in the manufacture of new automobiles. China's measures are th us internal ones, and
are subject to the disciplines of Article III of the GATT 1994.
(b) The charges are inconsistent with Article III:2, first sentence
4.49 The charges imposed under China's measures ar e inconsistent with the first sentence of
Article III:2 of the GATT 1994. As confirmed by the Appellate Body in Japan – Alcoholic
Beverages, a determination of an internal charge's inc onsistency with Article III:2, first sentence is a
two step process: First, the imported and domestic products at issue must be "like." Second, the
internal charge must be applied to imported produc ts "in excess of" those applied to the like domestic
products. "If the imported and domestic products are 'like products', and if the charges applied to the
imported products are 'in excess of' those applied to the like domestic products, the measure is
inconsistent with Article III:2, first sentence."
(i) Imported auto parts and domestic auto parts are like products
4.50 Where the number or value of the imported part s used in the assembly of a vehicle in China
exceeds the specified thresholds, the measures im pose an internal charge of 25 per cent on all
imported parts in the vehicle. This internal charge applies only to parts of foreign origin – domestic
parts are exempt.
4.51 Where a WTO Member draws an origin-based distin ction in respect of internal charges, a
case-by-case determination of "likeness" between th e foreign and domestic product is unnecessary.
As such, in this dispute, the requirement that the "like products" be established is readily satisfied.
(ii) Imported auto parts are taxed in excess of domestic auto parts
4.52 When the number or value of the imported part s used in the assembly of a vehicle in China
exceed the thresholds established in the measures, the measures im pose an internal charge on all
imported parts in the vehicle. Domestic parts are exempt. This differential taxation of imported and
domestic auto parts breaches Article III:2. Indeed, any taxation of imported products in excess of like
domestic products, regardless of amount, is suffici ent to render a charge inconsistent with
Article III:2, first sentence.
(c) The charges and reporting requirements applie d to the use of imported auto parts are
inconsistent with Article III:4 of the GATT 1994
4.53 In examining a claim under Article III:4, the Appellate Body has identified three distinct
elements required to establish a breach: (1) the im ported and domestic products are "like products;"
(2) the measure is a law, regulation, or requireme nt affecting the internal sale, offering for sale,
purchase, transportation, distribution, or use of the imported and domestic lik e products; and (3) the
imported product is accorded less favorable treatment than the domestic like product.
(i) Imported auto parts and domestic auto parts are like products
4.54
 As with the Article III:2 analysis above, th e determination of "like products" for purposes of
Article III:4 is established where the measures at issue make distinctions between products based
solely on origin. As noted above, China's measures at issue apply the internal charge, and the
burdensome administrative requirements on car manufacturers, solely on an origin-based distinction.
As such, foreign and domestic auto parts satisfy the "like products" requirement of Article III:4.

(ii) The charges and reporting requirements are laws or regulations affecting the internal sale,
offering for sale, purchase, distribution and use of imported auto parts
4.55 The second element of an Article III:4 analysis is that the measures "a ffect[] [the] internal
sale, offering for sale, purchase, distribution ... or use" of the like products. The Appellate Body has
noted that the term "affecting" in Article III:4 should be interpreted as ha ving a "broad scope of
application." In addition, the panels in EC – Bananas III and India – Autos both concluded that the
word "affecting" covered more than measures which directly regulate or govern the sale of domestic
and imported like products. In fact, the term "a ffecting" was broad enough to cover measures that
might "adversely modify the conditions of comp etition between domestic a nd imported products."
Thus, in India – Autos , the Panel found that a measure "affects" the internal sale, offering for sale,
purchase and use of an imported product, because it provided an incentive to purchase local products.
In Canada – Wheat Exports, the Panel found that a Canadian measure "affects" internal distribution of
like products, because it created a disincentive to accept and distribute imported grain.
4.56 In this instance, China's Policy Order 8, D ecree 125 and Announcement 4 work together to
create an incentive to purchase domestic auto part s. By establishing a system that (1) levies an
internal charge equal to 25 per cent of the total value of imported parts used in the automobile, and (2)
imposes burdensome administrative recording requirements when a certain threshold of imported
parts are used in the manufacturing of vehicles, Ch ina has established a disi ncentive to purchase, use
and distribute imported auto parts. Thus the measure s at issue "affect" the international sale, offering
for sale, purchase, distribution, and use of imported auto parts.
(iii) By establishing thresholds on the use of imported auto parts that trigger additional internal
charges and burdensome procedural requiremen ts, the measures accord less favorable
treatment to imported auto parts than to domestic auto parts
4.57 The last element for determining a breach of Article III:4 is to asses s whether the measures
accord less favorable treatment to imported products relative to the domestic product. Previous panels
have found that measures meet this element of th e analysis if they impose requirements on foreign
products that are not imposed on domestic products; create an incentive to purchase and use domestic
products or a disincentive to utilize imported products; or "adversely affect . . . the equality of
competitive opportunities of imported products in rela tion to like domestic products." Significantly,
the Appellate Body in US – FSC (Article 21.5) noted that a measure could still be inconsistent with
Article III:4 even if unfavorable treatment did not arise in every instance.
4.58 Here, the measures treat foreign parts less favourably than domestic parts by creating
different competitive conditions for the parts so that protection is afforded to the domestic products.
This is done in two ways.
4.59 With respect to the first, i.e ., through the application of the additional charge, consider the
following: When a manufacturer assembles a vehicl e, the manufacturer can choose to include either
an imported part or, if one is available, a domes tic part. As explained above, the measures establish
thresholds (i.e., what constitutes "features of a co mplete automobile") for the number of imported
parts that can be included in a fini shed vehicle; if the threshold is exceeded, then a charge equal to 25
per cent of the value of each imported part (instead of the import duty on the imported part) is
imposed on each and every imported part included in the vehicle. The measures accordingly alter the
conditions of competition by creating a significant incentive to include domestic parts over imported
parts.

4.60 The second method by which the measures treat foreign parts less favourably than domestic
parts is through the imposition of burdensome administrative reporting requirements on any
manufacturer who chooses to use imported auto part s in building an automo bile in China. These
requirements also create different competitive conditi ons for the imported parts so that protection is
afforded to the domestic products.
4.61 Decree 125 requires manufacturers to perform a "s elf-evaluation" to determine the number of
imported parts used in the assembly of a particular vehicle model. To perform this self-evaluation, a
manufacturer must catalogue all the parts of each model it manufactures, determine whether, under
the measures, the parts are foreign or domestic, and calculate the thresholds for each assembly system
and the overall price percentage of imported parts in the model. Should this self-evaluation result in a
determination that the imported parts used constitute "features of a complete automobile," as defined
in the Decree, the manufacturer must register the vehicle model with CGA. None of this is required if
the manufacturer uses only domestic auto parts.
4.62 To register the vehicle model with CGA, the manufacturer must include the following
information:
− a description of the manufacturer;
− the annual production plan for the vehicle model;
− a list of all domestic and foreign suppliers; and
− a detailed list of all imported and domestic parts used in the model being filed.
4.63 This information must then be constantly update d to take into account changes in the source
and relative price of various parts of every auto mobile model, as well as changes to individual
automobiles (e.g., if optional imported parts are fitted on an individual vehicle).
4.64 Further, if imported parts are used, China's sp ecial payment system for the internal charges
requires that the imported parts – if entering China through a port not administered by the district
customs office where the manufacturer is located – be "transferred" to the district customs office,
where the manufacturer is required to maintain a general financial guarantee in an amount no lower
than the average total amount of total duties payabl e by the enterprise for its average monthly imports
of parts and components. The manufacturer is requi red to make payments on a monthly basis, at
which time the following information is required: verification report, the previous month's total
production figures, and a list of parts and components used by the manufacturer in the prior month to
assemble completed vehicles.
4.65 Should the manufacturer use imported parts that he himself did not import, the manufacturer
is required to maintain records regarding the actual importer of record, and any evidence of duties and
value-added taxes paid.
4.66 None of these burdensome reporting requirements are necessary for manufacturers who
choose to use only domestic auto parts to manufactu re automobiles in China. Such administrative
requirements thus create different competitive conditi ons for the imported parts so that protection is
afforded to the domestic products. In sum, th e imposition of internal charges and burdensome
procedural requirements on manufacturers who use im ported rather than domestic parts results in a
breach of Article III:4 of the GATT 1994.

(d) China's measures are inconsistent with Article 2.1 and Paragraph 1(a) of Annex 1 of the
TRIMs Agreement.
4.67 China's measures are inconsistent with Article 2 of the TRIMs Agreement. First, these
measures fall within the types of measures covered in the Illustrative List in the Annex to the TRIMs
Agreement. The Chinese measures at issue provide an advantage, i.e., an exemption from paying the
internal charge and related burdensome administ rative requirements, for auto manufacturers that
decide to purchase or use domestic auto parts. Th us, the measures require "the purchase or use by an
enterprise of products of domestic origin or from any domestic source" so as "to obtain an advantage";
they fall squarely within the Illustrative List of measures covered by the TRIMs Agreement.
4.68 Further, under Article 2 of the TRIMs Agreement, a TRIM that is inconsistent with Article III
of the GATT 1994 is also inconsistent with the TR IMs Agreement. As the measures at issue are
already determined to be "trade-related investment measures" in that they fall squarely within
Illustrative List 1(a) of the TRIMs Agreement, and th ey are also inconsistent with China's obligations
under Article III:4 (as discussed above), these measures are thus inconsistent with Article 2 of the
TRIMs Agreement as well.
(e) China's measures are inconsistent with Article III:5 of the GATT 1994
4.69 China's measures are also inconsistent with Article III:5 of the GATT 1994. China's
measures at issue impose additional internal charge s and burdensome administrative requirements if,
among other things, the quantity of the imported parts and components used by a car manufacturer (1)
exceed specified limits on the number of imported assembly systems, or (2) results in the total price of
the imported parts and components being 60 per cent or more of the total price of all parts and
components in the finished vehicle. Given that these provisions are expressed in quantitative terms,
they are by their nature "quantitative regulations." Moreover, given that their terms specify the
quantitative amounts of imported parts that would result in the internal charges and reporting
requirements being applicable, the measures are al so quantitative regulations that relate "to the
mixture, processing or use of products in specifi ed amounts or proportions," and require that a
specified amount or proportion of an automobile be supplied from domestic sources or else a penalty
in the form of an additional char ge is assessed. As such, the Chin ese measures are inconsistent with
Article III:5 of the GATT 1994.
(f) China's measures are inconsistent with Part I, Article 7.2 of the Accession Protocol
4.70 Part I, Article 7.2 of China's Accession Protocol states in relevant part: "In implementing the
provisions of Articles III and XI of the GATT 1994 and the Agreement on Agriculture, China shall
eliminate and shall not introduce, re-introduce or apply non-tariff measures that cannot be justified
under the provisions of the WTO Agreement." Therefore, by introducing measures that are
inconsistent with Article III:2, Article III:4, a nd Article III:5 of the GATT 1994 and that thus cannot
be justified under the pr ovisions of the WTO Agreement, Chin a's measures at issue consequentially
are in breach of Part I, Article 7.2 of China's Accession Protocol.
(g) China's measures are inconsistent with Part I, Article 7.3 of the Accession Protocol and
paragraph 203 of the Working Party Report
4.71 Part I, Article 7.3 of China's Accession Protoc ol states in relevant pa rt: "China shall, upon
accession, comply with the TRIMs Agreement, without recourse to the provisions of Article 5 of the
TRIMs Agreement. China shall eliminate and cease to enforce ... local content ... requirements made

effective through laws, regulations or other measu res." Paragraph 203 of the Working Party Report
reiterates this obligation.
4.72 In light of the earlier discussion that China's m easures are inconsistent with obligations under
Article 2 of the TRIMs Agreement, and in light of the fact that the measures effectively maintain the
local content requirement initially set forth in China's Automotive Industry Industrial Policy of
3 July 1994, China's measures at issue consequentially are inconsistent with China's obligations under
Part I, Article 7.3 of China's Accession Protocol and paragraph 203 of the Working Party Report.
(h) In the alternative, China's measures are inc onsistent with Article II of the GATT 1994 and
paragraph 93 of the Working Party Report
4.73 As the United States has explained above, China' s measures at issue are internal charges and
other internal requirements, not border measures. Accordingly, the United States submits that these
measures are to be analysed under (and are inconsiste nt with) the obligations set out in Article III of
the GATT 1994.
4.74 Nonetheless, even if the measures were consid ered border measures, China's measures would
be inconsistent with Article II of the GATT 1994 and paragraph 93 of the Working Party Report.
4.75 First
, if China's measures are considered to resu lt in the imposition of customs duties subject
to Article II obligations, the measures would result in the imposition of customs duties in an amount
greater than allowed under Article II. Under Ch ina's Schedule of Concessions and Commitments,
most motor vehicles are classified under items 87.02 through 87.04, while auto parts and components
are classified under several different items includi ng 84.07-84.09 (engines and engine parts), 87.07
(bodies for motor vehicles), and 87.08 (parts and accessories of motor vehicles). China's final bound
tariff rate for complete vehicles is 25 per cent, wh ile its bound rate for auto parts and components is
10 per cent (and in some cases, even lower). Acco rdingly, should the 25 per cent charges under the
measures be considered customs duties on auto pa rts, those charges would violate China's tariff
binding (of 10 per cent or lower) on such parts.
4.76 Second, should China's measures be considered border measures rather than internal measures
subject to Article III, the 25 per cent charge on im ported CKD and SKD kits would be inconsistent
with China's commitments in paragraph 93 of the Wo rking Party Report. Part I, Article 1.2 of the
Accession Protocol provides that the Protocol, wh ich includes the commitments referred to in
paragraph 342 of the Working Party Report, shall be an integral part of the WTO Agreement.
Paragraph 342 of the Working Party Report includes China's commitment reproduced in paragraph 93
of the Working Party Report. As a result, China's commitment in paragraph 93 of the Working Party
Report is an integral part of the WTO Agreement.
4.77 Paragraph 93 of the Working Party Report provides:
Certain members of the Working Party expressed particular concerns about tariff
treatment in the auto sector . In response to questions about the tariff treatment for
kits for motor vehicles, the representative of China confirmed that China had no tariff
lines for completely knocked-down kits for motor vehicles or semi-knocked down
kits for motor vehicles. If China created su ch tariff lines, the tariff rates would be no
more than 10 per cent. The Working Party took note of this commitment.

4.78 To the extent that the charges imposed by th e measures are considered to be tariffs, the
measures would in effect specify a tariff line for CKD and SKD kits that imposes a 25 per cent tariff,
rather than a 10 per cent tariff as required under the Working Party Report.
(i) China's measures constitute an import substitution subsidy in breach of Articles 3.1(b) and 3.2
of the SCM Agreement
4.79 China's measures impose additional duties and other requirements on imported auto parts,
thereby resulting in a breach of China's obligations under Article III of the GATT 1994. Another way
to view these charges is that they exempt manuf acturers from the charges otherwise due if they use
domestic auto parts rather than imported auto parts. From this perspective, the measures constitute an
import substitution subsidy in breach of Articles 3.1(b) and 3.2 of the SCM Agreement.
4.80 The reduction available for using domestic parts is a subsidy pursuant to Article 1.1 of the
SCM Agreement. First, pursuant to the chapeau of Article 1.1(a)(1), the reduction is a "financial
contribution" by the Chinese Government, where " government revenue that is otherwise due is
foregone or not collected." Under China's meas ures, on domestic parts the government foregoes the
difference between the across-the-board 25 per cen t charge on auto parts and the customs duty
(10 per cent or less) applied to imported parts. Likewise, on certain imported parts, the government
foregoes the difference between the across-the- board 25 per cent charge and the customs duty
(10 per cent or less) when the thresholds for using domestic parts in a finished vehicle are satisfied.
Second, this financial contribution results in a "benef it ... conferred," pursuant to Article 1.1(b) of the
SCM Agreement, because the auto manufacturer is ab le to retain the amount of money equivalent to
the amount of revenue foregone by the government.
4.81 Article 2.3 of the SCM Agreement further specifies that a subsidy shall be deemed "specific"
if it falls within the provisions of Article 3 of the SCM Agreement relating to "prohibited" subsidies.
As shown below, China's measures are "prohibited" and therefore are deemed "specific" within the
meaning of Article 2.3 of the SCM Agreement.
4.82 China's measures are "prohibited" within the meaning of Article 3.1(b) because they are
"contingent, whether solely or as one of several other conditions, upon the use of domestic over
imported goods." China's measures are contingent upon the use of domestic over imported goods, in
that the subsidy provided by these measures is only available to an auto manufacturer when (1) the
quantity of the domestic parts and components used by the auto manufacturer exceeds specified
thresholds on the number of domestic assembly syst ems or (2) the quantity of the domestic parts and
components used by the auto manuf acturer results in the total pr ice of the domestic parts and
components being more than 40 per cent of the tota l price of all parts and components in a finished
vehicle. As such, the measures violate Articles 3. 1(b) and 3.2 of the SCM Agreement, which provide
that a Member shall neither grant nor maintain subsidies contingent upon the use of domestic over
imported goods.
4.83 Since China's measures amount to a prohibited subsidy, the provisions of Article 4.7 of the
SCM Agreement apply. Those provisions provide that the Panel shall recommend that the subsidizing
Member withdraw the subsidy without delay, and th at the Panel shall specify in its recommendation
the time-period within which the measure must be withdrawn.

C. F
IRST WRITTEN SUBMISSION OF CANADA
1. Introduction and background
4.84 In 2005 China introduced measures inconsistent with its WTO obligations and its Accession
Protocol by imposing discriminatory internal ch arges and administrative burdens on imported auto
parts. The internal charges under the measures apply when imported auto parts are used in
manufacturing a vehicle and the quantities or valu es of imported parts exceed specified thresholds.
The administrative burdens apply when any imported auto parts are used in vehicle manufacturing.
Neither the internal charges nor the administrative burdens apply to domestic parts.
4.85 Before its accession, China imposed differentia l charges on imported auto parts based on the
domestic content of the vehicles in which they we re incorporated. As it committed to do in its
Accession Protocol, China removed those differentia l charges and reduced its bound tariff rate on
most auto parts to 10 per cent, and on most vehicl es to 25 per cent, by 1 July 2006. China also
specifically agreed that the tariff imposed on kits im ported to form vehicles (described as either CKD
or SKD kits) would be no more than 10 per cent.
2. The measures
4.86 The measures are contained in three documents:
• Policy Order 8;
• Decree 125; and
• Announcement 4.
4.87 Decree 125 and Announcement 4, both made e ffective on 1 April 2005, are legally binding
instruments designed to implement and administer Policy Order 8.
(a) Substantive criteria for determining the imposition of internal charges at the "whole vehicle"
rate
4.88 If a vehicle model is manufactured using imported parts that exceed specified quantity or
value thresholds, all imported parts are considered to be "automobile parts characterized as complete
vehicles" and assessed a charge of 25 per cent of th e value of the imported parts. This 25 per cent
charge equates to a 10 per cent tariff on the auto pa rts and an additional 15 per cent internal charge.
Charges under the measures are levied, not at the border, but after the goods have entered into free
circulation in the Chinese market and have been in corporated into manufactured vehicles. Imported
parts will be automobile parts characterized as complete vehicles if any of the following three tests are
met:
• As of 1 April 2005, when complete CKD or SKD kits are imported to assemble a
vehicle.
• As of 1 April, 2005, if a sufficient numbe r of assemblies characterized as imported
assemblies are used in manufacturing the vehi cle. Imported parts will be automobile
parts characterized as complete vehicles if the following combinations of assemblies
are characterized as imported:

− the two main assemblies (the vehicle body and engine);
− either of the two main assemblies as well as three or more other assemblies; or
− five or more assemblies, other than the main assemblies.
• As of 1 July 2006, when the aggregate price of imported parts reaches 60 per cent or
more of the price of all parts used in a ve hicle. However, this aspect of the measures
was suspended by Customs Joint Bulletin 38, dated 5 July 2006, until 1 July 2008.
4.89 An assembly will be characterized as imported assembly and thus count against the thresholds
if the value of imported parts comprises 60 per cent or more of the price of all parts used in the
assembly, or if it uses more than a specified number of "key parts".
4.90 If the vehicle manufacturer produces a vehicle that uses imported parts that are automobile
parts characterized as complete vehicles, the manufacturer will be required to pay a charge on all
imported parts incorporated into the vehicle (i.e., no t just the imported parts used in the automobile
parts characterized as imported assembly).
(b) Administrative requirements imposed on vehicle and auto parts manufacturers when any
imported parts are used
4.91 Any use of imported parts in vehicle manufacturing will subject a manufacturer to the
burdensome administrative regime under the measur es. The administrative requirements do not apply
to vehicle manufacturers that use solely domestic parts. This may result in significant delays in
receiving and using imported auto parts and affect s a manufacturer's ability to source imported parts
not included in a registered vehicle plan.
4.92 The administrative burden requires every vehicl e manufacturer using imported parts, among
other things, to:
(a) perform a self-evaluation on proposed vehicle models to determine if the quantity or
value of imported parts to be used in manufacturing the vehicle renders those parts
characterized as complete vehicles;
(b) provide the district customs office with a general duty guarantee where a vehicle
model uses parts that are characterized as complete vehicles;
(c) file documents with the customs office showing the quantity and value of imported
parts actually used in manufacturing a vehicle model. That filing must then be re-
evaluated by the Chinese government's Veri fication Centre, and a verification report
prepared; and
(d) pay internal charges based on the verification report.
4.93 Another administrative burden on the face of the measures is the deeming of imported parts to
be "in bond". However, that de eming is a fiction. Imported auto parts are not subject to Chinese
bonding requirements and are used freely at the manufacturing sites of vehicle and auto parts
manufacturers.

4.94 The administrative requirements make it difficu lt to source imported parts not included in a
vehicle model registered with CGA. Such changes may require repeating all the administrative
hurdles to register and import parts. The effect is to limit the ability of vehicle manufacturers to freely
source imported auto parts.
4.95 The measures also require manufacturers to tr ack down the chain of supply to determine
whether individual assemblies and key parts are to be treated as imported for purposes of the
measures. As a result, parts manufacturers and supp liers that use imported parts have to maintain
records of the quantity, type and cost of importe d parts used in any parts incorporated into a
manufactured vehicle. The parts manufacturers and suppliers do this in order to meet their contractual
obligations to vehicle manufacturers and guarantee to them that they meet the domestic content
requirements of the measures.
(c) Impact of the measures
4.96 The overall impact of the measures is to discriminate against imported auto parts by
encouraging the use of domestic parts in auto part s and vehicle manufacturing in China. Due to the
price-sensitivity of the Chinese market, vehicle and au to part manufacturers would be "priced out" of
the Chinese marketplace if they passed on the additional 15 per cen t internal charge to their
customers, and they would suffer a loss if they ab sorbed the cost themselv es. The result is that
manufacturers are forced to meet the domestic content thresholds under the measures. This also
serves to devalue the investment of foreign vehicle and auto parts manufacturers that had invested in
China on the premise they would be able to import auto parts at the 10 per cent rate to which China
bound itself in its Schedule of Concessions.
3. Legal argument
4.97 The measures are inconsistent with China's WTO obligations, including the terms of its
Accession Protocol. Specifically, the measures result in the following violations:
• Articles III:2, III:4 and III:5 of the GATT 1994, and Articles 1.2 and 7.2 of the
Accession Protocol;
• Article 2 of the TRIMs Agreement and Articles 1.2 and 7.3 of the Accession Protocol;
• Article II of the GATT 1994, and thereby Article 1.2 of the Accession Protocol; and
• Article XXIII:1(b) of the GATT 1994, in r espect of, but not limited to, China's
commitments under Article 1.2 of the Accessi on Protocol and paragr aphs 93 and 342 of
the Working Party Report.
(a) China is bound by the WTO Agreement and China's Accession Protocol
4.98 China agreed on its accession to be bound by all the obligations contained in the
WTO Agreement and covered agreem ents, and all of the terms set out in its Accession Protocol.
These terms include the specific commitments contai ned in its Working Party Report and its tariff
commitments in its Schedule.

(b) The measures impose internal charges on internal trade in China
4.99 The measures regulate internal trade, not the process of importation. They are, therefore,
subject to obligations relating to internal measures imposed by Article III of the GATT 1994, not
obligations relating to border measures under Article II of the GATT 1994.
4.100 Internal charges and border charges can readily be distinguished. First, Members have a
greater degree of flexibility in varying internal char ges and duties than with tariffs. Internal charges
need not be specified by a WTO Member and, subj ect to the restrictions in Article III of the GATT
1994 and elsewhere, they can be increased at will. In contrast, all border charges, both "ordinary
customs duties" and "other duties and charges", must be limited to those re corded in a Member's
Schedule against the tariff item to which they appl y. Second, internal charges are imposed on
activities occurring within the territory of a Member in relation to normal internal trade of a product,
while border charges are imposed "at the time or point of importation". A Member may not, at its
discretion, "deem" imported products not to have entered their internal commerce. To permit
otherwise would allow Members subjectively to determine after the fact whether Articles II or III
would apply to their charges.
4.101 China attempts to move the border inwards by deeming imported parts to be "bonded" while
they are being used in manufacturing. However, this deeming is irrelevant: the measures apply
charges and administrative requirements after importe d parts have entered into commerce in China.
As such, the measures are properly characterized as internal measures subject to the disciplines of
Article III.
(c) The measures violate national treatment obligations in Articles III:2, III:4 and III:5 of the
GATT 1994 and Articles 1.2 and 7.2 of the Accession Protocol
4.102 Under Articles 1.2 and 7.2 of China's Accession Protocol, China commits itself to remove and
not to introduce measures contrary to Article III of the GATT 1994. Consequently, China's violations
of Article III of the GATT 1994 set out below also constitute violations of the Accession Protocol.
(i) The measures violate Article III:2 first sentence of the GATT 1994
4.103 The measures violate Article III:2, first sente nce of the GATT 1994, because they impose an
internal charge on imported auto parts in excess of that imposed on like domestic parts. A measure is
inconsistent with the first sentence where: (1) th e imported and domestic products at issue are "like
products"; and (2) the imported products are subject to internal charges "in excess of" those applied to
the like domestic products.
4.104 WTO jurisprudence has established that origin alone cannot distinguish an imported product
from an otherwise like domestic product. The m easures' only distinction between imported and
domestic auto parts is on the basis of origin, and therefore the parts are like for purposes of
Article III:2.
4.105 Further, any taxation above that "in excess of" that applied to the like domestic product is
inconsistent with Article III:2, first sentence. China has imposed a 15 per cent internal charge on
imported auto parts, thereby taxing imported auto parts "in excess of" like domestic parts.
4.106 The measures therefore meet the two conditions re quired to show a violation of Article III:2,
first sentence.

(ii) The measures violate Article III:4 of the GATT 1994
4.107 The measures violate Article III:4 of the GATT 1994 by providing less favourable treatment
for imported auto parts than domestic auto parts. Three elements must be satisfied for a measure to
violate Article III:4: (1) there are imported products that are like domestic products; (2) the measure
constitutes a law, regulation or requirement affec ting the internal sale, offering for sale, purchase,
transportation, distribution or use; and (3) th at measure accords less favourable treatment to the
imported products by modifying the conditions of co mpetition in the relevant market to the detriment
of imported products.
4.108 In the present circumstances, the only distinction between imported and domestic auto parts is
their origin, which alone cannot distinguish an imported product from an otherwise like domestic
product. Imported and domestic auto parts are, therefore, like for purposes of Article III:4.
4.109 The measures constitute "laws, regulations and requirements" affecting the sale, offering for
sale, purchase, transportation, distribution or use of imported auto parts. This condition has broad
application, and includes both obligations that an enterprise is "legally bound to carry out" and those
that an enterprise voluntarily accepts in order to obtain an advantage from the government. The
measures meet this second element as they are legally binding and affect the conditions of
competition for imported auto parts.
4.110 The measures modify the conditions of competiti on, as required by the third element, in two
ways.
(a) They create an economic incentive for manuf acturers to use domestic parts. If a
manufacturer exceeds the level of imported part s specified in the measures, even by a
nominal quantity or value, that manufacturer is subject to additional charges equal to
15 per cent of the value of all imported parts that it uses.
(b) A vehicle manufacturer using any imported auto parts is subjected to burdensome
administrative requirements. The only way to avoid these administrative requirements
under the measures is for a vehicle manufacturer to use solely domestic auto parts.
4.111 China's measures violate Article III:4, as all three elements are satisfied.
(iii) The measures violate Article III:5, first sentence of the GATT 1994
4.112 The measures are inconsistent with Artic le III:5 of the GATT 1994, first sentence, by
requiring the use of domestic auto parts in specified quantities or values. In or der to find a violation
of the first sentence of Article III:5, the measure must be: (1) an internal re gulation; (2) that is
quantitative, relating to the mixture, processing or use of products in specified amounts; and (3)
requiring, directly or indirectly, the use of those products from domestic sources.
4.113 The measures constitute "internal regulations " as they are legally binding and regulate
conduct with respect to the purchase, sale or use of imported auto parts in China.
4.114 The measures are quantitative and relate to the u se of auto parts in specified amounts. The
measures "relate" to the use of domestic parts and are "quantitative" as they specify quantity and value
thresholds for the use of domestic parts. The measur es therefore "relate" to the use of auto parts in
specified amounts.

4.115 The measures "require" the use of domestic auto parts. If measures provide advantages
conditioned on the purchase of a specified quantity of goods from domestic sources, then those
measures "require" such a purchase. The measures "r equire" that vehicle manufacturers satisfy these
domestic content thresholds because failure to meet such thresholds results in the imposition of the
additional charges on all imported auto parts.
4.116 In summary, the measures violate Article III:5, first sentence, becau se they are internal
quantitative regulations relating to the use of domes tic auto parts in specified quantities and values
that impose financial penalties if those specified quantities and values of domestic parts are not met.
(d) The measures violate the TRIMs Agreement and Articles 1.2 and 7.3 of the Accession
Protocol
(i) The measures violate Article 2 of the TRIMs Agreement
4.117 The measures are inconsistent with Article 2 of the TRIMs Agreement because they are trade-
related investment measures ("TRIM") that establish domestic-content thresholds that adversely affect
imports of auto parts. In addition, the measures also violate Articles 1.2 and 7.3 of the Accession
Protocol, which bind China to all obligations contained in the TRIMs Agreement.
4.118 The TRIMs Agreement applies where: (1) a challenged measure is a TRIM, i.e., an
"investment measure" that is "trade-related"; and (2 ) the measure is inconsistent with Articles III or
XI of the GATT 1994. The inconsistency required for the second element is apparent if the measure
is included in the Illustrative List.
4.119 The measures constitute a TRIM. An "invest ment measure" includes receiving an advantage
by meeting domestic content requirements, such as choosing to use domestic over imported goods. It
also includes a measure designed to develop dom estic manufacturing capability. The measures
constitute an "investment measure" because they impose domestic content requirements that are
designed to improve domestic auto parts manufact uring capability. "Trade-related" investment
measures are those that adversely affect th e conditions of competition between WTO Members
respecting trade in goods, and necessarily include th ose that prescribe domestic-content requirements.
As the measures specify domestic-content thresholds and apply to trade in auto parts, they are
"trade-related".
4.120 The measures violate Article III of the GATT 1994, both for the reasons set out above
regarding Article III generally and because they fall within paragraph 1(a) of the Illustrative List
referenced in Article 2.2 of the TRIMs Agreement, and therefore necessarily violate Article III of the
GATT 1994. A measure must satisfy two elements to fall within paragraph 1(a) of the Illustrative
List: (1) it must be mandatory or enforceable, or there must be compliance with it in order to obtain
an advantage; and (2) it must require the purchase of domestic product.
4.121 A simple advantage conditional on the use of domestic goods meets the requirement for the
first element. The measures provide two distinct advantages conditional on the use of domestic auto
parts: avoiding additional internal charges and avoiding additional administrative requirements.
4.122 The second element is met because the measures "require" vehicle manufacturers to meet
specified quantities or values of domestic auto pa rts. If vehicle manufacturers do not comply, all
imported parts used will be subject to an internal charge of 15 per cent. Accordingly, the measures
"require" a specified quantity or value of domestic content in order to avoid those internal charges.

4.123 In sum, the measures are a TRIM that is incons istent with Article 2 of the TRIMs Agreement
and China's Accession Protocol.
(e) Even if the measures are characterized as tariffs, they violate Article II:1 of the GATT 1994
and China's Accession Protocol
4.124 Canada has submitted that the measures impose an internal charge. However, if the Panel
determines, contrary to Canada's position, that the additional charge under the measures constitutes a
tariff on the importation of auto parts, then the charge violates Article II:1(a) and (b) of the GATT
1994, Article 1.2 of the Accession Protocol and Chin a's Schedule, by imposing a tariff rate on auto
parts greater than 10 per cent.
(i) China's tariff commitments in its Schedule with respect to auto parts and whole vehicles
4.125 The relevant bound tariff rates in China's Schedule fall into three categories:
• whole vehicles, whose bound tariff rate is generally 25 per cent;
• vehicle chassis fitted with engines and bodies , whose bound tariff rate is generally
10 per cent; and
• auto parts, whose bound tariff rate is generally 10 per cent.
4.126 There is presently no explicit tariff line in China's Schedule for CKD and SKD kits, but China
specifically committed in the Working Party Report to charge them a tariff no greater than 10 per
cent, a commitment incorporated into the Accession Protocol in Article 1.2.
4.127 The only relevant factor in levying a customs ta riff is the classification of the product based
on its condition at the time of importation at the borde r. Contrary to this well-established principle,
the measures impose a 25 per cent charge on imported auto parts characterized as complete vehicles
after importation based upon their use in manufacturing. China has therefore violated its GATT and
Accession Protocol obligations to apply a tariff rate of 10 per cent on imported auto parts.
(ii) The measures provide "less favourable treatmen t" than is set out in China's Schedule and are
thereby inconsistent with Article II:1(a) and (b) of the GATT 1994
4.128 Article II:1(b) of the GATT 1994 contains two distinct commitments. A Member may not,
except as set out in its Schedule, impose in connec tion with the importation of products from other
Members: (1) any ordinary customs duty; or (2) any other duty or charge.
4.129 Canada has submitted that, should the Panel determine, contrary to Canada's position that the
measures impose internal charges, that the entir e 25 per cent charge under the measures constitutes a
tariff on importation of auto parts, then that charge is an ordinary customs duty "in excess of" that set
forth in China's Schedule. Imported parts are not whole vehicles. China, through its arbitrary
deeming of imported parts as whol e vehicles and thus charging a 25 pe r cent tariff rate, provides less
favourable treatment to imported auto parts than that provided for in its Schedule, contrary to Article
II:1(b), first sentence.
4.130 If the charge under the measures is not an "ordin ary customs duty", it must be an "other duty
or charge". China has not recorded the measures as an "other duty or charge" in its Schedule.
Therefore, the additional 15 per cent charge on auto pa rts, even if it is an "other duty or charge",

violates Article II:1(b), second sentence, by imposing charges not set out in China's Schedule, and
Article II:1(a), by providing less favourable treat ment to auto parts from Canada than China's
Schedule permits.
4.131 Further, in the Working Party Report China co mmitted to charging no more than 10 per cent
for parts imported as CKD and SKD kits. China's imposition of a 25 per cent charge on CKD and
SKD kits therefore violates its obligations under the WTO Agreements.
(f) China's measures nullify or impair benefits accr uing to Canada under Article XXIII:1(b) of
the GATT
4.132 Even if the Panel finds, contrary to Canada's pos ition, that China is entitled to charge a tariff
rate in excess of 10 per cent on CKD and SKD kits , China has nevertheless nullified or impaired
benefits owing to Canada in the sense of Article XXIII:1(b) of the GATT 1994. A complaining party
must establish three elements for a claim under Article XXIII:1(b): (1) application of a measure by a
WTO Member; (2) a benefit accruing under the relevant agreement, including legitimate expectations
of improved market access opportunities arising out of relevant tariff concessions; and (3) the
nullification or impairment of the benefit as the result of the application of the measure.
4.133 The measures are legally enforceable measures applied to imported auto parts from other
Members. As such they are "measures" within the meaning of Article XXIII:1(b).
4.134 Canada had a benefit accruing: a legitimat e expectation of improved market access
opportunities for auto parts imported, notably that CKD and SKD kits would be charged tariffs no
greater than 10 per cent. That expectation deriv es from China's Schedule, wh ere tariff lines for auto
parts are bound at 10 per cent. It also derives from China's commitment in paragraph 93 of the
Working Party Report, incorporated as an obliga tion in Article 1.2 of the Accession Protocol, to
charge no more than 10 per cent on CKD and SKD kits.
4.135 China has nullified or impaired that benefit by upsetting the competitive relationship between
imported and domestic auto parts by imposing on imported auto parts an additional 15 per cent
internal charge that is not imposed on domestic auto parts.
4.136 Thus, the three elements are met for establis hing that China has nullified or impaired a
concession to Canada within the meaning of Article XXIII:1(b) of the GATT 1994.
D. F
IRST WRITTEN SUBMISSION OF CHINA
1. Introduction
4.137 This case concerns the relationship between s ubstance and form in the administration of
national customs laws. The European Communities, the United States, and Canada submit that the
GATT 1994 does not permit China to look beyond the form of how an auto manufacturer imports and
assemble auto parts into complete motor vehicles. China considers that, on the contrary, its authority
to give effect to the substance of how an auto manufacturer imports and assembles auto parts is
entirely supported by Article II of the GATT 1994.
4.138 Under GIR 2(a), customs authorities should classify as a complete article any group of parts
and components that has the essential character of that article, regardless of the state of assembly or
disassembly of the parts and components at the time of importation. The issue presented in this
dispute is whether the manner in which an importe r chooses to structure its imports of parts and

components should change this classification result. In particular, the issue presented is whether
customs authorities must assign a different classification to a group of imported parts and components
merely because the parts and components enter the customs territory in multiple shipments.
4.139 The measures challenged in this proceeding give effect to China's tariff provisions for "motor
vehicles" by defining the circumstances under whic h China will classify imported auto parts and
assemblies as having the essential character of a moto r vehicle. These measures are designed to reach
the same classification determination without re gard to whether the imported auto parts and
assemblies enter China in one shipme nt or in multiple shipments. The measures thereby ensure that
the substance of an auto manufacturer's import tran sactions prevails over their form, and prevent the
circumvention of China's tariff provisions for motor vehicles.
4.140 China will demonstrate that the measures at issue are border measures subject to the
disciplines of Article II of the GATT 1994. China will further demonstrate that these measures give
effect to a proper interpretation of the term "motor vehicles" in China's Schedule of Concessions, and
therefore do not result in the imposition of ordinary customs duties in excess of China's bound
commitments. The claims advanced by complain ants on the contrary assumption that the challenged
measures are internal measures subject to Article III of the GATT 1994 are without basis, and the
Panel should reject them.
2. The measures
4.141 China's tariff commitments with respect to moto r vehicles are set forth in Chapter 87 of its
Schedule of Concessions. With limited exceptions, China's bound duty rate for motor vehicles is
25 per cent. Different tariff headings under Chap ters 84, 85, and 87 set forth China's commitments
with respect to parts and assemblies of motor vehi cles. In almost all cases, the bound duty rate for
parts and assemblies of motor vehicles is 10 per cent.
4.142 The difference between the higher tariff rates fo r motor vehicles and the lower tariff rates for
parts and assemblies of motor vehicles creates an in centive for auto manufacturers to take a collection
of auto parts and assemblies that has the essential character of a motor vehicle under GIR 2(a), export
those parts and assemblies to China in multiple shipments, and assemb le them domestically into a
complete motor vehicle. Auto manufacturers can thereby import a group of auto parts and assemblies
that would have been classified as a complete motor vehicle had it entered China in a single shipment,
and evade the higher duty rate that applies to moto r vehicles. This type of tariff evasion deprives
China of duly-owned revenues and undermines the e ffectiveness of the tariff concessions that China
negotiated upon its accession to the WTO.
4.143 As other WTO Members have done under like circumstances, China adopted measures to
define the boundary between complete motor vehicl es and the parts and assemblies of motor vehicles,
and to prevent tariff circumvention. The principal measure that China adopted for this purpose, and
that is challenged in this proceeding, is the Administrative Rules on Importation of Automobile Parts
Characterized as Complete Vehicles, which took effect on 1 April 2005. This measure is known as
"Decree 125". Decree 125 is further implemented in Announcement 4, "Rules on Verification of
Imported Automobile Parts Characterized as Complete Vehicles".
4.144 The basic objective of Decree 125 is to establish a uniform methodology for determining
whether a group of imported auto parts has the essential character of a complete motor vehicle, and to
apply that methodology without regard to whether the auto parts in question enter China in a single
shipment or multiple shipments. Decree 125 requi res every auto manufacturer in China, without
regard to the extent of its domestic or foreign ow nership, to conduct an evaluation of each vehicle

model that it produces. The purpose of this evaluation is to determine whether the imported parts and
assemblies that the manufacturer uses to assemble that vehicle model should be characterized as
having the essential character of a complete motor vehi cle, based on a series of thresholds set forth in
the measure.
4.145 If, as a result of the evaluation, the auto manuf acturer determines that a particular vehicle
model is assembled from imported parts and assemblies having the essential character of a motor
vehicle, the manufacturer must register that model with the CGA. Thereafter, when auto parts are
imported for use in the assembly of that model, th e importer must declare those parts at the time of
importation as parts of a complete motor vehicle. The importer is required to provide a customs bond
for those entries, and the parts remain under customs control after they cross the border.
4.146 When the auto manufacturer assembles the imported parts an d components in accordance
with the declaration made at the time of importation, i.e. , as part of a larger group of imported parts
and components having the essential character of a motor vehicle, the CGA assesses the imported
parts and components at the tariff rate for motor vehi cles. This tariff rate applies only to the imported
parts and assemblies in the assembled vehicle. The CGA calculates the amount of duty liability on
the imported parts and assemblies in accordance with the ordinary customs laws and regulations of
China.
4.147 The overall effect of this system is to base the tariff classification of imported auto parts and
components on the commercial reality of what the auto manufacturer is importing and assembling. If
the auto manufacturer plans to import and assemble parts that, in their quantity and character, have the
essential character of a complete vehicle, then it must register that intent in advance and declare those
imports accordingly. Auto parts that are importe d for this purpose enter China in bond, and the CGA
collects the appropriate duties when the imported auto parts are assembled in accordance with the
declarations made at the border. These measures ensure that there is no difference in tariff
classification or duty liability based solely on how the auto manufacturer structures its imports.
3. Legal argument
(a) The measures are border measures subject to Article II of the GATT 1994
4.148 The threshold issue before the Panel is whet her the challenged measures are border measure
subject to Article II of the GATT 1994, or whether th ey are internal measures subject to Article III of
the GATT 1994. The Panel must resolve this issue at the outset to determine which provisions of the
covered agreements are relevant to its evaluation of the conformity of the challenged measures.
4.149 The challenged measures implement and enfo rce the provisions of China's Schedule of
Concessions relating to "motor vehicles" by de fining the circumstances under which China will
classify imported auto parts and assemblies as having the essential character of a motor vehicle.
4.150 The measures operate on the basis of a prior dete rmination that an auto manufacturer intends
to assemble a particular vehicle model from imported parts and assemblies that have the essential
character of a motor vehicle. When an importer s ubsequently imports auto parts and assemblies into
China for the purpose of assembling one of these vehicl e models, the declaration that it is required to
make at the time of importation imposes a conditio n upon the entry of goods into China. That
condition is that the CGA will assess the imported au to parts and assemblies at the tariff rate for
motor vehicles when they are used in the assembly of the designated vehicle model. This condition is
secured by the provision of a bond, and the importe d auto parts and assemblies remain in a bonded
status until they are used in accordance with the declaration.

4.151 These characteristics of the challenged measures re sult in the imposition of ordinary customs
duties on auto parts and assemblies "on their importati on" into the customs territory of China, within
the meaning of Article II:1(b) of the GATT 1994. Consistent with a proper interpretation of
Article II:1(b) under the Vienna Convention, and consistent with prio r interpretations of this
provision, a measure falls within the scope of Artic le II if it imposes charges that are conditional upon
the importation of a product into the customs territory of a Member.
4.152 Contrary to the arguments of the United States and Canada, the conclusion that the challenged
measures fall within the scope of Article II is supported, not undermined, by the adopted GATT panel
report in EEC – Parts and Components. That report interpreted the sc ope of Article II to include
charges that are "imposed conditional upon the impor tation of a product or at the time or point of
importation."
22 As demonstrated by the widespread customs practices of WTO Members, this
includes charges that are imposed subsequent to th e point at which goods physically cross the border,
so long as any such charges objectively relate to a duty obligation that arose as a condition of
importation. The challenged measures operate in precisely this way.
4.153 In addition, the anti-circumvention measures that the panel in EEC – Parts and Components
found to be inconsistent with Article III of th e GATT 1994 were materially different than the
measures at issue in this proceeding. Following the adoption of the Panel report in EEC – Parts and
Components, the European Communities significantly re vised its anti-circumvention measures to
address the concerns identified by that panel and to place the measures squarely within the framework
of Article II. The EC has taken the position that its revised measures do not impose internal taxes or
charges subject to Article III of the GATT 1994. The measures that China has adopted to prevent
circumvention of its tariff provisions for motor ve hicles operate on the same basis as the revised EC
measures, and do not have the flaw that fo rmed the basis for the panel's findings in EEC – Parts and
Components.
4.154 For these reasons, the challenged measures are subject to the disciplines of Article II of the
GATT 1994, and it is on this basis that the Panel must evaluate the conformity of the challenged
measures with China's WTO obligations.
(b) The measures are consistent with Article II of the GATT and do not collect ordinary customs
duties in excess of China's bound commitments
(i) China's interpretation of its tar iff schedule is consistent with its ordinary meaning, in context
and in light of its object and purpose
4.155 The central issue before the Panel is whether the challenged measures give effect to a proper
interpretation of the term "motor vehicles" as used in China's Schedule of Concessions. In particular,
the interpretive issue is whether the term "motor vehicles" can encompass the importation, in multiple
shipments, of auto parts and assemblies that have the essential character of a motor vehicle when
assembled. In accordance with the Appellate Body's holding in EC – Computer Equipment, the Panel
must resolve this interpretive issu e in accordance with "the general rules of treaty interpretation set
out in the Vienna Convention."23
4.156 Critical context for the resolution of this interp retive issue is provided by GIR 2(a) of the HS,
which states:

22 GATT Panel Report on EEC – Parts and Components, para. 5.5.
23 Appellate Body Report on EC – Computer Equipment, para. 84.

Any reference in a heading to an article shal l be taken to include a reference to that
article incomplete or unfinished, provide d that, as presented, the incomplete or
unfinished article has the essential character of the complete or finished article. It
shall also be taken to include a reference to that article complete or finished (or
falling to be classified as complete or finished by virtue of this rule), presented
unassembled or disassembled.
4.157 The application of GIR 2(a) to the interpretation of the term "motor vehicles" gives rise to
several circumstances in which customs author ities should classify auto parts and assemblies as
"motor vehicles," and not as parts and assemblies of motor vehicles:
• First, the importation of a completely assembled motor vehicle is clearly the
importation of a "motor vehicle," even though it is necessarily composed of the parts
and components of a motor vehicle.
• Second, the importation of 100 per cent of the parts necessary to assemble a motor
vehicle is the importation of a "motor vehicl e," and not the parts of a motor vehicle,
regardless of their state of assembly or di sassembly. Thus, for example, a completely
knocked-down ("CKD") kit is classified as a motor vehicle, not as parts of a motor
vehicle.
• Finally, the importation of less than 100 per cent of the parts necessary to assemble a
complete motor vehicle is the importation of a "motor vehicle," and not the parts of a
motor vehicle, provided that the imported parts, when assembled, have the essential
character of a motor vehicle.
4.158 As is evident from GIR 2(a) and these examples, there is no clear dividing line between tariff
provisions for a complete article (such as motor vehi cles) and separate tariff provisions for the parts
and components of that article (such as parts and assemblies of motor vehicles). There is necessarily
a continuum of circumstances under which the parts and components of an article will be classified as
the complete article.
4.159 Further context for the interpretation of the te rm "motor vehicles" in China's Schedule of
Concessions is provided by Note VII of the Expl anatory Notes to GIR 2(a), which states that
"unassembled components of an article which are in excess of the number required for that article
when complete are to be classified separately." As other customs authorities have recognized, the
effect of this rule is that a collection of parts is cl assified, in the first instance, as the total number of
complete articles that can be assembled from those parts (including articles that have the essential
character of the complete article). Any separate tariff provisions for parts and components therefore
encompass the importation of parts other than for the purpose of assembling a complete article from
imported parts.
4.160 The challenged measures apply the interpretive rul es of GIR 2(a), including Note VII, in two
basic respects.
4.161 First, the challenged measures define the thres holds at which China will classify a collection
of auto parts as having the essential character of a complete motor vehicle. Because GIR 2(a)
provides that something less than 100 per cent of the parts necessary to assemble the complete article
can have the essential character of the complete article, regardless of their state of assembly or
disassembly, it benefits customs authorities and importer s alike to have certainty with respect to the
boundary between motor vehicles and the parts and assemblies of motor vehicles.

4.162 Second, the challenged measures apply the interpre tive rules of GIR 2(a) to ensure that the
substance of an auto manufacturer's import activiti es prevails over their form. The United States has
stated, and China agrees, that it is "a general princi ple of international customs practice that substance
should prevail over the form of a transaction."
24 Consistent with this principle, the challenged
measures apply the interpretive rules of GIR 2(a) w ithout regard to whether the imported auto parts
and components used to assemble a motor vehicle enter China in one shipment or in multiple
shipments. This ensures that tariff classificati ons do not change based solely on how an auto
manufacturer chooses to structure its imports.
4.163 The application of the interpretive rules of GIR 2(a) to multiple shipments of auto parts and
assemblies is consistent with the object and pur pose of China's Schedule of Concessions and of
Article II of the GATT 1994. The Appellate Body has observed that one object and purpose of the
WTO Agreement and the GATT 1994 is to "maintain[] the security and predictability of reciprocal
market access arrangements manifested in tariff concessions …". 25 The Appellate Body has stated
that the interpretation of a Schedule of Concessions must recognize that tariff arrangements negotiated
by Members are meant to be "reciprocal and mutually advantageous".26
4.164 The difference in tariff rates between motor vehicles and parts and assemblies of motor
vehicles is part of the "reciprocal and mutually advantageous" market access arrangements that China
negotiated with other WTO Members. It is therefor e consistent with the "security and predictability
of reciprocal market access arrangements" to inte rpret China's Schedule of Concessions to prevent the
circumvention of this tariff rate difference thr ough the importation and assembly of auto parts that
have the essential character of a motor vehicle. At th e same time, China continues to give effect to its
separate tariff provisions for auto parts and assemblies by classifying parts and assemblies under these
headings when they are not used to circumvent the higher tariff rates on motor vehicles. This ensures
that the overall balance of market access arrangeme nts with respect to motor vehicles and motor
vehicle parts is maintained.
(ii) China's interpretation of its tariff schedule is consistent with the practice of other Members in
preventing the circumvention of duties
4.165 Numerous WTO Members, including all three complainants in this proceeding, have adopted
measures that prohibit the use of domestic assembly operations as a means of circumventing
duties that apply to complete articles, whether they are ordinary customs duties or
anti-dumping/countervailing duties. Under Article 31 of the Vienna Convention, this practice
"constitutes objective evidence of the understanding of the parties" with respect to the distinction
between the imposition of duties on complete artic les and the imposition of duties on the parts and
components of those articles.
27
4.166 This practice demonstrates that Members have applied the interpretive rules of GIR 2(a) to
classify multiple shipments of parts and components as having the essential character of the complete
article, and have done so where necessary to preven t the circumvention of duties that apply to the
complete article. The common objective of these measures is to ascertain what Canada has referred to
as the "commercial reality" underlying multiple imports of parts and components.

24 GATT Panel Report on EEC – Parts and Components, para. 4.37 (describing US argument).
25 Appellate Body Report on EC – Chicken Cuts, para. 243.
26 Appellate Body Report on EC – Chicken Cuts (AB) , para. 243 (quoting EC – Computer Equipment ,
para. 82).
27 Appellate Body Report on EC – Chicken Cuts, para. 255.

4.167 In applying anti-circumvention measures, Member s have made the duty liability that arises at
the time of importation conditiona l upon whether imported parts and components are used to
assemble complete articles. Members have also a dopted measures that track the final use of imported
parts and components as a means of determining wh ether parts and components were imported for the
purpose of circumventing duties th at apply to the complete article. In connection with these
measures, Members have imposed bonding or other secu rity requirements to ensure the collection of
any duty liability that applies to the complete article.
4.168 The measures adopted by China to prevent circum vention of its tariff rates for motor vehicles
are entirely consistent with these practices of ot her WTO Members under like circumstances. Under
Article 31 of the Vienna Convention, this practice demonstrates that China has properly interpreted its
tariff provisions for "motor vehicles" to include the importation, in multiple shipments, of auto parts
and assemblies that have the essential character of a motor vehicle when assembled.
4.169 Moreover, because these anti-circumvention practices existed at the time of China's accession
to the WTO, they constitute circumstances su rrounding the conclusion of China's Schedule of
Concessions, and therefore bear upon the interpretation of the term "motor vehicles" under Article 32
of the Vienna Convention.
(iii) China's interpretation of its ta riff schedule is based on the condition of goods at the time of
importation
4.170 The measures that China has adopt ed to prevent circumvention of its tariff rates for motor
vehicles are based on the demonstrated and declar ed intention of the manufacturer to assemble
complete motor vehicles from multiple shipments of auto parts and assemblies. As the customs
practices of other WTO Members demonstrate, this type of measure is consistent with the general
principle that merchandise is ordinarily classified based on its condition at the time of importation.
4.171 The practice of all three complainants in th is proceeding demonstrates that there are
circumstances under which Members will make a determination of duty liability based on the
combination of multiple shipments of parts. This is necessarily an element of preventing the
circumvention of duties on complete articles, as refl ected in the measures that Members have adopted
for this purpose.
4.172 Members have also combined multiple shipme nts of parts and components for classification
purposes in dealing with so-called "split shipme nts". Under these measures, such as the split
shipment regulation recently adopted by the Unite d States, customs authorities can base a tariff
classification on the combination of multiple ship ments. One circumstance in which customs
authorities classify split shipments on this basis is where the importer intends to assemble parts and
components into a complete article. This type of measure is necessarily based on an understanding of
the "condition as imported" rule that looks beyond the c ontents of a single import entry, and that rests
instead on the stated intention of the importer to assemble separate shipments of parts and components
into a complete article.
4.173 These types of measures are consistent with the decision of the WCO that "the questions of
split consignments and the classification of goods as sembled from elements originating in or arriving
from different countries are matters to be settled by each country in accordance with its own national
regulations."
28 On this basis, Members have adopted practices under GIR 2(a) that permit the

28 World Customs Organization, Decisions of the Harmonized System Committee, Interpretation of
General Interpretative Rule 2(a), HSC/16/Nov. 95, Doc. 39.600 (CHI-29).

classification of imports based on the combination of multiple entries, including under circumstances
in which the importer intends to assemble parts and components into a complete article.
(iv) Any ambiguity concerning the measures should be resolved in China's favour under the
principle of in dubio mitius
4.174 China does not believe that there is any ambigu ity concerning the interpretation of the term
"motor vehicles" as it relates to China's Schedul e of Concessions. China considers that the
interpretation of the term "motor vehicles" to whic h the challenged measures give effect is consistent
with the ordinary meaning of that term in contex t and in light of the object and purpose of the GATT,
and is also consistent with the practice of other WTO Members under like circumstances.
4.175 However, if the Panel were to identify any ambiguity in the meaning of the term "motor
vehicles," or any ambiguity concerning China's au thority under Article II of the GATT 1994 to adopt
the challenged measures, the Panel should apply the principle of in dubio mitius so as to minimize any
imposition on the sovereign authority of China to enforce its customs laws.
4.176 The Appellate Body has affirmed that "if the meaning of a term is ambiguous, that meaning is
to be preferred which is less onerous to the part y assuming an obligation, or which interferes less with
the territorial and personal supremacy of a party, or involves less general restrictions on the parties."
29
The application of that principle in this case s hould lead the Panel to interpret the term "motor
vehicles" to preserve for China the same scope of sovereign authority that other WTO Members have
exercised to interpret and enforce their customs la ws, and to prevent the use of domestic assembly
operations as a means of circumventing duties on complete articles.
4. Claimants have failed to demonstrate a viol ation of Article III of the GATT 1994, the
TRIMs Agreement, Part I, Article 7.2 of the Accession Protocol or Part I, Article 7.3 of
the Accession Protocol
4.177 China has demonstrated above that the measu res challenged in this proceeding are border
measures subject to the disciplines of Article II of the GATT 1994. The Panel should therefore
evaluate the challenged measures under Article II.
4.178 Because the challenged measures are border me asures, complainants' specific claims under
Article III of the GATT 1994, the TRIMs Agreement, Part 1.7.2 of the Accession Protocol, and
Part I.7.3 of the Accession Protocol, are all without basis. All of these claims are premised on the
erroneous assertion that the challenged measures are internal measures.
5. The United States and the European Co mmunities have failed to demonstrate a
violation of the SCM Agreement
4.179 The United States and the European Commun ities contend that China foregoes revenue
within the meaning of Article 1.1 of the SCM Ag reement by not imposing its tariff rates for motor
vehicles on all imports of auto parts and components. They further contend that this "foregone
revenue" is contingent upon the use of domest ic over imported goods, and thus constitutes a
prohibited subsidy under Article 3.1(b) of the SCM Agreement.
4.180 The United States and the European Commun ities claim under the SCM Agreement merely
underscores their mischaracterization of the purpose of the challenged measures. The fact that China

29 Appellate Body Report on EC – Hormones, para. 165, n. 154.

has adopted measures to prevent the circumvention of its tariff provisions for motor vehicles does not
mean that China must impose the tariff rates for mo tor vehicles on all imported auto parts. On the
contrary, China must continue to give effect to its separate tariff provisions for auto parts, and assess
imported auto parts at those rates when they are not used to circumvent the duties that apply to
complete articles. The United States and the European Communiti es claims under the SCM
Agreement are therefore without basis.
6. The complainants' claims in respect of China's Accession Protocol and Article XXIII of
the GATT 1994 must fail
4.181 In ways that are not entirely consistent with each other, the complainants allege that the
challenged measures violate the commitment that Ch ina made in paragraph 93 of the Working Party
Report, incorporated by reference into the Accessi on Protocol and the WTO Agreement, concerning
separate tariff lines for CKD and SKD kits. In add ition, Canada alleges nullification and impairment
of tariff benefits under Article XXIII:1(b) of the GATT 1994, also premised upon its interpretation of
paragraph 93 of the Working Party Report.
4.182 Paragraph 93 of the Working Party Report states:
Certain members of the Working Party expressed particular concerns about tariff
treatment in the auto sector . In response to questions about the tariff treatment for
kits for motor vehicles, the representative of China confirmed that China had no tariff
lines for completely knocked-down kits for motor vehicles or semi-knocked down
kits for motor vehicles. If China created su ch tariff lines, the tariff rates would be no
more than 10 per cent. The Working Party took note of this commitment.
30
4.183 Complainants have failed to demonstrate a prima facie violation of this limited and
conditional commitment. Complainants have neither alleged nor demonstrated that China has created
separate tariff lines for CKD/SKD kits. In fact, it is evident on the face of Decree 125 that China
continues to adhere to the rule, established by GIR 2(a), that CKD/SKD kits are classified as complete
motor vehicles. Article 2 of Decree 125 states that "automobile manufacturers importing [CKD/SKD]
kits may declare such importation to the customs in charged of the area where the manufacturer is
located and pay duties, and these Rules shall not apply." This provision exists precisely because there
is no doubt as to the proper tariff classification of imported CKD/SKD kits – they are classified as
complete vehicles under all circumstances, as complainants have acknowledged in other
circumstances and as their own customs practices demonstrate.
4.184 The apparent basis for the United States and Canadian claims under paragraph 93 is their
assertion that China had a practice, prior to its accession to the WTO, of classifying CKD/SKD kits as
"parts." Even if it were possible to interpret paragraph 93 of the Working Party Report to require
China to continue this alleged practice, the sole source of evidence on which they rely to establish the
existence of this practice does not support their clai m. In fact, it is clear from complainants' own
review of China's pre-accession policies that Ch ina generally prohibited the assembly of motor
vehicles from CKD/SKD kits prior to its accession to the WTO. Moreover, during the only period in
which China maintained separate tariff lines for CKD/SKD kits (1992 to 1995), the tariff rates for
CKD/SKD imports were the same as the tariff rates for motor vehicles – not the lower tariff rates for
parts and assemblies of motor vehicles.

30 Working Party Report, para. 93.

4.185 For these reasons, the various claims that compla inants assert based on their interpretations of
paragraph 93 of the Working Party Report are without basis.
7. Any inconsistency with the GATT 1994 is subject to the general exception under
Article XX(d)
4.186 The Panel may find, contrary to China's ar guments, that the challenged measures are
inconsistent with one or more provisions of the GATT 1994, or that particular aspects of the
challenged measures are inconsistent with the GAT T 1994. Should the Panel make any such finding,
China considers that the challenged measures are justified under Article XX(d) of the GATT 1994 as
measures that are necessary to secure compliance with China's customs laws.
4.187 The challenged measures secure compliance with China's customs laws and regulations by
preventing the importation and assembly of auto pa rts as a means of circumventing China's tariff
provisions relating to motor vehicles. They are therefore within the purview of Article XX(d).
4.188 Applying the balancing test that the Appe llate Body most recently articulated in Dominican
Republic – Import and Sale of Cigarettes, the challenged measures are "necessary" because, inter alia,
they further China's substantial in terest in collecting tariff revenues and preserving the effectiveness
of its negotiated tariff concessions. The measures c ontribute to the realization of these interests by
ensuring that tariff classifications are based on the substance of what an auto manufacturer imports
and assembles, and not the form of the shipments. Moreover, the challenged measures have little or
no restrictive impact on international trade, as their only purpose is to ensure that the correct tariff
rates are collected. The fact that the challenged measures had had no impact on trade and investment
has been noted by several of the world's largest auto manufacturers and auto parts suppliers.
4.189 For these reasons, and in the event that the Pa nel finds that one or more aspects of the
challenged measures is inconsistent with the GATT 1994, China has provisionally demonstrated that
any inconsistency between the ch allenged measures and China's GATT obligations is subject to the
general exception under Article XX(d).
8. Conclusion
4.190 For the reasons set forth in China's first written submission, as summarized herein, China
requests the Panel to reject the claims raised by the European Communities, the United States, and
Canada.
E. O
RAL STATEMENT BY THE EUROPEAN COMMUNITIES AT THE FIRST SUBSTANTIVE MEETING
OF THE PANEL
1. Introduction
4.191 The co-complainants have already in their written submissions co-ordinated positions to
facilitate the proper conduct of these panel proceedi ngs. This is also the case today so we will be
relatively brief in order to avoid unnecessary repetiti on. In this opening statement, the European
Communities will present its main claims. The European Communities will demonstrate that the
contested measures violate the TRIMs Agreement and Article III of the GATT 1994. Subsequently
the European Communities will also address the key el ements that come up in China's first written
submission with regard to Article II of the GATT 1994 and the SCM Agreement. The European
Communities reserves of course its full position on China's first written submission to its formal
written rebuttal submission. In particular, the Eur opean Communities will address China's alternative

defence based on Article XX(d) of the GATT 1994 in its rebuttal submission although the European
Communities associate itself with the observations the United States and Canada will make in a
moment.
4.192 However, before turning to the details of the case and in order to understand the issues in their
proper context the European Communities must firs t say a few words about China's industrial policy
in the automotive sector.
4.193 China has a history of imposing charges on imported auto parts depending on the amount of
domestic content in complete vehicles in order to promote local production of vehicles and auto parts
in China. Before WTO accession, China imposed hi gher charges on imported auto parts used in the
domestic production of vehicles if the manufacturer importing these parts did not meet certain
domestic content in the final vehicle produced. This policy was based on its 1994 Automotive
Industry Policy, which China had to remove as part of its Accession Protocol to the WTO.
4.194 China has now decided to reintroduce its old po licy despite its explicit commitment not to do
so. It has adopted the contested measures that im pose again local content requirements on vehicles
manufactured in China.
4.195 This case is based on simple and largely undisputed facts.
4.196 In its Schedule of concessions, China has committed to a tariff rate of 25 per cent for
complete vehicles and of 10 per cent for auto parts. Previously this difference was even greater.
However, in 2004, China again decided to stimulate the local production of auto parts. According to
Article 4 of Policy Order 8, China's objective is to
"Nurture a group of relatively strong auto-p arts manufacturers to achieve large-scale
production such that they are able to partic ipate in the global auto parts supply chain
as well as be internationally competitive."
4.197 In order to foster this objective, China introduced measures that in many cases impose
charges on imported auto parts that equal the full tariff rate on complete vehicles, i.e. 25 per cent
instead of 10 per cent. This results in an additi onal charge equal to the difference between the rates
for vehicles and parts, typically 15 per cent. These charges are imposed after the manufacture of the
parts into vehicles and provided that the vehicles do not contain sufficient local content. Domestic
auto parts are exempt from these charges. The eff ect of the measures is to discourage manufacturers
from importing auto parts and, thus, to afford protection to domestic production.
4.198 In sum, this case is about m easures that China introduced to protect its local auto parts
industry from imports through a local content rule. This case is about discrimination, and not – as
China would like to present it – about tariff circumvention.
4.199 Although based on very simple and largely undisputed facts that consist essentially of the text
of the measures, this case is very important since it is about the very core principles of the WTO
system, namely the principles of non-discriminat ion and the security and predictability of the
multilateral trading system. Without adherence to these principles the system established by the WTO
Agreement would lose most of its meaning. As a Me mber of the WTO, China has to adhere to these
principles.

2. China's failure to respond to a prima facie case
4.200 The European Communities and its co-complaina nts have established a prima facie case of
inconsistency between the Chinese measures and Arti cle 2 of the TRIMs Agreement and Article III,
paragraphs 2, 4 and 5 of the GATT 1994. Accordi ng to established principles on the burden of proof,
it is now for China to attempt to provide the arguments and the proof to the contrary.
4.201 However, in its first written submission China has decided to largely ignore these claims of
the complainants and insists that the Panel must first decide as a "threshold issue" whether the
measures are "border measures" or not. We wonder if and when China will address our main claims.
4.202 This is all the more remarkable since an an alysis, in particular under the TRIMs Agreement,
very clearly requires no preliminary assessment as to whether a measure is a "border measure" or an
"internal measure". The European Communities is of the view that the approach taken by China risks
to unduly delay these panel proceedings and compromise due process. This would be regrettable.
3. The TRIMs Agreement and Article III of the GATT 1994
4.203 The European Communities considers that the Chinese measures are inconsistent with the
TRIMs Agreement and Article III, second, fourth and fifth paragraph of the GATT 1994. Let me very
briefly set out why.
(a) The TRIMs Agreement
4.204 The measures are inconsistent with Article 2 of the TRIMs Agreement.
4.205 First, the measures are "investment measures". They aim at the development of a local
manufacturing capability for auto parts and finished motor vehicles in China. In addition to the
provision quoted in the introduction, this objective is reflected in numerous other provisions of Policy
Order 8, of Decree 125 and of Announcement 4. It is inherent to this objective that the measures have
a significant impact on investment in this sector. The whole investment strategy of both local and
foreign vehicle and part manufacturers is governed by the constraints laid down by the measures.
4.206 Secondly, the measures are "trade-related" becau se they apply and relate only to imported
parts.
4.207 Finally, the measures fall squarely within the description of paragraphs 1 (a) and 2 (a) of the
Illustrative List annexed to the TRIMs Agreement.
4.208 In other words, the measures are trade-related investment measures that
• contain local content requirements, and
• restrict the importation of products used in local production.
4.209 China's response to the analysis by the European Communities is limited to the statement that
its measures are border charges and, therefore, do not fall under the TRIMs Agreement. This is
remarkable since an an alysis under the TRIMs Agreement does not require any preliminary position
as to whether the measures are internal or border measures. Therefore, the European Communities
can only underline the position it has taken in its first written submission and assume that China
considers the measures as otherwise indefensible under Article 2 of the TRIMs Agreement.

4.210 As the measures are precisely of the kind that China specifically undertook to eliminate and
cease to enforce as a condition of its accession to th e WTO, they are also in breach of China's
Accession Protocol and in particular Part I, Article 7.3 thereof.
(b) Article III of the GATT 1994
4.211 As with the TRIMs Agreement, China bases its entire defence strategy on the premise that the
measures are border measures and therefore not "inter nal" within the meaning of Article III of the
GATT 1994. The European Communities cannot agree with this position.
4.212 First, the Chinese measures impose charges on imported auto parts depending on whether
they are actually assembled and manufactured into complete vehicles that do not have sufficient local
content. Thus, they are not "imposed on or in co nnection with the importation" within the meaning of
Article II(1)(b) of the GATT 1994. In other words, their application depends on how the parts are
used after importation and, in particular, whether they are assembled in China into vehicles with an
insufficient level of local content as set out by the measures.
4.213 Secondly, the measures impose charges on auto parts not at the time of importation, but only
after they have been manufactured.
4.214 The internal nature of the measures is further illu strated by the fact that they apply directly
only to vehicle manufacturers, rather than to the importers of the auto parts. Thus, manufacturers
have to pay charges even if they purchase parts on the Chinese internal market from suppliers that
previously imported them. This follows clearly from Article 29 of Decree 125.
4.215 Contrary to China's argument, the declaration of imported goods under Article 15 of Decree
125 does not make the charges border measures. First, the declaration is only one in a series of acts
manufacturers have to accomplish under the measures. Secondly, the declaration itself does not
concern the imported parts as presented at the borde r but a prediction about their future role in
vehicles that are yet to be manufactured. Thirdl y, the verification application under Article 19 of
Decree 125 that is decisive for wh ich charges are imposed only occurs after the imported parts have
been assembled and manufactured into whole vehicles.
4.216 China also argues that the measures should be categorized as border measures because they
are administered by the customs authorities, cl assified as "ordinary customs duties" under Chinese
law and because imported auto parts are "not in free circulation" within China. In this respect, the
European Communities would like to remind China of its own position in its first written submission
according to which this case " concerns the relationship between substance and form ". If the formal
categorisation of a charge as a customs duty and the formal treatment of imported parts under
domestic law were sufficient to establish a c onnection with importation, WTO Members could
determine themselves which GATT provisions apply to their charges. The Panel in EEC – Parts and
Components set out that "with such an interpretation the basic objective underlying Articles II and III,
namely that discrimination against products from oth er contracting parties should only take the form
of ordinary customs duties imposed on or in connecti on with importation and not the form of internal
taxes, could not be achieved".
31
4.217 Consequently, the Chinese measure s are internal measures within the scope of Article III of
the GATT 1994.

31 GATT Panel Report, on EEC – Parts and Components, para. 5.7.

4.218 The European Communities regrets that Chin a refuses to address the remainder of its
arguments under Article III of the GATT 1994. Ag ain, the European Communities can only assume
that China considers its measures otherwise i ndefensible under Article III of the GATT 1994.
Therefore, the European Communities will only give a very cursory overview of its arguments which
are set out in greater detail in its first written submission.
4.219 Domestic and imported auto parts are "like" products both under paragraphs 2 and 4 of
Article III of the GATT 1994 since the only distinction the measures make is on the basis of the origin
of the products. The consistent WT O jurisprudence is clear on this poi nt: the mere origin of the good
cannot make an imported good "unlike" the domestic good.
4.220 The measures are inconsistent with Article III:2 of the GATT 1994 since they impose internal
charges on certain imported auto parts, but not on lik e domestic parts. Therefore, the charges applied
to imported auto parts are necessarily "in excess of" the charges applied to like domestic products.
4.221 In respect of Article III:4, the European Communities underlines that only imported auto parts
may become subject to the charges and the cumberso me procedural requirements described in detail
in its first written submission. Such conditions are bound to adversely modify the conditions of
competition between domestic and imported auto pa rts on the internal Chinese market. This occurs
exclusively to the detriment of the imported parts. Consequently, the European Communities is of the
view that the measures are inconsistent with Article III:4 of the GATT 1994.
4.222 Furthermore, the measures are also inconsiste nt with Article III:5. They constitute an
"internal quantitative regulation" because they are concerned with the amounts and proportions of
domestic and imported auto parts in manufactured ve hicles. As vehicle parts are "products", which
are processed and used during the assembly and manuf acture of vehicles, the measures also relate to
the "mixture, processing or use of the products" with in the meaning of paragraph 5. Finally, the
measures also fulfil the third element of Article III: 5, first sentence. They require that specified
amounts or proportions of vehicle parts used in th e assembly and manufacture of vehicles are not
imported and instead of domestic origin. Vehicle ma nufacturers have to obtain domestic parts if they
want to remain within the thresholds laid down by Articles 21 and 22 of Decree 125. Consequently,
the measures are inconsistent with Article III:5, first sentence of the GATT 1994.
4.223 With regard to the claims under the second sente nces of Article III:2 and III:5, the European
Communities refers to its first written submission.
4. The "anti-circumvention theory" of China under Article II of the GATT 1994
4.224 China's whole defence strategy is based on the position that the measures should exclusively
be examined under Article II of the GATT 1994. Although the European Communities would have
no difficulty in confronting China under Article II of the GATT 1994, it is systemically very
important not to accept China's premise for the anal ysis. The categorisation of the additional charges
and the cumbersome procedural requirements as pa rt of China's custom clearance process would
seriously undermine the scope and effectiveness of the TRIMs Agreement and Article III of the
GATT 1994.
4.225
However, as China will no doubt continue to insist on the premise of its defence, it is
necessary to demonstrate the fundamental flaws th at its position has even under Article II of the
GATT 1994.

4.226 As mentioned already before, China's schedule of concessions provides generally for a 25 per
cent tariff on complete vehicles and 10 per cent or less on automotive parts. In addition, there are very
important intermediary categories, which generally are also subject to the lower 10 per cent tariff.
China conveniently ignores these in termediary categories as they entirely undermine China's defence
strategy.
4.227 According to their very explicit wording, the measures deem imported auto parts as complete
vehicles if certain combinations or proportions are used in the manufacture of a vehicle. In such a
case, all imported auto parts of that vehicle will be subject to the 25 per cent duty on complete
vehicles. To put it in customs language: auto parts ar e classified as complete vehicles. It is therefore
not the product as presented at the border that decides the tariff classification but rather its internal use
after manufacture.
4.228 It is undisputed that the basic standard for interpreting Members' schedule of concessions is
the test under Article 31 of the Vienna Convention . This test requires an analysis of the ordinary
meaning of China's schedule of concessions in thei r context and in the light of their object and
purpose. It is also undisputed that the HS and the rules for its interpretation provide important context
for the analysis.
4.229 China pays only lip service to Article 31 of the Vienna Convention. In truth, it simply fails to
examine the relevant tariff headings under this test.
4.230 As regards the ordinary meaning of the releva nt tariff headings, China simply shrugs this
obvious complication for its position off with a couple of blatantly erroneous statements such as "the
details of the specific tariff headings and tariff rat es at issue are not relevant to the disposition of the
claims before the Panel".
32 The obvious intention is to draw attention away from the wording of the
relevant tariff headings because they simply do not support China's position.
4.231 When it comes to a contextual analysis, China tr ies to trick us again by drawing our attention
to GIR 2(a) of the Harmonised System. China conveniently jumps over GIR 1, according to which
the terms of the headings and any relative Section or Chapter Notes are the first consideration in
determining classification.
4.232 As regards the object and purpose of tariff commitments, China makes anti-circumvention the
main issue. It is this "anti-circumvention theory" to which I shall now turn. According to China, auto
parts may be classified as complete vehicles in order to counter an alleged practice of circumventing
the tariff rates for vehicles.
4.233 The European Communities profoundly disagrees w ith the whole premise of China's first
written submission. There simply is no conspira cy to undermine China's customs tariffs on motor
vehicles. The only so-called evidence that China presents for its theory is a statement that the value of
imported parts and components may have increased since China became a member of the WTO 33.
Even if this were the case, the only thing that this could prove is that the multilateral trading system is
functioning as it should. It is China that has c hosen to commit itself to a difference between the
applicable tariff rates for vehicles and their parts.
4.234 As the whole premise of China's defence is profoundly flawed, the European Communities
would in principle not wish to enter its logic. Howe ver, this would have the potential of leading to a

32 China's first written submission, para. 15.
33 China's first written submission, para. 21.

total impasse where the parties refuse to address each others' claims. Therefore, the European
Communities will address the main elements of China's defence even if it carries the risk of entering a
logic that rests on a fundamental flaw.
4.235 In describing the measures, China attempts to paint a picture of neutral tariff classification
where "the substance of a series of import transactions prevails over their form".
34 The measures are
allegedly targeted against importers that "circumven t the higher tariff rate on the complete article",
even though, according to China "t he commercial reality is that the manufacturer intends to assemble
the complete article from imported parts and components".35
4.236 The simple reply to this is: No, there is nothing that is circumvented when a vehicle part is
declared as a part when imported even when it, af ter manufacture ends up in a new complete vehicle.
Manufacturing a vehicle out of imported parts does not amount to circumvention. The complete
vehicle and its parts are subject to different tariff headings. This is normal; there is nothing that is
circumvented.
4.237 A rule that requires classification of parts depending on how they are used in the final product
would have drastic consequences for the present and fu ture state of international trade, dominated by
global production chains where the production process is broken down into a multitude of steps and
intermediate products produced by several companies in several countries.
4.238 However, before dealing with the arguments of China any further it is necessary to address
what China fails to address, namely that its a llegedly neutral anti-circumvention measures are in
reality enforcing local content requirements in the finished vehicle.
4.239 On the basis of the theories th at China presents in its first written submission, the crucial
criterion in its view is the intended end use of the product, not its objective characteristics as
presented at the border. Indeed, China refers to "d emonstrated intention of the auto manufacturer" as
a basis for tariff classification.36 Of course China does not use the words local or domestic content.
4.240 A simple example is sufficient to demonstrate how the measures apply in reality: Let's take an
example of 100 brake cylinders that are packaged and shipped together to China. Of these, 30 will be
used as spare parts, 40 will be fitted into complete vehicles that attain the necessary level of domestic
content while the remaining 30 will be fitted into complete vehicles that do not attain the necessary
level of domestic content.
4.241 Of these brake cylinders 70 out of the 100 will under the measures be subject to the lower
tariff on parts. To the 30 spare parts one has to add the 40 brake cylinders that are used in complete
vehicles attaining the necessary domestic content. Only the 30 that will be used in complete vehicles
that do not attain the necessary domestic content will be subject to the higher duty on complete
vehicles. Of course, under a correct tariff classification all 100 brake cylinders should be classified as
parts.
4.242 There is nothing neutral about these rules even unde r the false logic that China presents in its
first written submission. The real criterion is the level of domestic content.

34 China's first written submission, para 3.
35 China's first written submission, para. 18.
36 China's first written submission, para. 7.

4.243 However, China goes even much further. It is of the view that even if the 100 brake cylinders
would be imported to China in, say, 20 different sh ipments at different times and would arrive to
different ports from different parts of the world a nd be imported by different and unrelated importers
(e.g. vehicles manufacturers, parts importers, afte r-sales maintenance companies etc.). China would
still insist on applying its anti-circumvention theory. In other words, it will still verify whether the
brake cylinders will be used in a complete vehi cle or not and whether the complete vehicle will
contain sufficient local content before deciding whet her to apply an additional charge on the products
after they have already been manufactured in China.
4.244 It is important to underline that there is no basis in China's tariff schedule or in the
interpretative rules of the HS that would allow fo r such a drastic measure that undermines the whole
system of tariff classification.
4.245 Indeed, China uses the general rul es for the interpretation of the HS in a very selective if not
abusive manner. The HS rules simply do not co ntain the "anti-circumvention rule" that China
suggests in its first written submission. China comple tely jumps over the most important rule of the
HS, that is, GIR 1 according to which the terms of the headings and any relative Section or Chapter
Notes are the first consideration in determining classification. If there is no doubt about the
classification of a product on the basis of GIR 1, the other rules simply do not apply. This is the case
in the overwhelming majority of situations.
4.246 China repeatedly refers to GIR 2(a) of the HS . However, it is remarkable how selectively
China refers to this rule. First of all, China ig nores the fact that the relevant chapter of the HS
nomenclature, that is, Chapter 87 contains a speci fic application of that rule with very precise
examples that cannot even remotely be compared to the situations foreseen by the contested measures.
The European Communities has examined this rule already in its first written submission.
4.247 However, what is perhaps even more remark able is that China uses even the general
formulation of GRI 2(a) in a very selective manner. It is worth to quote GIR 2(a) to see this clearly.
GIR 2(a) states:
Any reference in a heading to an article shal l be taken to include a reference to that
article incomplete or unfinishe d, provided that, as presented
, the incomplete or
unfinished article has the essential character of the complete or finished article . It
shall also be taken to include a reference to that article complete or finished (or
falling to be classified as complete or finished by virtue of this rule), presented
unassembled or disassembled. [emphasis added]
4.248 China ignores the two basic principles in this ru le, that is, the words "as presented" and "the
essential character of the complete or finished article".
4.249 In other words, the "anti-circumvention theory" presented by China igno res the fact that the
tariff classification of a product is to be made as presented to customs at the border. The measures
completely disregard this by classifying the pr oduct after it has been used in manufacturing and
irrespective of the fact that no other parts were pr esented to the customs at the same time. This
amounts to tariff classification at will.
4.250 As regards the essential character criterion, the European Communities would like to draw the
attention of the Panel to the example China itself uses in its first written submission, at paragraph 19
concerning alleged tariff circumvention. China stat es: "a specific example illustrates the problem".

This is perhaps the only sentence with which th e European Communities can agree. This example
indeed illustrates the problem. A simple calculation will suffice:
4.251 To recall, according to Article 21(2) of Decr ee 125, all imported parts will be automobile
parts characterized as complete vehicles if any of the following combinations of assemblies are
deemed imported:
1. the two main assemblies (the vehicle body and engine)
2. either of the two main assemblies as well as three of more other assemblies
3. five or more assemblies, other than the main assemblies.
4.252 Let us now combine some of the relevant pe rcentages in the table under paragraph 19 of
China's first written submission on the basis of the criteria of Article 21(2) of Decree 125:
1. The two main assemblies i.e. the vehicle body and the engine would amount to 29
per cent of the value of the vehicle;
2. One of the main assemblies i.e. the vehicl e body and three other assemblies i.e. the
non-driving axle, the steering system and the braking system would amount to 21 per
cent of the value of the vehicle
3. five other assemblies i.e. the non-driving axle, the driving axle, the frame (or chassis),
the steering system and the braking system would amount to 17 per cent of the value
of the vehicle.
4.253 These very simple calculations on the basis of the example that China itself provided
demonstrate that China applies the full vehicle duty to all imported parts if the vehicle contains certain
imported assemblies that constitute only 17-29 per cent of the value of the complete vehicle. In other
words, a combination of certain parts that amount to 17 per cent of the total value of the vehicle will
be sufficient to classify all imported parts in that vehicle as a complete vehicle. And this irrespective
of when, from where and by whom these parts were imported.
4.254 It goes without saying that a combination of part s, which may have been imported to China at
different times, from different parts of the world a nd been subject to internal transactions in China
between importers of parts and the vehicle manufacturer and, which represent 17 to 29 per cent of the
total value of the vehicle, cannot even remotely ha ve the essential character of a complete vehicle
within the meaning of GIR 2(a) of the HS as it is applied under Chapter 87 according to the very
explicit chapter notes.
4.255 There is also another very simple way of de monstrating how manifestly erroneous China's
position is. It is sufficient to read tariff line 87.06 entitled "chassis fitted with engines" together with
its interpretative note. A chassis fitted with engi nes would under the contested measures always be
classified as the complete vehicle despite it being subject to a specific heading and normally subject to
the lower 10 per cent duty. The details have been set out in paragraphs 255 to 260 of the European
Communities' first written submission.
4.256 The European Communities is therefore of the vi ew that even under the entirely false premise
on which China bases its defence, the arguments pres ented simply do not hold any water. Although
the European Communities would comfortably be pr epared to confront China even under the terms

China wishes to argue the case, it is systemically very important not to allow China to escape the main
claims brought forward by the complainants. In any event, China's measure s are inconsistent with
Article II of the GATT 1994.
5. Inconsistency of the Chinese Measures with the SCM Agreement
4.257 With regard to Article 3 of the SCM Agre ement, China argues that its measures do not
constitute a prohibited subsidy. According to Chin a, it does not forego revenue when it applies the
tariff rate for complete vehicles only to those parts wh ich, in China's perception, circumvent this tariff
rate. China argues that the tariff rate for complete vehicles cannot serve as the appropriate benchmark
for parts in general because its Schedule of concessions prevents it from imposing it on all parts.
4.258 The truth is that China's Schedule of concessi ons prevents China from imposing the duty for
complete vehicles on any parts. If China were allowed to impose the complete vehicle duty on certain
parts, it would still be prevented from making this dependent on the local content in the final
manufactured vehicles. As China does not impose the duty for complete vehicles on parts
manufactured into vehicles that satisfy the lo cal content requirements, it is foregoing revenue
otherwise due.
6. Conclusion
4.259 The European Communities is firmly of the view that the measures under scrutiny in this case
threaten the very basic structures of the multilate ral trading system. These Measures circumvent
China's core obligations under the covered agreements.
4.260 For these reasons, all specified in detail in its first written submission, the European
Communities requests that the Panel find that China has acted inconsistently with its obligations
under the relevant covered agreements.
F. O
RAL STATEMENT BY THE UNITED STATES AT THE FIRST SUBSTANTIVE MEETING OF THE
PANEL
4.261 For two reasons, the United States initial comments in its oral statement will be brief. First,
the United States and our two co-complainants have already submitted extensive written submissions,
and both the European Communities and Canada are presenting oral statements. And second,
although China's first submission contains a consider able amount of material, very little of that
material is relevant to the issues in this dispute. Most notably, China presents an extensive discussion
of the complainants' practices with regard to circumvention of antidumping duties, but this dispute has
nothing to do with dumping. And conversely, aside from the threshold issu e, China does not even
dispute the inconsistency of its measures with core ob ligations of Article III. Indeed, China in fact
appears to concede that one key aspect of its measures is inconsistent with Article III.
4.262 As discussed in our first submission, China h as adopted measures that favor domestic auto
parts over imported parts, so as to afford protecti on to the domestic production of auto parts. These
measures include a substantial charge – over and a bove customs duties – on imported auto parts, with
no comparable charge on domestic auto parts. Chin a's measures further favor domestic parts in that
the additional charge only applies if domestically -produced autos include an amount (in volume or
value) of imported auto parts that exceeds specifi ed thresholds. And the measures include extensive
record-keeping, reporting, and verification requirements that apply if and only if domestic automobile
manufacturers make use of imported auto parts.

4.263 These measures amount to clear and straightforw ard inconsistencies with China's national
treatment obligations under Article III of th e GATT 1994. In particular, these measures
impermissibly result in internal charges on imported parts in excess of those applied on domestic parts
(Article III:2); the measures accord treatment less favorable to imported parts with respect to
requirements affecting internal sale, purchase, distri bution, and use (Article III:4); and the measures
directly or indirectly require that specified amounts or proportions of auto parts used in vehicle
manufacturing must be supplied from domestic sources (Article III:5).
4.264 China's defence is twofold – its measures all involve customs duties, and those customs duties
are consistent with Article II. As the EC in par ticular outlined in its first submission, and as all the
complainants will return to today, China's Article II argument is utterly without merit. Were China to
charge an import duty on imported auto parts of 25 per cent, China would be in outright breach of its
Article II tariff bindings.
4.265 But the clearly unfounded nature of China's Artic le II argument must not distract from a far
more important point. Namely, China does not impose a simple import duty of 25 per cent on auto
parts. To the contrary, China's measures are far more pernicious
 than the simple breach of a tariff
binding. Rather, the measures set up a complex, internal regulatory regime – the primary effect of
which is to discriminate against imported auto part s, encourage the use of local content and pressure
foreign parts manufacturers to re-l ocate their facilities and technolog y to China. These pernicious
aspects of discrimination would be present whether or not
 the level of China's charges on auto parts
were above their specific bindings on auto parts. Thus, it is of extreme importance to the United
States that the findings in this dispute address China's serious breaches of Article III.
4.266 With one caveat, most of what China presents as a defence does not even respond to the
Article III inconsistencies inherent in its auto parts regime. I would like to highlight this point by
departing from the usual order of an Article III di scussion. That is, I will first address Article III:4
and Article III:5, and then return to Article III:2.
4.267 Turning first to Article III:4, the Appellate Body has identified three distinct elements
required to establish a breach: (1) the imported and domestic products are "like products;" (2) the
measure is a law, regulation, or requirement aff ecting the internal sale, purchase, or use of the
imported and domestic like products; and (3) the imported product is accorded less favorable
treatment than the domestic like product.
4.268 The first element, the determination of "like products" is easily met here. The only distinction
between imported and domestic auto parts is thei r origin, and China does not dispute that imported
and domestic auto parts are "like products" for purposes of Article III.
4.269 The second element of an Article III:4 analysis is that the measures aff ect the internal sale,
purchase, distribution or use of the like products. In this instance, China's Policy Order 8, Decree 125
and Announcement 4 work together to create an incen tive to purchase domestic auto parts. First, the
system levies a charge based on the types and total value of imported parts used in the automobile.
Second, the system imposes burdensome administrativ e recording requirements when imported parts
are used in the manufacturing of vehicles. These asp ects of its measure established a disincentive to
purchase, use and distribute imported auto parts. Thus the measures meet the second element of an
Article III:4 analysis. China also does not dispute this element.
4.270 The third and last element for determining a breach of Article III:4 is to assess whether the
measures accord less favorable treatment to imported products relative to the domestic product. Here,

the measures treat foreign parts less favourably th an domestic parts by creating different competitive
conditions for the parts. This is done in two, or perhaps three, ways.
4.271 First, the level of China's charge on auto parts depends on the types and value of imported
parts used in a complete vehicle. If the thresholds are exceeded, then an additional charge is applied
to each and every imported part included in the vehi cle. In other words, leaving aside whether the
absolute level
 of the charge is consistent with China's GATT obligations, the point here is that the
level of that charge on say, Part A, changes based on whether Part B is imported or sourced
domestically. Thus, automobile manufacturers in China, independently of any question of the
absolute level of China's customs duties, have a strong disincentive to make use of imported auto
parts. The measures accordingly alter the conditions of competition by creating a significant incentive
to include domestic parts over imported parts. And, China does not dispute that this system provides
less favorable treatment for imported parts.
4.272 The second method by which the measures treat foreign parts less favourably than domestic
parts is through the imposition of burdensome administrative reporting requirements on any
manufacturer who chooses to use imported auto part s in building an automo bile in China. These
requirements include;
− a "self-evaluation" to determine the number of imported parts used in the assembly of
a particular vehicle model, involving a catalogue of all the parts of each model it
manufactures, and calculations of the thresholds for each assembly system and the
overall price percentage of imported parts in the model;
− a registration of the vehicle model, in cluding the annual production plan for the
vehicle model; a list of all domestic and fo reign suppliers; and a detailed list of all
imported and domestic parts used in the model being filed;
− a requirement to constantly update the regist ration to take into account changes in the
source and relative price of various parts of every automobile model, as well as
changes to individual automobiles;
− monthly payments of charges, accompanied by the verification report, the previous
month's total production figures, and a list of parts and components used by the
manufacturer in the prior month to assemble completed vehicles;
− and a requirement for the manufacturer to ma intain – with respect to all parts not
imported by the manufacturer itself – records regarding the importer of record, and
any evidence of duties and value-added taxes paid.
4.273 None of these burdensome reporting requirements are necessary for manufacturers who
choose to use only domestic auto parts to manufactu re automobiles in China. Such administrative
requirements thus create different and less favorable competitive conditions for the imported parts.
And, China does not dispute that these aspects of its measure provide less favorable treatment to
imported parts.
4.274 Third, in describing its measures, China asserts that imported auto parts "are not in free
circulation in the customs territory of China."
37 As noted in the US's first written submission, China's
measures appear to require burdens ome "in-bond" requirements on all imported auto parts, but these

37 China's first written submission, para. 46.

measures do not appear to be enforced. China, in its first submission, however, appears to claim
otherwise. If indeed all imported parts in fact are subject to burdensome "in-bond" requirements that
render them "not in free circulation," then for th is additional reason China is providing less favorable
treatment to imported parts than to domestic parts. Again, this breach of Article III:4 is independent
from any question of tariff rates allowed under China's Article II tariff bindings.
4.275 To summarize, we have just gone through a st raightforward Article III:4 analysis. China's
measures plainly meet each one of the three elements needed to establish a breach of Article III:4.
And, China in its submission has not disputed any of these elements. Moreover, with one caveat, the
primary defense presented in China's first submissi on – namely, that its charges are customs duties
and that imported parts may be classified as complete vehicles – does not even implicate any issue
which might provide a defense to this plain breach of Article III:4.
4.276 To elaborate on this point, even if China's ch arges were considered "customs duties," and
even if China were correct that it was entitled under its tariff bindings to charge a duty of 25 per cent
on all imported parts, China's measures would st ill constitute a breach of Article III:4. The
Article III:4 breach, as just discussed, is based on the f act that the charge on any particular auto part
will change depending on the types and value of other
 imported parts used in a complete vehicle, a
system which creates a strong disincentive to the purchase and use of imported parts. Similarly, the
administrative burdens applicable only to users of imported auto parts, and the burdens relating to the
bonded status of imported auto parts, are inconsistent with Article III:4, regardless of whether or not
China's charges are considered "customs duties". These breaches of Article III:4 would exist
regardless of any issue related to Article II; ind eed, these breaches would exist even if China had not
bound at all its tariff duties on auto parts.
4.277 China's measures are also inconsistent with Article III:5 of the GATT 1994. And again, with
one caveat, China's defense in its first submission do es not touch on any issue related to Article III:5.
China's measures at issue impose additional charg es and burdensome administrative requirements if,
among other things, the types and values of imported parts and components used by a car
manufacturer exceed specified thresholds. Given that these provisions are expressed in quantitative
terms, they are by their nature "quantitative regul ations" under Article III:5. Moreover, given that
their terms specify the quantitative amounts of impor ted parts that would result in the charges and
reporting requirements being applicable, the measures are also quantitative regulations that relate "to
the mixture, processing or use of products in specified amounts or proportions" under Article III:5,
and require that a specified amount or proportion of an automobile be supplied from domestic sources
or else a penalty in the form of an additional char ge is assessed. In its submission, China does not
dispute this fundamental Article III:5 analysis.
4.278 Furthermore, as for the breach of Article III:4, th is breach of Article III:5 exists regardless of
any issue with respect to China's tariff bindings, or with respect to whether or not the extra charge
imposed by China is an internal charge or a customs duty.
4.279 Unlike in the case of Article III:4 and Article III:5, China's first submission does discuss a
possible defense to the breach of the Article III:2 obl igations. This defense, however, is unavailing.
Moreover, China even appears to c oncede that at least some aspects of its measures are inconsistent
with Article III:2.
4.280 A determination of an internal charge's inconsistency with Article III:2, first sentence is a two
step process: First, the imported and domestic products at issue must be "like". As explained in the
US's first written submission, imported and domestic auto parts are like parts for the purpose of
Article III:2. China does not contest this. Second, the internal charge must be applied to imported

products "in excess of" those applied to the like domest ic products. In this case, when the types or
value of the imported parts used in the assembly of a vehicle in China exceed the thresholds
established in the measures, the measures impose an internal charge on all imported parts in the
vehicle. Domestic parts are exempt. Thus, the inte rnal charge applied to im ported parts is "in excess
of" any charge imposed on domestic parts, resulting in a plain breach of Article III:2. Again, China
does not contest this.
4.281 China's only defense to this plain breach of Article III:2 is to argue that its charges are
customs duties instead of internal charges under Article III:2. This defense is totally without merit.
4.282 As discussed in the US's first written submission, the distinction between internal charges and
customs duties has been addressed in prior panels under the GATT 1947. In one of the first GATT
1947 reports, Belgian Family Allowances , the Panel examined whether a particular charge should be
treated as an "internal charge" within the scope of Article III:2 of the GATT 1994 or an "import
charge" within the scope of Article II. The Panel concluded that because the charge (a) "was collected
only on products purchased by public bodies for their own use and not on imports as such" and (b)
"was charged, not at the time of importation, but when the purchase price was paid by the public
body," the charge constituted an internal charge. In other words, because the charge depended on the
internal use of the product, it could not be considered a border charge.
4.283 The issue was again addressed in EEC – Parts and Components . In that dispute, the GATT
1947 Panel examined whether charges imposed to allegedly prevent the circumvention of
anti dumping duties should be analysed as customs duties or internal charges. In making its
determination, the Panel focused on "whether the char ge is due on importation or at the time or point
of importation or whether it is collected internally." The Panel noted that the duties were levied on
finished products assembled or produced in the EE C and were not imposed at the time or point of
importation. Accordingly, the Panel concluded th at the EEC charges qualified as "internal charges"
under Article III.
4.284 As in Belgian Family Allowances and EEC – Parts and Components, China's charges at issue
in this dispute are internal ones, not border charges. China's charges are not imposed at the time of, or
as a condition to, the entry of the parts into Chin a. Indeed, the measures at issue do not impose
charges on all imported parts, but only on parts used by manufacturers in the assembly of new
vehicles that exceed the thresholds established by China's measures.
4.285 Instead of being border measures, China's meas ures at issue in this dispute are internal
measures, the application of which turns on th e details of the post-importation manufacturing
operations conducted within China. All of the following factors lead to this conclusion:
− The determination of whether imported parts constitute "features of a complete
automobile" is made based on the details of the operations of an internal assembly
process, rather than on the conditions of the parts at the time of entry.
− Under the measures, all of the parts of a completed vehicle are combined for the
determination of whether the 25 per cent ch arge applies, regardless of the countries
from which those parts originate, when or wh ere they entered the territory of China,
or who imported them. Even if a part has been imported by a supplier, and even if the
supplier has already paid customs fees and duties, the part is nonetheless grouped
together with parts imported by the manufacturer itself when making the
determination.

− The 25 per cent charge is imposed not on the importer, but on the manufacturer –
whether or not the manufacturer is actually the importer of the part in question.
4.286 China's first submission contains what appears to be an important concession on the part of
China with respect to its argument that its measures impose customs duties, not internal charges. In
particular, footnote 20 of its first written submission provides:
In some cases, a manufacturer may assemble a vehicle using a certain number of
imported parts and components that it has purchased from a third party in China. In
those cases, the manufacturer is liable for any difference between the amount of duty
that was assessed on the imported parts at the time of importation and the amount of
duty that should have been assessed based on their use in the assembly of a complete
imported vehicle. As discussed in Part IV.G [of China's first written submission], this
provision is necessary to prevent the use of third-party importers as a means of
circumventing the tariff provisions for complete motor vehicles.
Part IV.G, referred to by China in this footnote , is the section in China's first written submission
stating that any breaches of other GATT article s are justifiable under Article XX(d) of the
GATT 1994. Thus, the way the United States reads this footnote, and we think it is fair, is that China
is conceding that the imposition of a charge on a part imported by a third party is an internal charge –
not a customs duty – inconsistent with Article III, but that China nonetheless has an Article XX(d)
defense.
4.287 This is a key concession. The consideration of , and application of charges on, parts imported
by third parties are not incidental aspects of China' s measures. Rather, they are an integral part of
China's measures. The number or value of parts im ported by third parties ca n be determinative of
whether charges are imposed on all
 imported parts used in a domestically produced vehicle.
Furthermore, and more fundamentally, under China's an alysis, there really is nothing to distinguish
the charge imposed on parts imported by third parti es and parts imported by the manufacturer. If, as
China appears to concede, the charge on the parts imported by a third party is an internal charge, the
charge on the parts imported by manufacturers must be as well.
4.288 In its first written submission, China tries to distinguish Belgian Family Allowances and EEC
– Parts and Components , but its efforts are unsuccessful. Fi rst, China argues that the measures
involved in those two cases are different from its m easures. But the measures in every dispute are
different. The point here is that in both tho se cases, like in the present dispute, the charge was
imposed upon the internal sale of the product, not upon importation. Consequently, regardless of the
label applied to the charge, the charge was an internal one subject to Article III disciplines.
4.289 Second, China argues that its measure is diffe rent because it is imposed for the purpose of
collecting customs duties. But this type of argumen t was explicitly considered and rejected in EEC -
Parts and Components . To quote from that report: "[T]he Panel first examined whether the policy
purpose of the charge is relevant to determining the issue of whether the charge is imposed in
'connection with importation' in the meaning of Artic le II:1(b). ... The relevant fact ... is not the
policy purpose attributed to the charge but rather whether the charge is due on importation or at the
time or point of importation or whether it is collected internally."
4.290 Applying that reasoning here, whether or not, as China claims, its charge is adopted for the
policy purpose of collecting an amount equal to a cu stoms duty to which China believes it is entitled,
that charge is an internal one, subject to Article III disciplines.

4.291 To summarize the Article III discussion, the Un ited States has established breaches of Article
III:2, III:4, and III:5. China's defense – that the ch arge under its measure is a customs duty consistent
with Article II bindings – relates only to the Artic le III:2 breach, and even then China appears to
concede that its measures breach Article III with respect to those parts imported by a third party.
4.292 I would now like to turn to the "caveat" that I have mentioned several times. That is, the
caveat to the statement that nothing in China's first written submission even touches on a possible
defense to its Article III violations. At most, a ll of the discussion in China's first written submission
about the proper classification of imported auto part s and its Article II bindings appears to be an
attempt to invoke an Article XX(d) exception to its Article III breaches, as sketched out vaguely in the
last section of China's first written submission.
4.293 As a result, the United States submits that the proper mode and order of analysis in this
dispute should be as follows. The Panel shoul d first examine China's measures under Article III
disciplines, and – as the United States has shown, find them to be inconsistent with those obligations.
To the extent that China's discussion of tariff cla ssification and Article II bindings have any relevance
in this dispute, it would be as part of Chin a's attempt to meet its burden of establishing an
Article XX(d) defense to its Article III breaches.
4.294 In the United States' view, any Article XX(d) defense by China would be tantamount to the
following argument: that China wish es to breach Article II, and is thus justified to commit a primary
breach of Article III. In other words, the United States submits that China does not even have the
beginnings of an Article XX defense to its Article III breaches.
4.295 Turning now to China's tariff classification argument, the United States submits it is
completely without merit. The argument is based only on GRI 2(a), but China misreads it, and
ignores other interpretive notes as well as the entirety of China's schedule of tariff commitments.
4.296 GRI 2(a) has two parts, neither of which amounts to anything approaching China's
interpretation. First, GIR 2(a) provides that incomplete products may be classified as complete ones,
if they have their essential character. It does not come close to allowing, as China contends, for
China, for example, to classify a brake cylinder as a complete automobile.
4.297 Second, GIR 2(a) allows importers to present an unassembled product for tariff treatment as
the assembled product. The key idea here, which is confirmed by the interpretive notes cited by
China itself, is that the importer "presents" the un assembled product to the customs authority. There
is no notion in GIR 2(a) that a customs authority is supposed to seek out all entries of diverse parts, by
different importers, from different suppliers, and even of different national origin, and then proceed to
collect them into some fictitious unassembled product, to then be classified as the assembled product.
4.298 China also ignores the very first General Rule of Interpretation for the HS, GIR 1. That rule
provides that "classification should be determined according to the terms of the headings and any
relative section or chapter notes." In addition, Chin a ignores the HS chapter h eadings specific to auto
parts, and its own schedule of tariff commitments containing detailed descriptions of various auto
parts and auto assemblies and subassemblies. It is impossible to read China's schedule, with all its
detailed descriptions of auto parts, and to co nclude that nonetheless all auto parts used for
manufacturing purposes must be classified as complete autos. Rather, as both a matter of simple logic
and as an application of GIR 1, auto parts and auto assemblies imported into China must be classified
in accordance with the specific tariff headings listed in China's schedule.

4.299 Consider, for example, an automobile radiator . China's schedule has a specific subheading
for radiators (87089100). There is no basis under Chin a's schedule or the GIRs for China to classify a
shipment of radiators as "unassembled vehicles," in stead of under the tariff line provided in China's
schedule specifically for radiators.
4.300 China's Working Party Report further confirms that China may not try to classify auto parts as
complete vehicles. Part I.1.2 of the Accession Protocol provides that the Protocol, which includes the
commitments referred to in paragraph 342 of the Work ing Party Report, shall be an integral part of
the WTO Agreement. Paragraph 342 of the Working Party Report includes China's commitment
reproduced in paragraph 93 of the Working Party Report. As a result, China's commitment in
paragraph 93 of the Working Party Report is an inte gral part of the WTO Agreement. China does not
appear to dispute this.
4.301 Paragraph 93 of the Working Party Report provides,
Certain members of the Working Party expressed particular concerns about tariff
treatment in the auto sector . In response to questions about the tariff treatment for
kits for motor vehicles, the representative of China confirmed that China had no tariff
lines for completely knocked-down kits for motor vehicles or semi-knocked down
kits for motor vehicles. If China created su ch tariff lines, the tariff rates would be no
more than 10 per cent. The Working Party took note of this commitment.
4.302 This paragraph shows that Members were con cerned about the tariff treatment of CKDs and
SKDs kits, and wanted to ensure that they were subject to a duty of no more than 10 per cent. China's
interpretation of this paragraph, as set out in its first submission, does not withstand even limited
scrutiny. According to China, Members did not really care about the tariff treatment of CKD and
SKD, kits but only cared about the tariff treatment of these items if they had a separate tariff line, and
that China is thus free to charge a much higher rate of duty so long as China classified those items in
some existing subheading. China can present no reason why any Member in any circumstance would
have such an intention, and there is no reason. In short, the only reasonable interpretation of the
Working Party Report is that China committed to imposing no greater than a 10 per cent duty on CKD
and SKD kits.
4.303 The existence of this commitment on CKD and SKD kits highlights the untenable nature of
China's assertion that it is entitled to impose 25 pe r cent duties on all imported parts when certain
thresholds are met. These thresholds are triggere d when far fewer imported parts than in CKD and
SKD kits are included in the assembly of the complete vehicle.
4.304 China also has no basis for asserting, as it does in its first written submission, that many other
WTO Members have put in place measures in any way similar to China's regime for imported auto
parts. For example, China cites a US regulati on (Exhibit CHI-27) regarding "multiple conveyances"
as somehow being supportive of China's proposed interp retation of GIR 2. But, to the contrary, the
regulation shows precisely the opposite. As explaine d in the regulation, it covers entities which, due
to their size and nature, cannot be shipped in a single conveyance, and instead must be imported in an
unassembled or disassembled condition. The rule wa s adopted for the convenience of importers, who
wanted
 their products classified as the complete product under GIR 2, but could not previously do so
because the entity was too large to fit on a single co nveyance (usually meaning a single ship). The
rule eases customs regulations to allow a disassem bled product to benefit from GIR 2 even if the
product must be imported on more than one ship. No thing in this rule is anything like China's auto
parts regime, which requires that separate shipments of parts must receive the tariff treatment of a
complete vehicle. Indeed, the US regulation goes out of its way to assure importers that they "may, of

course
, continue to file a separate entry for each portion of an unassembled or disassembled shipment
as it arrives, if they so choose."38
G. ORAL STATEMENT BY CANADA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
1. Introduction
4.305 As we have set out in our subm issions, and as just highlighted by our co-complainants, China
has failed to comply with its basic obligation, pursuant to Article III of the GATT 1994, to afford
national treatment to automobile parts imported for use in the production of Chinese automobiles. It
has also established domestic content requirements that stand in clear conflict with the TRIMs
Agreement. And it has failed to abide by commitme nts it made in its accession to the WTO, including
that with respect to the tariffs applicable to parts and complete and semi knock-down kits.
4.306 China mischaracterizes its measures as consistent with its Schedule of Concessions and
thereby consistent with Article II of the GATT 1994, which China does in place of dealing squarely
with its violation of Article III.
4.307 To begin by setting this dispute in context, China is a rapidly growing economy. Its
government has clear strategies for the development of key industrial sectors, including automobile
production. As a result, China has become one of the world's largest automobile producers in only a
few short years. It is a remarkable economic success story.
4.308 Foreign suppliers to this sector have sought to benefit from the growth in Chinese automobile
production. They have invested in the Chinese ma rket, have expanded production as the industry has
expanded, and as required have exte nded global supply chains to provi de the capacity and technology
that the market demands. These business decisions, and the economic benefits to China that have
flowed from them, have come as a direct result of the elimination of protectionist measures on China's
accession to the WTO. These protectionist measur es included preferential treatment for vehicles
manufactured in China that met certain domestic -content thresholds. Unfortunately, with the
introduction of the measures, those domestic-content thresholds have returned.
4.309 Automobile production is a complex industria l process. Massive amounts of capital and
materials are required to develop, produce and sel l automobiles. One new family sedan represents
many years of investment in design and development, as well as long input chains with many,
sometimes overlapping suppliers.
4.310 Automobile parts are shipped according to exac ting logistical requirements. In many cases, a
single part – say, a fastener – will move from one supplier to anothe r, undergoing various
transformations en route to its final inclusion in a finished vehicle. And, for many parts, these supply
chains move them not only from factory to factory, but from country to country.
4.311 Of course, in such a complex manufacturing pr ocess, where thousands of individual parts
make up a finished vehicle, many parts are not ascribed to the production of specific vehicles. Instead,
they are bought and sold in large volumes and sh ipped as required to production facilities. China
ignores this complexity in an effort to justify its measures as a necessary solution to a simple problem
of what it calls "circumvention".

38 Exhibit CHI-27, at 31,922, emphasis added.

4.312 The nature of the dispute is, however, simple. At issue is the well-established obligation of
national treatment. WTO Members may not discriminate between products imported into their
territory and like domestic products. And China's measur es, in violation of this obligation, are merely
domestic-content requirements that deny national treatment to imported automobile parts.
4.313 In its submission, China has done an admirable j ob of obfuscating this fact. It has attempted
to establish as a basic premise that the essential natu re of automobile parts imported into China may
not be assessed with any certainty on their presen tation at the border. And, importantly, it has
suggested, without substantiation, that much of th e trade of these parts is aimed at avoiding Chinese
tariffs, and that this avoidance is illegitimate.
4.314 There are clear rules in international trade for assessing goods on importation. These rules
recognize that there must be flexibility on importation at the border to allow for the effective
administration of customs laws and regulations. Canada and other WTO Members recognize this
flexibility in their laws and regulations. But, Ca nada does not accept that this gives Members the
freedom to define importation as it suits them, and thereby undermine the commercial certainty
afforded by the principle of national treatment. China does not address in any meaningful way the
clear relationship of its measures to the obligations set out in Article III of the GATT 1994 and fails
even to answer the basic case against it.
4.315 In its Article XX defence, China presents no compelling evidence that such measures are
necessary. It also fails completely to answer the claim that the measures amount to anything other
than a disguised restriction on internal trade.
2. Legal issues
(a) China has not answered the case under Article III of the GATT 1994
4.316 Canada agrees with China that this case pres ents the question of whether Article II or
Article III applies to charges imposed on imported pa rts used in Chinese manufacturing. Where we
differ, and significantly, is how that question must be answered. The charges at issue are internal, as
Canada's first written submission describes in detail, and therefore subject to the disciplines set out in
Article III.
4.317 China argues that its measures are somehow distinct from those considered in previous GATT
and WTO decisions. This argument rests on China's faulty claim that a charge it describes as a
customs duty under its domestic law must therefore be a customs duty within the meaning of
Article II. To give effect to this fiction, Chin a notionally determines that imported automobile parts
are "in bond", until such time as it applies a final, internal charge to them. And China only applies this
final charge once the part is included in a vehicle produced in China.
4.318 China gives two purported justifications for treati ng imported auto parts this way. First, it
argues that there is no clear dividing line between part s and a complete article made up of those parts.
Its second and related claim is that a difference in classification, and a resulting difference between
the tariffs assigned for parts and the complete article, results in what China calls "circumvention".
4.319 Regarding the first purported justification, there may indeed be instances when an article is an
incomplete or unfinished product on importation, but has all of the essential characteristics of a
complete or finished product. The HS permits cu stoms officials to classify such a product as a whole
product, provided that classification is based on presentation at the border. For example, the HS
specifically permits a vehicle otherwise complete but missing its engine to be classified as an

automobile. Likewise, the practice of many customs authorities is to classify a kit, presented in one
unit at the border, and consisting of all parts necessary to construct a whole vehicle, under the six-
digit tariff sub-heading for whole vehicles.
4.320 Let us leave aside the fact that such kits are often further categorized at the eight-digit level
under a separate, and lower, tariff rate. In mo st cases, parts shipped to gether will properly be
classified either as parts or as an intermediate category provided for in the HS. For example, a chassis
to which is attached an engine, a drive and non-dr ive axle, brakes, and steering – in other words, a
good that has all of the essential characteristics of a whole vehicle except for the body – even if
already assembled, cannot properly be classified as a whole vehicle under the HS.
4.321 Instead, such a combination has its own categor y, namely chassis with engines attached,
under tariff line 87.06.
39 Significantly for this case, China's bound tariff rate for this intermediate
category is the same rate as for parts, and not the much higher rate for whole vehicles. The fact that
the intermediate category is bound at the parts rate is presumably the reason that China ignores this
category, while suggesting that a Member has gr eat discretion under the HS to classify various
combinations of parts as whole vehicles. That the intermediate category exists at all is clear evidence
that there is no such discretion.
4.322 The determination of whether a good has the essen tial characteristic of a different, finished
good occurs on importation – that is, when it first p asses the border. At that point, a "snapshot" is
taken of the product. A Member's customs laws and regulations should provide for an objective
determination of how that snapshot is taken, a nd how related duties are assessed. Those laws and
regulations, in accordance with internationally acce pted principles, may include flexibility to allow
for payment of duty at a date after importation, or permit importers to challenge the accuracy of
classification decisions. They may also provide for the testing of goods where the accuracy of the
classification is at issue.
4.323 While customs practices include procedures that may apply after the snapshot is taken and the
products have entered the customs territory of a Me mber, Members do not take new snapshots at their
discretion. They certainly do not, or should not, take a snapshot of an imported good after it has been
transformed during manufacturing.
4.324 Article II of the GATT 1994 allows Members to apply tariffs on importation "subject to the
terms, conditions or qualifications set forth" in their Schedules. As the written submissions of the
complainants have established and the jurisprude nce makes clear, border charges can only be applied
based on presentation of goods at the border . A Member may impose conditions at the time of
presentation, but only if the Member's Schedule so provides. Nowhere in China's Schedule is there
any term, condition or qualificati on that permits what the measures accomplish. Nowhere is there a
justification for a condition allowing for a determ ination, contrary to established classification
practice, that an automobile part in China's internal market is something other than what the snapshot
at the border clearly showed it to be.
4.325 A few useful conclusions may be drawn from the application of the measures:
• The levy of a 15 per cent additional charge on parts bears no relation to the snapshot
of the condition of the parts as presented at China's border. Two identical imported
parts will be treated differently based upon what happens to them within China.

39 Exhibit JE-2.

• The measures are not restricted to the situation where a single manufacturer imports
all the parts necessary to manufacture a vehicle from a single foreign supplier, or even
from a single foreign country. They apply to arm's-length parts manufacturers in
China that import parts to manufacture a product that, in turn, will be used by a
variety of other arm's-length parts manufact urers. All of this occurs before the
transformed parts are finally sold to a vehicle manufacturer.
4.326 For all of China's attempts to confuse the issue, the EEC – Parts and Components decision
makes clear that the measures apply internally and do not fall under Article II of the GATT 1994.
40 In
that case, the panel found that the EEC's measure, which imposed a charge on certain parts, based on a
claim that such a charge was necessary to avoid circumvention of anti-dumping duties on
manufactured vehicles, was inconsistent with Artic le III of the GATT 1994 and could not be justified
under Article XX. That conclusion applies even mo re strongly to China's measures, which impose a
charge on all imported parts, regardless of origin, regardless of who purchases them, and not based on
an earlier investigation.
4.327 China returns again and again to its misrep resentation of the language of the panel in EEC –
Parts and Components. It points to the general administrative flexibility held by customs officials that
allows them to review and challenge pr evious assessments of goods. Nothing in EEC – Parts and
Components suggests that a classification review can be used to deny national treatment. The
invocation, out of context, of the customs practices of other Members only serves to confuse the real
issue. Whatever flexibility exists in customs ta riff classification, it does not extend to tracing
imported parts in the manufacturing process and cla ssifying those parts as the finished product into
which they are incorporated. That is an internal measure.
4.328 The measures not only track and reclassify go ods well after importation, but they also link
that classification to the use of domestic products. That is, discrimination is linked intrinsically to the
investment measures established by Decree 125 and Announcement 4
41, and to China's express
preference for domestic over imported parts. These measures, and the charges that they impose, apply
only to imported parts. They are, then, trade-related, in violation of Article 2 of the TRIMs
Agreement, and inconsistent with China's Accession Protocol . These points and those relating to
China's violations of GATT Articles III:2, III:4 and III:5 are explored in Canada's written submission.
(b) China's GATT Article XX defences
4.329 This recourse is both explicit and implicit.
4.330 How is this so? China makes a clear, albeit p assing reference to Article XX(d). This is its
first, and express recourse to Article XX. Yet China's primary argument, made ostensibly under
Article II of the GATT 1994, is merely a reinvention of what is, for all intents and purposes, the same
Article XX defence.
4.331 China justifies its measures by arguing that they are required to prevent importers from taking
what China characterizes as efforts to "circumven t" customs duties. Canada agrees with the
observations made by the European Communities in respect of this flawed "anti-circumvention"
theory, and would add the following. In order to defend against this alleged problem, China suggests
that importation can be made on a "conditional basis", that condition being the overall use of domestic

40 GATT Panel Report on EEC –Parts and Components, para. 5.8.
41 Exhibits JE-27 and JE-28, respectively.

content. But such conditions are not permitted by Article II, nor, as China would have it, does the
panel in EEC – Parts and Components suggest that they are.
4.332 China needs to invent this concept of "importation subject to conditions", as it is not assessing
charges on products at the time of their importation. Instead, it is imposing an internal charge on the
theory that such a charge is necessary to prevent "circumvention" of customs duties. Just as in EEC –
Parts and Components , such a charge cannot be defended on th e basis that it is really a customs
charge. As a result, China's only recourse is to Article XX.
4.333 As the Appellate Body noted in Dominican Republic – Import and Sale of Cigarettes , the
analysis of a measure under Article XX is two-tiered.
42 The measure at issue must be provisionally
justified under the specific exception in Article XX, in this case Article XX(d). The onus of that
justification is on China. China must then satisfy the requirements of the chapeau of Article XX.
That is, the measure cannot be applied in a manner constituting an arbitrary or unjustified
discrimination, or a disguised restriction to trade.
4.334 To rely on Article XX(d), China must prove tw o elements: the measures must be designed to
"secure compliance" with laws or regulations that are not themselves inconsistent with some provision
of the GATT 1994; and the measures must be "necessar y" to secure such compliance. Whether a
measure is "necessary" involves a balancing of factors, notably the contribution made by the
compliance measure to the enforcement of the law or regulation at issue, the importance of the
common interests or values protected by that law or regulation, and the accompanying impact of the
law or regulation on imports or exports. A me asure cannot be necessary if a more reasonable
alternative is available, assessed in the light of those three factors.
4.335 China's measures are neither designed to secure compliance, nor necessary. They cannot be
necessary. A Member cannot qualify or reduce commi tments, such as that made in respect of
Article III of the GATT 1994, in order to apply its Sc hedule. Yet, China has made clear that, in its
view, the measures are necessary to "implement a nd enforce" its Schedule. China's defence here
appears to be founded on the following logic:
• The measures concern parts imported into China;
• if those parts were shipped together in one shipment, they could under the HS have
been classified as a whole vehicle;
• vehicle manufacturers are "evading" the tariff on whole vehicles by shipping parts
separately; and, therefore,
• China is justified in imposing an internal charge on those parts to impede this
"evasion".
4.336 China's defence ignores the fact that parts are imported both by vehicle and parts
manufacturers, are sold and undergo further pro cessing in various locations by various independent
parts manufacturers within China. More fundament ally, China's defence fails to identify a problem
that makes the measures necessary. At paragraph 19 of its first written submission, China cites the
example of shipments from company Z in Korea as an illustration of the problem supposedly inherent
in trade in automobile parts. Even if one accepts that the company Z example represents a
classification issue, which Canada does not, this ex ample shows only that a large portion of imported

42 Appellate Body Report on Dominican Republic –Import and Sale of Cigarettes, at paras. 64-70.

parts were used in a vehicle that was assembled in China. It offers no evidence concerning the timing
of shipments, or their frequency, or anything else that relates to the core issu e of the condition of the
goods on presentation at the border. That is, it offers no evidence of any tariff "evasion".
4.337 China maintains a theory that all imported part s used in automobile manufacturing in China
can be classified as a fi nished product. According to this definition of evasion, it is difficult to
imagine any discipline on the application of customs rules where a higher rate of duty can be found to
apply to an imported product. In that context, any classification could be justified as "necessary"
under Article XX, by virtue of reliance on different classifications set out in a Member's Schedule.
4.338 In terms of the chapeau of Article XX, the application of the measures results in an arbitrary
and unjustifiable discrimination against imported parts, and a clear restriction on trade. The measures
are not targeted at specific companies that have been found to "evade" tariffs. Nor are they restricted
in their impact to vehicle manufacturers, which ar e the only ones that, under China's theory, could be
perpetrating this "evasion". This is quite aside from whether imported parts exceeding the thresholds
set out in the measures could even constitute a whole vehicle under the Harmonized System.
4.339 This is quite aside from whether imported pa rts exceeding the thresholds set out in the
measures could even constitute a whole vehicle under the HS. It is perhaps because of that
arbitrariness that China elects to distinguish between the notion of commonly understood bonding
requirements, the application of which are limited in scope, and the expansive security deposit system
that is applied to parts imported into China.
3. Conclusion
4.340 Articles III and II of the GATT 1994 are mutually supporting, that is true. Yet they are
entirely distinct obligations: Article II relates to the charges that a WTO Member may apply to
imported goods at its border; Article III relates to what a WTO Member does after those products pass
the border. Consequently, a violation of Article III cannot be justified merely by invoking Article II.
A WTO Member may justify internal measures that violate Article III on the basis that they are
necessary to secure compliance with customs law, and are therefore defensible under Article XX(d).
But China in this case has not met its burden for establishing such a defence.
4.341 An otherwise-internal measure cannot become a border measure just because a Member says
it does. The jurisprudence makes that clear. Chin a has provided oblique and irrelevant references to
Member practice to confuse this issue, but it has not provided a justification for the inconsistency of
its domestic-content requirements with its WTO comm itments. Decree 125 a nd its related measures
amount, simply, to a violation of China's obligation to provide national treatment to imported auto
parts under Articles III:2, III:4 and III:5 of the GATT 1994, as well as a violation of Article 2 of the
TRIMs Agreement. As a result, the measures constit ute a clear violation of the essential principle of
non-discrimination in international trade.
H. O
RAL STATEMENT BY CHINA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
1. Introduction
4.342 This disputes concerns China's sovereign right to enforce its tariff schedule, and to obtain the
benefit of the reciprocal and mutually advantageous market access arrangements that it negotiated in
connection with its accession to the WTO. Under the Schedule of Concessions that China negotiated
with other WTO Members, it is entitled to maintain a higher rate of duty on motor vehicles than the
rate of duty on parts of motor vehicles. This ta riff rate difference has impor tant revenue and market

access implications for China. Th e question presented in this dispute is whether China can adopt
measures to enforce its tariff schedule and preserve the value of the market access arrangements that it
negotiated when it joined the WTO.
4.343 The position of the complainants in this dispute is that the difference in tariff rates between
motor vehicles and parts of motor vehicles in Ch ina's Schedule of Concessions is effectively
unenforceable. Let me provide the Panel with a specifi c example. As China demonstrated in its first
written submission, there is an auto manufacturer in China that imports 90 per cent of the parts and
components to assemble a particular vehicle model. It imports these parts and components from its
own affiliates, and from a single country. There is no question that China could properly classify
these parts and components as a motor vehicle if they were to enter China in a single shipment.
According to the complainants, however, the auto ma nufacturer can evade the higher rate of duty that
applies to motor vehicles merely by importing these parts and components in separate shipments.
4.344 China does not agree that the Schedule of Concessions that it negotiated is effectively
unenforceable. Nor does China believe that this resu lt is consistent with maintaining the security and
predictability of tariff concessions. The measures that China has adopted to enforce its tariff schedule
are consistent with its obligations under Article II of the GATT 1994, and consistent with the
commitments that it made when it joined the WTO.
2. The issue presented in this dispute
4.345 It suits the complainants' purposes to make this dispute appear significantly more complicated
than it is. The question presented to the Panel is really quite simple: Can China, consistent with its
WTO obligations, classify multiple shipments of auto parts and components based on their substance,
instead of their form? The complainants' position is, in effect, that the GATT requires China to give
effect to form over substance. In their view, im porters have unfettered discretion to structure their
imports of parts and components as they see fit, and the GATT prohibits national customs authorities
from looking behind that structure to discern the commercial reality of what the importer is bringing
into the country.
4.346 If we look at a continuum of possible imports , we can see where the complainants' logic
leads, and what this case is actually about:
• Let's begin with the case of a completely assembled motor vehicle. No one would
reasonably dispute that this is a "motor vehicle," even though it is necessarily
comprised of the parts of motor vehicles.
• What if we removed the tires, the seats, and the doors? Clearly, no one is going to
drive anywhere in this vehicle, and yet it is nonetheless a "motor vehicle" under
GIR 2(a) of the HS because it has the essential character of a motor vehicle.
• Now let's imagine that we take all of the parts necessary to assemble a particular
motor vehicle and place them, entirely unassembled, in a shipping container. Under
GIR 2(a), this is still a "motor vehicl e," because GIR 2(a) encompasses unassembled
parts and components of the complete article, provided that the parts and components,
when assembled, have the essential character of the complete article.
• Finally, let us suppose that we place less than 100 per cent of the parts necessary to
assemble a motor vehicle in our shipping cont ainer. Let's imagine, for example, that

we take out the radiator, the windows, the tires, the battery, the seats, and the doors.
It would still be a motor vehicle under GIR 2(a), provided that the parts and
components in the shipping container have the essential character of a motor vehicle
when assembled.
• So now we come to what this dispute is all about: What if we take our shipping
container of parts and components that have the essential character of a motor vehicle,
and divide them into, for example, four shipping containers? And instead of
importing these shipping containers in a singl e consignment, what if we import them
in four separate consignments over four consecutive weeks? Did we import a motor
vehicle, or did we import parts and co mponents of a motor vehicle? Most
importantly, should we be entitled to pay the lower duty rate that applies to parts and
components of motor vehicles simply because we took our single shipping container
and divided it into four shipping containers? That is the issue presented in this case.
4.347 The necessary consequence of the complainants' position is that an auto manufacturer that
assembles the same vehicle model from the same imported parts and components can avoid the higher
duty rate on motor vehicles solely by importing the parts and components in several shipments instead
of one shipment. Nothing in Article II of the GATT 1994, nothing in China's Schedule of
Concessions, and nothing in the HS supports this arbitrary result.
3. The challenged measures interpret and en force China's tariff provisions for motor
vehicles
4.348 China has demonstrated in its first written s ubmission, and will con tinue to demonstrate
throughout these proceedings, that the measures challe nged in this dispute implement and give effect
to a proper interpretation of China's tariff provisions for motor vehicles. China has interpreted the
term "motor vehicles" in its Schedule of Concessions to encompass the importation of auto parts and
components that have the essential character of a comp lete motor vehicle, without regard to whether
those parts and components enter China in one shipment or in multiple shipments. This interpretation
is entirely consistent with ordinary methods of treaty interpretation under the Vienna Convention.
4.349 Without reviewing all of the interpretive ar guments set forth in China's first written
submission, China would like to emphasize two points. First, the interpretation of the term "motor
vehicles" that China has adopted is consistent with the object and purpose of the GATT. The
Appellate Body has recognized that "a basic object and purpose of the GATT 1994, as reflected in
Article II, is to preserve the value of tariff con cessions negotiated by a Member with its trading
partners, and bound in that Member's Schedule."
43 The Appellate Body has likewise observed that the
tariff concessions negotiated by Members are intended to be "reciprocal and mutually
advantageous."44
4.350 Preserving the value of reciprocal and mutually advantageous tariff concessions is necessarily
a two-way street. It is fully consistent with th is object and purpose for China to preserve the value,
from both a revenue and market access perspective, of the higher bound duty rates that it negotiated
for motor vehicles. It is not consistent with this object a nd purpose to conclude that auto
manufacturers can evade the higher tariff rates on motor vehicles by importing parts and components
in multiple shipments, when those parts and co mponents would have been classified as a motor
vehicle had they entered China in a single shipment.

43 Appellate Body Report on Argentina – Textiles and Apparel, para. 47.
44 Appellate Body Report on EC – Chicken Cuts, para. 243 (emphasis added).

4.351 The second point that China would like to emphasize is that it is entirely consistent with
international customs practice for China to apply GIR 2(a) to multiple shipments. The WCO has
specifically affirmed that the classification under GIR 2(a) of goods assembled from multiple
shipments of imported components is a matter to be resolved by each country in accordance with its
national laws and regulations. This means that the interpretive principles of GIR 2(a) can be applied
to multiple shipments of parts and components on th e basis of the importer's demonstrated practice of
assembling imported parts and components into a complete article.
4.352 This application of GIR 2(a) is confirmed and reinforced by the subsequent practice of WTO
Members in classifying multiple shipments of part s and components on the basis of the importer's
demonstrated practice of assembling those parts and components into a complete article. One of the
circumstances in which Members have done this is where it is necessary to prevent the circumvention
of duties that apply to complete articles.
4.353 Once it is recognized that there is no absolute and inviolate rule against applying GIR 2(a) to
multiple shipments, much of the complainants' cas e against the challenged measures simply falls
away. A necessary consequence of applying GIR 2(a) to multiple shipments is that customs
authorities need some form of administrative pr ocess to keep track of how companies import and
assemble parts and components into complete articl es. That is what the challenged measures do.
What the complainants characteriz e as an internal measure is not hing more than the process that
China has adopted for establishing the intention of an auto manufacturer to import and assemble parts
and components that have the essential character of a complete motor vehicle, and to keep track of the
parts and components that the auto manufacturer imports for this purpose.
4. The threshold issue before the Panel: Interpreting the scope of Article II
4.354 This brings China to the critical threshold issue before the Panel: Whether the measures
challenged in this dispute are border measures s ubject to Article II of the GATT 1994, or whether
they are internal measures subject to Article III of the GATT 1994. The Panel must resolve this issue
at the outset to determine which set of disciplines is relevant to its eval uation of the challenged
measures.
4.355 The relationship between Article II and Article III is of critical systemic importance to the
operation of the GATT, and yet there is little in th e text of the GATT itself to define the boundary
between these two sets of disciplines. Given how im portant these two articles are to the functioning
of the international trade system, it is also surp rising that there is little GATT or WTO jurisprudence
concerning the relationship between Article II and Article III.
4.356 There are two general points that are relevant to this threshold issue. First, it is evident from
the context of the GATT, as well as from its object and purpose, that the relationship between
Article II and Article III is binary. That is, a measu re is either a border measure subject to Article II
or an internal measure subject to Article III, but it cannot be both simultaneously.
4.357 The second general point is that the classificati on of a measure under Article II or Article III
is necessarily independent of an evaluation of whethe r the measure is consistent with the relevant set
of disciplines. The classification of the measure logically precedes the determination of conformity.
4.358 With these two general points in mind, we can exam ine the scope of Article II. Article II:1(a)
states that "each contracting party shall accord to the commerce of the other contracting parties
treatment no less favourable than that provided for" in the relevant Schedule of Concessions. In the
context of an article that concerns the imposition of customs duties, it is reasonable to interpret the

term "commerce" to be synonymous with "imports." Thus, in broad terms, we know that Article II
concerns charges that Members impose upon imports of products from other countries.
4.359 Article II:1(b) states that the products of othe r Members "shall, on their importation into the
territory to which the Schedule relates, and subject to the terms, conditions or qualifications set forth
in that Schedule, be exempt from ordinary custom s duties in excess of those set forth and provided
therein." Thus, measures that fall within the scope of Article II are measures that Members
(1) impose upon the products of other Members "on their importation" into the customs territory, and
(2) concern the imposition of "ordinary customs du ties" set forth in the Member's Schedule of
Concessions.
4.360 It is evident from the arguments of the parti es that much of the disagreement concerning the
classification of the challenged measures ultimately relates to the meaning of the term "on their
importation" in Article II:1(b). Much of the di spute before the Panel comes down to whether the
challenged measures do or do not impose charges on motor vehicles "on their importation" into the
customs territory of China.
4.361 What does it mean for a measure to impose duti es on products "on their importation" into a
Member's customs territory? We know that the te rm "on their importation" is not limited to the
imposition of customs duties at the exact point in time and space at which products from another
country cross the border. We know this because there is probably not a single national customs
system in the world that operates on this basis. As China demonstrated in its First Written
Submission, national customs authorities routinely make classification dete rminations and impose
customs duties long after the point at which goods have crossed the border.
4.362 If the scope of Article II is not defined by the time or place at which the charge is collected,
then how is it defined? The GATT Panel in EEC – Parts and Components considered that a measure
is within the scope of Article II if it imposes charges " conditional upon the importation of a product
or at the time or point of importation."
45 The panel did not elaborate upon what it means for a charge
to be imposed "conditional upon the importation of a product …" Nor did it discuss the textual or
contextual basis for its interpretation. Bu t we can use the panel's interpretation in EEC – Parts and
Components as at least the beginning of a proper interpretation of Article II under the Vienna
Convention.
4.363 Let us recall, in this regard, that Article II concerns the manner in which Members impose
customs duties and other types of border charges on imports from other Members. It is consistent
with this context to interpret the term "on thei r importation" to encompass charges that Members
impose as a condition of the importation of products fro m other countries. In the specific context of
Article II:1(b), first sentence, the condition of impo rtation must relate to the obligation to pay an
ordinary customs duty of a type set forth in the Member's Schedule of Concessions.
4.364 Interpreting the term "on their importation" to include measures that Members impose
"conditional upon the importation of a product" is likew ise consistent with the object and purpose of
the GATT. As I have already noted, the Appellate Body has stated that a basic object and purpose of
the GATT is to preserve the value of tariff concessions negotiated by Members. It is consistent with
this object and purpose to interpret Article II to encompass conditions that Members impose upon the
entry of products into their customs territory, and that serve to preserve the value of its negotiated
tariff concessions.

45 GATT Panel Report on EEC – Parts and Components, para. 5.5 (emphasis added).

4.365 These considerations inform the Panel's assess ment of what it means for a charge to be
imposed "conditional upon" the importation of product s into a country. China agrees with the panel
in EEC – Parts and Components that the manner in which a Member characterizes a particular charge
cannot determine whether the charge is one that is "conditional upon" the im portation of a product.
Rather, consistent with the context of Article II and the object and purpose of the GATT, China
considers that a charge is "conditional upon" the importation of a product if the charge bears an
objectively ascertainable relationship to the fulfillment of a customs liability.
46 For the reasons that
China has explained, the time or place at which th e charge is assessed is not determinative; what
matters is whether the charge objectively relates to a duty obligation that arose as a condition of the
importation of the product.
5. The challenged measures are border measures within the scope of Article II
4.366 The measures challenged in this dispute are with in the scope of Article II because they bear
an objective relationship to the fulfillment of a cu stoms liability. The me asures ensure that the
importation and assembly of auto parts and compone nts receives the same customs treatment without
regard to whether the parts and components enter Ch ina in one shipment or in multiple shipments.
The measures thereby give effect to China's ta riff provisions for motor vehicles, and preserve the
value of the tariff concessions that China negotiated in connection with its accession to the WTO.
4.367 The relationship between the charges that China imposes under Decree 125 and the
fulfillment of a customs obligation is objectiv ely ascertainable from the manner in which the
measures operate. China has provided a detailed desc ription of how the measures operate in its First
Written Submission, but it is important to highlight several key features:
− First, the auto manufacturer determines wh ether it will assemble a particular vehicle
model – let's call it the X900 – from importe d parts and components that China would
classify as having the essential character of a motor vehicle if they were to enter China in
a single shipment. Let's assume for the sake of illustration that the X900 meets one or
more of the thresholds under Decree 125 for a complete motor vehicle.
− Thereafter, when the auto manufacturer imports parts and components to assemble the
X900, it must: first, enter parts and components for the X900 separately from parts and
components for other vehicle models; second, d eclare at the time of importation that the
parts and components are part of a larger collection of imported parts and components
that, when assembled together, have the essentia l character of a motor vehicle; and third,
provide a customs bond for those entries.
− The X900 parts and components that the auto manufacturer imports on this basis remain
in a bonded status. The Customs General Administration of China collects the applicable
customs duties on these parts and components when the auto manufacturer fulfills its
stated intention to assemble them into an X900 – a motor vehicle that the manufacturer
has previously verified as having the essential character of a complete motor vehicle.
The Customs General Administration assesses th e applicable duties only on the imported
auto parts and components in that vehicle, and in accordance with ordinary methods of
customs valuation.

46 The European Communities has referred to this as the "objectively ascertainable purpose of a levy."
EEC Comments on the Panel Report on EEC –Parts and Components, L/6676 (16 May 1990) at 2.

4.368 These conditions that China attaches to the impor tation of auto parts and components provide
the administrative mechanism for applying the interpre tive rules of GIR 2(a) to multiple shipments.
These are the conditions of importation that allo w China to ascertain the commercial reality of
whether an auto manufacturer has assembled a vehi cle from imported parts and components that have
the essential character of a motor vehicle. China h as already demonstrated that it is consistent with
GIR 2(a) to classify multiple imports of parts and components on the basis of the importer's practice
of assembling those parts and components into a comp lete article. The conditions that China attaches
to the importation of auto parts and components do nothi ng more than establish and give effect to that
intention.
4.369 For these reasons, the charges that China im poses under the challenged measures bear an
ascertainable relationship to the fulfillment of a duty obligation that arose as a condition of
importation. Unlike the measures at issue in EEC – Parts and Components, the charges that China
imposes under the challenged measures relate back to a condition that attached at the time of
importation. That condition is that when the auto manufacturer fulfills its stated intention to import
and assemble parts and components that have the es sential character of a motor vehicle, it will be
obligated to pay the applicable duty rate for motor vehicles, just as if it had imported those parts and
components in a single shipment.
4.370 It is simply not the case, as the complainants have suggested, that no determination of duty
liability is ever based on what happens to an importe d article after the point of importation. There are
many situations in international customs practice in which this happens. China will focus on one such
instance: The US inward processing regime that it calls "Temporary Importation Under Bond," or
"TIB".
4.371 Under the US TIB rules, an importer can ente r articles into the United States conditionally
free of duty if the importer intends to alter or pro cess that article and export it from the United States
within a period of one year. The importer pays no du ty at the time of importation, but is required to
provide a bond. The importer declares at the time of importation that it intends to alter or process the
article and re-export it within one year. If the importer does not alter or process the article within one
year, it is, of course, liable for th e duty that it would have paid had it not entered the article on the
condition of re-exportation.
4.372 The US TIB system involves a determination of duty liability that is based on what happens
to the article after the point of importation – was it altered or processed and re-exported, or did it
remain within the United States after a period of a y ear? However, the fact that the determination of
duty liability is contingent upon what happens to the imported article does not mean that any duties
that the United States thereby imposes are "internal" charges under Article III. Rather, they are border
charges because they relate back to a condition that attached at the time of importation. The importer
declared that it was going to use the imported artic le for a particular purpose, and provided a bond to
secure that commitment. The final determination of duty liability is deferred until the condition that
attached at the time of importation is either fulfilled or not fulfilled. Even though this occurs after the
point of importation, any charge that the Unite d States imposes under these rules bears an objectively
ascertainable relationship to the satisfaction of a duty liability. It is therefore a border measure.
4.373 The measures challenged in this dispute are bor der measures for the same reason that the US
TIB rules, and other examples like it, are border measures – all of these measures objectively relate to
the fulfillment of a customs obligation. In the case of the measures challenged here, that obligation is
to pay the applicable duty rate for motor vehicles on imports of parts and components that have the
essential character of a motor vehicle.

6. The challenged measures do not impose excess customs duties
4.374 Once it is properly established that the challe nged measures are border measures within the
scope of Article II of the GATT 1994, the question th en becomes whether these measures result in the
imposition of ordinary customs duties in excess of t hose set forth in China's Schedule of Concessions.
China perceives only three possible arguments that the challenged measures result in the imposition of
excess customs duties. Each one of these arguments is without basis.
4.375 The first argument is the argument advanced by the European Communities in its first written
submission, to the effect that China's tariff rates fo r motor vehicles apply only to imports of complete
motor vehicles.
47 We know this is wrong, because GIR 2(a) plainly provides that something less than
100 per cent of the parts and components of an ar ticle can be classified as the complete article
provided that they have the essential character of the complete article, and without regard to their state
of assembly or disassembly.
4.376 The second possible argument is that the cha llenged measures result in the imposition of
excess customs duties because, as Canada puts it, "the only relevant factor" in customs classification
is what is in the shipping container when it crosses the border. 48 We know this is wrong, among other
reasons, because the WCO has stat ed that the classification of articles assembled from multiple
shipments of imported parts and components is a matter to be determined under national law, and
because there are numerous circumstances in wh ich WTO Members combine multiple shipments for
classification purposes, including when necessary to prev ent the circumvention of duties that apply to
the complete article.
4.377 The third possibility is that the complainants simply disagree with where China has drawn the
line for purposes of the essential character test. 49 As China illustrated in its first written submission,
GIR 2(a) necessarily gives rise to a continuum of pa rts and components that could be said to have the
essential character of a complete article. If the compla inants are of the view that China has drawn the
line at the wrong point along this continuum, the complain ants must identify, either to this Panel or to
the HS Committee of the WCO, the specific combinations of parts and components that, in their view,
do not have the essential character of a motor vehicl e. This determination can only be made on the
specific facts of each combination. China does not consider that the complainants have made any
such showing. In any event, even if the complain ants were able to demonstrate that the challenged
measures result in the imposition of excess customs duties when applied to a specific combination of
parts and components, this would not mean that the measures result in the imposition of excess
custom duties in all cases.
7. Conclusion
4.378 China has thus demonstrated, first, that the challenged measures are border measures subject
to Article II of the GATT 1994. It follows that the complainants' claims based on the contrary
assertion that the measures are internal measures subject to Article III of the GATT 1994 are without
basis. The complainants' claims under the TRIM s Agreement and China's Accession protocol must
fail for the same reason. Secondl y, China has demonstrated that, as border measures, the challenged
measures do not result in the imposition of ordinary customs duties in excess of those set forth in
China's Schedule of Concessions. The measures therefore do not violate China's WTO commitments
under Article II of the GATT 1994.

47 The European Communities' first written submission, para. 245.
48 Canada's first written submission, para. 115.
49 See, e.g., Canada's first written submission, para. 143.

4.379 In conclusion, China would respectfully suggest that, as these proceedings continue, the Panel
keep the following questions in mind:
• First, what is the specific interpretive basis under Article 31 of the Vienna Convention
for the complainants' position that China is not allowed to classify multiple shipments
of auto parts and components on the basis of the manufacturer's demonstrated practice
of assembling those parts and components into a complete motor vehicle? In
particular, where is this prohibition to be found (1) in the GATT 1994, (2) in China's
Schedule of Concessions, (3) in the Harmonized System, or (4) in relevant decisions
of the WCO?
• Second, how do the complainants believe that it is consistent with the security and
predictability of tariff concessions that were meant to be mutually advantageous to
conclude that importers can pay a lower ra te of duty based on nothing other than the
fact that they import parts and components in multiple shipments instead of one
shipment?
• Third, with respect to the scope of Article II, how does the complainants'
interpretation of the term "on their import ation" comport with ordinary methods of
treaty interpretation, including the object and purpose of the GATT and the
subsequent practice of WTO Members? Is it a practical and workable interpretation,
and does it recognize the realities and complexities of contemporary customs
practices?
• Finally, when the complainants seek to di stinguish their own customs practices or the
customs practices of other WTO Members fro m the measures that China has adopted,
have the complainants explained how tho se alleged distinctions detract from the
relevance of those practices to the interpretive issues in this dispute? It should not be
sufficient for the complainants to assert that they undertake certain customs practices,
such as classifying multiple shipments of pa rts and components on a combined basis,
only in what they perceive to be different contexts – the question is whether those
alleged differences in context matter to whether it is releva nt subsequent practice
under Article 31 of the Vienna Convention. In short, are these distinctions that make
a difference, or are they distinctions that are merely convenient?
4.380 China believes that the complainants' answers to these questions will help to narrow and focus
the issues in this dispute. China looks forwar d to questions from the Panel and to the parties'
discussions of these matters.
I. SECOND WRITTEN SUBMISSION OF THE EUROPEAN COMMUNITIES
1. Introduction
4.381 China has conceded on the detailed arguments made by the European Communities under
Article 2 of the TRIMs Agreement and Article III of the GATT 1994 since it does not even begin
rebutting the prima facie case brought by the complainants. Inst ead, its entire defence strategy is
based on the premise that the majority of the measures should only be examined under Article II of
the GATT 1994 and on the basis of an unprecedented in terpretation of the Harmonised System. The
arguments put forward by China put in question th e very basic principles of the WTO Agreement and
the GATT 1994.

2. Factual background
4.382 China portrays a fundamentally flawed and unrealistic image of the automotive industry
which "conspires" to circumvent China's tariff rate s on whole vehicles. In reality, vehicle production
is a highly complex process, involving a constant inflow of parts from various origins through long
supply chains to manufacturing facilities where co mplex technologies are integrated. One single
vehicle model can contain thousands of different pa rts from all over the world. Many of these would
be used interchangeably in several different models if China's Measure did not require an artificial ex
ante identification of their destination in a particular model.
4.383 After requiring manufacturers to artificially identify all the parts used in a specific vehicle
model and to declare imported parts as complete vehi cles (which in reality are just parts), China now
boldly uses this as "evidence" of a circumvention c onspiracy. This "anti-circumvention theory" was
invented ex post to justify measures which were actually adopted to "[n]urture a group of relatively
strong auto-parts manufacturers" (Article 4 of Policy Order 8). It also ignores that nothing is
circumvented if vehicle manufacturers decide to import auto parts and manufacture them into vehicles
in China.
3. Legal argument
(a) The violation of the TRIMs Agreement and the Accession Protocol of China relating to the
TRIMs Agreement
4.384 The measures are inconsistent with Article 2 of the TRIMs Agreement in conjunction with
paragraphs 1(a) and 2(a) of the Illustrative List and China's Accession Protocol to the WTO. Contrary
to China's only defence in this resp ect, these claims do not require any ex ante determination of
whether the measures are "internal" or not.
4.385 The European Communities reiterates that th e measures are "investment measures" and
"trade-related". For the reasons already set out in the first written submission of the European
Communities, they are covered by paragraphs 1(a) and 2(a) of the Illustrative List to which Article 2.2
of the TRIMs Agreement refers. Therefore, they must be considered to be in consistent with Articles
III:4 and XI:1 of the GATT 1994 and, consequently, Ar ticle 2.1 of the TRIMs Agreement. China also
violated its commitments in Part I, Articles 1.2 (in connection with paragraphs 203 and 342 of the
Working Party Report) and 7.3 of its Accession Protocol.
(b) The violation of Article III of the GATT 1994
4.386 China has, in spite of the prima facie case established by the complainants and explicit
requests from the Panel, still not responded to th e claims under Article III of the GATT 1994.
Instead, it bases its entire defence strategy, as fo r the claims under the TRIMs Agreement, on the
premise that the measures are not "internal". China' s obstructive silence with regard to the essence of
the main claims in these proceedings can only mean that it concedes the inconsistency of its measures
with Article III of the GATT 1994.
(i) The "internal" nature of the measures
4.387 Contrary to China's view, the measures do not impose "ordinary customs duties" within the
meaning of Article II: 1(b), first sentence of the GATT 1994.

4.388 "Ordinary customs duties" are financial charges in the form of a tax and imposed on products
"on their importation into the territory". They n eed to be distinguished from internal charges under
Article III:2 that are imposed on products already "im ported into the territory". In a temporal sense,
the term "on importation" means that ordinary cu stoms duties are normally collected "at the time or
point of importation" (see Interpretative Note Ad Article III). The term "on importation" also has a
material aspect limiting it to charges due because of importation of the product, and not because of
other events or criteria, e.g. the amount of local content in products into which the imported product is
subsequently assembled.
4.389 China's attempts to extend the scope of the te rm "on importation" to cover an indefinite
"process of importation" and all charges that " bear[] an objective relationship to the administration
and enforcement of a valid customs liability " find no support in the wording, context and purpose of
Article II:1(b), first sentence.
4.390 The charges imposed on imported auto parts under the measures are no ordinary customs
duties, but internal charges. They are not collected at the time or point of importation, but internally
after assembly and manufacture. This is not affect ed by the declaration and the duty guarantee to
which China refers, inter alia since both focus on the way in which the imported parts will be used
internally within China, rather than on the contents of a consignment upon importation.
4.391 Furthermore, the charges under the measures are not due because of importation of the auto
parts. Their imposition rather depends on whether th e imported auto parts are verified as automobile
parts characterized as complete vehicles which in turn depends on whether the imported parts are
assembled into vehicles with an insu fficient level of local content. Irrespective of how auto parts are
presented "on importation", charges are imposed on th e basis of how the auto parts are used after
importation in China.
4.392 For Article 29 of Decree 125, which provides for charges even if manufacturers purchase auto
parts on the Chinese internal market from suppliers that previously imported them, China had to
implicitly acknowledge that these are "internal" char ges (allegedly justified under Article XX(d) of
the GATT 1994). The European Communities considers that Article 29 of Decree 125 cannot be
isolated in that respect from the remainder of the measures.
(ii) The violation of Articles III:4, III:2 and III:5 of the GATT 1994
4.393 As set out in detail in the first written submission of the European Communities, imported
and domestic auto parts are "like" within the meaning of Articles III:4, III:2 and III:5 of the
GATT 1994. The measures constitute generally app licable "laws, regulations and requirements
affecting [the] internal sale, offering for sale, purchas e, transportation, distribution, or use" within the
meaning of Article III:4 and treat imported auto pa rts "less favourably" than like products of Chinese
origin. As regards Article III:2, the internal charges applied to imported auto parts are "in excess of"
those applied to the like domestic products. The measures are also inconsistent with Article III:5
since they constitute an "interna l quantitative regulation relating to the mixture, processing or use of
products in specified amounts or proportions" which "requires … that any specified amount or
proportion" of auto parts used in the assembly and manufacture of vehicles "must be supplied from
domestic sources" and not imported.
50

50 In the alternative, the measures are inconsistent with the second sentences of Articles III:2 and III:5
respectively.

(iii) Accession Protocol
4.394 China also acted inconsistently with its obligations under the WTO Agreement as set out in its
Accession Protocol, in particular Part I, Article 7.2 of the Accession Protocol by introducing non-
tariff measures that are inconsistent with Article III, paragraphs 2, 4 and 5 of the GATT 1994 and not
justified under the provisions of the WTO Agreement.
(c) Alternatively: the measures are inconsistent with Article II:1 (a) and (b) of the GATT 1994
4.395 It is important to emphasise from the outset that China's arguments do nothing less than
undermine the whole system of tariff classification and the object and purpose of the WTO agreement
and the GATT 1994 namely "the security and pr edictability of the reciprocal and mutually
advantageous arrangements directed to the substa ntial reduction of tariffs and other barriers to
trade".
51
(i) The HS in the context of WTO law
4.396 In the context of this case there is a rare point of agreement between the parties: the HS is
relevant and constitutes context for purposes of interpreting tariff commitments in the WTO Members'
Schedules. This has been confirmed by the Appellate Body. 52 The European Communities considers
that the HS could also fulfil the criteria in Article 31(3)(c) of the Vienna Convention as a "relevant
rule[] of international law applicable in the relations between the parties".
4.397 However, there is considerable disagreement on how the relevant parts of the Chinese tariff
schedules should be interpreted. More fundamentally , there is considerable disagreement on the very
basic rules on which the HS is founded.
4.398 It is of paramount importance to underline that when goods are classified in the HS it is
always done on the basis of the objective characteristi cs of the product at the time of importation, that
is, as imported and presented to customs on a shipme nt-by-shipment basis. The intentions of the
importer and differing duty rates are irrelevant. With the exception of China, this is the position
shared by all parties to this dispute, including the third parties that have addressed Article II of the
GATT 1994 in their submissions. More importantly , this position was confirmed by the Appellate
Body in EC – Chicken Cuts:
We agree with the Panel that, in characterizing a product for purposes of tariff
classification, it is necessary to look exclus ively at the "objective characteristics" of
the product in question when presented for classification at the border.53
(ii) GIR 1: Motor vehicles vs. parts thereof
4.399 GIR 1 is the backbone of the application and inte rpretation of the HS and, hence of the tariff
schedules of most WTO members such as China's. Th e overwhelming majority of tariff classification
situations are decided on the basis of GIR 1, which reads as follows:
The titles of Sections, Chapters and sub-Ch apters are provided for ease of reference
only; for legal purposes classification shall be determined according to the terms of

51 Appellate Body Report on EC – Chicken Cuts, para. 243.
52 Appellate Body Report on EC – Chicken Cuts para. 199.
53 Appellate Body Report on EC – Chicken Cuts para. 246.

the headings and any relative Section or Chapter notes and, provided such headings
or Notes do not otherwise require , according to the following provisions. (emphasis
added)
4.400 GIR 1 is very clear: there is a clear hierarchy between the rules. If the classification can be
determined according to the terms of the head ings and any relative Section or Chapter notes , other
rules are simply not applicable.
4.401 At the level of China's tariff schedules, there is no ambiguity on where complete vehicles,
intermediate products and parts of complete vehicles should be classified. They are very clearly
subject to different tariff headings.
4.402 Therefore, the other rules and in particular GIR 2(a) on which China bases its entire defence
strategy are simply not applicable at the level of the tariff headings and without considering a very
specific shipment as presented to customs at the border.
4.403 This means also that in the overwhelming majority of cases it is a simple task to interpret the
notions of "motor vehicle" and "parts" 54 of such motor vehicles under Article 31 of the Vienna
Convention as the European Communities has demonstrated in its first written submission. It is
important not to lose sight of the simplicity of this case from the point of view of tariff classification
at the level of China's tariff schedules: the fundame ntal difference between the ordinary meanings of
the words in the tariff headings is confirmed by their context and object and purpose.
(iii) The exceptional situations in casu subject to GIR 2(a)
4.404 China bases its entire defence strategy on GI R 2(a). The European Communities considers
that GIR 2(a) is of extremely limited relevance for the present case. Recourse to GIR 2(a), which is
one of the "following provisions" within the meaning of GIR 1, can only be relevant in very specific
individual cases "as presented" to customs, and not at the level of Chin a's tariff schedules generally as
China insists.
4.405 Apart from the very limited relevance of GIR 2(a) for the present case, the European
Communities wishes to stress that China's defence st rategy is based on an unprecedented reading of
GIR 2(a). China has in the course of the proceedings put forward a wide range of evolving and often
inconsistent arguments.
4.406 The European Communities considers that the "multiple shipments" theory invented by China
ignores the plain wording of GIR 2(a), in particular that the classification must be determined on the
basis of the article "as presented", and is not su pported by the WCO Decision to which China refers.
China also ignores the "essential character" element contained in GIR 2(a). Furthermore, China
obviously construed its "multiple shipments" theory ex post since nothing in the wording of the
measures refers to GIR 2(a). It is also worth noting that China appears to apply its "multiple
shipments" theory exclus ively in the automobile sector, and only since 2004 – which happens to
coincide with the moment in which China decided to "[n]urture a group of relatively strong auto-parts
manufacturers".55 (Article 4 of the Automotive Policy Or der). Furthermore, China's "multiple

54 China continuously insists that the key question before the Panel is to interpret the notion of "motor
vehicle" in China's tariff schedules. This is not correct as a proper analysis requir es to examine the relevant
words in all relevant tariff headings starting with "p arts and accessories" of motor vehicles, "chassis fitted with
engines" etc.
55 Article 4 of Policy Order 8.

shipments" theory is not supported by any allege d anti-circumvention practice of WTO Members.
The European Communities consider s also that China's arguments on the importer's intention are
contradictory and irrelevant for th e case. Finally, the application by China of GIR 2(a) to CKD and
SKD kits in a systematic way is not consistent with that rule, which is to be applied in casu.
(iv) Conclusion
4.407 The European Communities has demonstrated that under each of the criteria in Article 57 of
Policy Order 8, Article 21 of Decree 125 and Article 13 of Announcement 4, the measures require to
classify auto parts as complete vehicles in viola tion of the HS nomenclature and, as a result, impose
on auto parts the higher 25 per cent duty on complete vehicles instead of the bound duty rate of 10 per
cent for auto parts.
4.408 This establishes that the measur es are as such inconsistent w ith China's obligations under
Article II of the GATT 1994. The mere fact that there may be exceptional individual instances where
a large combination of parts as presented to customs at the border in a single consignment would
qualify as a complete vehicle pursuant to GIR 2(a) of the HS and in the light of the Chapter note to
Chapter 87 cannot exempt the Chinese measures from being, as such
, incompatible with Article II of
the GATT 1994 when it has been established that their application will necessarily result in WTO
violations.
(d) No justification under Article XX(d) of the GATT 1994
4.409 China has not established that the violations of the GATT 1994 are justified under
Article XX(d) of the GATT 1994. The measures fall neither under paragraph (d), nor do they satisfy
the requirements of the chapeau of Article XX.
4.410 Contrary to China's allegation, the measur es are not necessary to secure compliance with
"China's tariff schedule relating to imports of 'motor vehicles'". The measures explicitly do not intend
to secure compliance with China's tariff schedule, but to develop th e Chinese auto parts industry. A
justification of the Article II infringement is excluded since measures providing treatment less
favourably than the schedule cannot secure complian ce with the latter. The justification of the
Article III infringement also fails. China has not demonstrated a real problem of tariff evasion. The
measures are unsuitable to enforce the schedule si nce they impose charges amounting to complete
vehicles tariffs in cases where there are no imports of complete vehicles. China has also failed to
show that measures less burdensome than the local content requirements, administrative procedures
and internal charges under the measures, for example investigations in individual instances of alleged
evasion, would be insufficient to secure compliance with its tariff schedule.
4.411 China has not even attempted to show that its measures satisfy the chapeau of Article XX and
consequently failed in its burden of proof. In any ev ent, they do not since they result in both arbitrary
and unjustifiable discrimination and also constitute a disguised restriction on trade. The primary
purpose of the measures is to afford protection to domestic industry from imported competition.
(e) The measures are inconsistent with Article 3 of the SCM Agreement
4.412 Were the Panel to find that the measures fa ll under Article II of the GATT 1994 and that
China is entitled to impose the tariff rate fo r vehicles on the imports of auto parts, quod non , the
measures would in any case be a prohibited subsidy pursuant to Articles 3.1(b) and 3.2 of the SCM
Agreement.

4.413 The measures constitute a financia l contribution within the meaning of Article 1.1(a)(1)(ii) of
the SCM Agreement. Imported auto parts satisfying the local content requirements of the measures
are charged at 10 per cent. The revenue "other wise due" follows from the "definitive, normative
benchmark" of Article 28 of Decr ee 125 which charges 25 per cent on imported auto parts that do not
satisfy the local content requirements. China's st atement that the 25 per cent duty and the 10 per cent
duty treatment "are not the same 'fiscal situations' for purposes of making a proper comparison" is not
further substantiated.
4.414 The measures also confer a benefit within the meaning of Article 1.1(b) of the SCM
Agreement and are contingent upon the use of do mestic over imported goods within the meaning of
Article 3.1(b) of the SCM Agreement.
4. Conclusion
4.415 The measures are inconsistent with Article 2 of the TRIMs Agreement, Articles III:4, III:2
and III:5 of the GATT 1994 and China's Accession Protocol, and are not justified under Article XX(d)
of the GATT 1994. In the alternative, they violate Article II of the GATT 1994 or Article 3 of the
SCM Agreement.
J. S
ECOND WRITTEN SUBMISSION OF THE UNITED STATES
1. Introduction
4.416 China's measures amount to clear and straightfo rward inconsistencies with China's national
treatment obligations under Article III of th e GATT 1994. In particular, these measures
impermissibly result in internal charges on imported parts in excess of those applied on domestic parts
(Article III:2); the measures accord treatment less favorable to imported parts with respect to
requirements affecting internal sale, purchase, dist ribution, and use (Article III:4); and the measures
directly or indirectly require that specified amounts or proportions of auto parts used in vehicle
manufacturing must be supplied from domestic sources (Article III:5). For the same reasons, China's
measures amount to a domestic content requirement that is inconsistent with China's obligations under
Article 2.1 and Paragraph 1(a) of Annex 1 of the TRIMs Agreement.
4.417 China's defense is twofold – its measures all involve customs duties, and those customs duties
are consistent with Article II. In the event the Panel agrees with the United States and its co-
complainants that China's measures are subject to Article III of the GATT 1994 and the TRIMs
Agreement, China has not even attempted to a ssert a defense – aside from a vague reliance on
Article XX(d) - to these plain breaches of its WTO obligations.
4.418 Moreover, the defense under Article II is based not on the text of China's schedule of tariff
commitments. To the contrary, China does not di spute that its measures impose a charge on imported
parts that is higher than the rate set out in Chin a's schedule. Rather, China's defense is based on a
single rule of interpretation (GRI 2(a)) of the Harmonized System, and on the explanation that its
measures are required to prevent the "circumvention" of classification under GIR 2(a) through the
ruse of "split shipments" of pre-organized kits of automotive parts.
4.419 The United States will address and refute the tw o main assertions – one factual and one legal
– that underlie China's defense of its measures. As discussed in the next section below, the
importation of bulk shipments of parts is routinely undertaken by automotive plants around the world,
and such bulk shipments cannot be analogized to China's hypothetical case of the "split shipment" of a

pre-organized kit. As discussed in the last secti on, the HS has only limited, specific relevance to the
interpretation of WTO obligations, and even then, GIR 2(a) does nothing to support China's measures.
2. China's analogy between the routine import of auto parts for manufacturing purposes
and the hypothetical case of a kit separate d into "split shipments" is fundamentally
flawed
4.420 China's defense is built on a simple paradigm : that of a kit (either an SKD or CKD)
containing all parts of a single automobile, or at least all parts of what amounts to something with the
essential characteristics of an automobile. Under Ch ina's customs laws, China argues, it treats such
kits as complete automobiles. Now, China asks rhetorically, should an importer be allowed to change
the tariff treatment of the kit by the simple expedien cy of splitting that kit into two boxes? Of course
not, asserts China. China simply and reasonably has adopted a measure to address that problem of
"circumvention."
4.421 This dispute, however, does not
 turn on questions of split shipments of kits. The reason is
that China's measures – although purportedly adopt ed to prevent importers from splitting kits to
circumvent duties on whole cars – is vastly broader than that. It sweeps in not just a kit broken into
two separate boxes, but all modes of parts supply used by modern manufacturers. That is, it sweeps
together all imported parts from different suppliers , from different countries, purchased at different
times, and even parts produced within
 China if such parts have insuffici ent local content. All this is
done without any evidence of intent on behalf of the importer to "circumvent" the whole vehicle duty.
Thus, there is no match between the measure actuall y adopted, and China's paradigm of the kit split
into separate boxes.
4.422 In response, China further argues that collecti ons of imported parts – even if sourced from
different places at different times – are conceptually the same as a kit. After all, in both cases, at
some point, the parts will be used to make an automobile.
4.423 This is the point at which China's argument, based on the paradigm of a kit in split shipments,
completely falls apart. In commercial realities, a k it is totally different from the streams of parts used
in manufacturing operations. An operation that asse mbles kits is different than a full-fledged,
automobile manufacturing plant with full logistical capabilities to handle bulk shipments of parts.
And most auto manufacturing plants are not in the business of assembling discrete kits.
4.424 Rather, manufacturing plants assemble automobiles using parts held in their inventories. The
parts are sourced from around the world. They arrive at different times in different quantities. Some
parts are defective. Some are damaged in assembly . Some are used for testing. Some parts are
common to multiple models. In these nor mal commercial operations, there is never a box or "kit"
containing all the imported parts used in a single vehicle.
4.425 Moreover, it would be fantastically expensiv e for a commercial manufacturer to create and
use such a box of parts. To do so, the manufacturer would have to build or employ a warehouse in a
location outside of China. The manufacturer woul d need to import and/or ship bulk shipments of
parts to the warehouse, and then unpack all parts from various sources. The manufacturer would need
to hold inventories. The manufacturer would then ha ve to make kits by collecting one of each part
used in a vehicle. All parts would then need to be repacked. When the kit arrived at the factory in
China, the kit would have to be broken back into part s. The parts to be used in that plant would need
to be resorted and placed in inventory for use on th e assembly line. And the parts to be assembled by
other operations in China would need to be repacked , for a second time, and then shipped to the parts
producer. No commercial operation would ever work this way.

4.426 In short, China has no basis for comparing the streams of parts used by a manufacturing plant
to the conduct of purported "circumvention" involved in splitting a kit before import. The imported
parts used by manufacturing plants are not and cannot be put into kits. This is the commercial reality,
and does not, as China asserts, raise any issue of "circumvention." Thus, the purported goal of
China's measures – merely to stop "circumvention" in the form of splitting preorganized kits – is in no
way consistent with actual scope and operation of China's measures. Rather, contrary to China's
argument about "circumvention", the measures as actually constructed impose a local content
requirement on all automobiles manufactures in China, and thus are plainly intended to encourage the
growth of the domestic parts industry by discriminating against imported auto parts.
3. China cannot rely on GIR 2(a) as the basis for the defense of its measures
(a) GIR 2(a) only relates to the interpretation of China's obligations under its schedule of tariff
commitments and not to the interpretation of other WTO obligations
4.427 China's defense to all of the claims of th e United States are based on GIR 2(a). That
interpretive rule, however, has only limited relevance to the legal issues in this dispute. In particular,
the rule is only relevant with regard to the inte rpretation of China's schedule of tariff commitments.
The rule is not
 relevant to the consideration of Chin a's obligations under Article III of the GATT
1994, or to the question of whether China's additiona l charges on imported parts are to be considered
either as "ordinary customs duties" under Article II:1(b), or as internal charges under Article III:2.
4.428 In EC - Chicken Cuts , the Appellate Body made the limited finding that the HS Convention
could be "context" for interpreting a Member's tari ff schedule with respect to agricultural products.
The Appellate Body's reasoning was that GATT Contracting Parties agreed that the HS was to be used
for the basis of Uruguay Round tariff negotiations for agricultural products, and that this agreement in
turn served to qualify the HS as "context" under Article 31(2)(a) of the Vienna Convention in
interpreting Member's schedules of tariff commitments in this specific regard. The Appellate Body
made no finding that the HS was context for the interpretation of the GATT 1994, or for any other
elements of the WTO Agreement.
4.429 China's extensive reliance on GIR 2(a) seem s to imply that China believes that the
interpretive rule, although relevant fo r interpreting China's tariff schedul e, also has some sort of spill-
over interpretive effect with regard to meaning of other WTO obligations. Any such view, however,
is without basis and directly contrary to the text and the longstanding interpretation of the
GATT 1994.
4.430 In particular, the content of a Member's ta riff schedule cannot be used as a defense to
breaches of the GATT 1994 obligations (aside of cour se from questions of breaches of tariff bindings
under Article II). And, a fortiori, if a Member's tariff schedule is not a defense to a breach of other
GATT 1994 obligations, neither may a document (such as GIR 2(a)) used as "context" for interpreting
the schedule be used as a defense to a breach of the GATT 1994 obligations. As explained by the
GATT panel in US - Sugar:
Article II gives contracting parties the possibility to incorporate into the legal
framework of the General Agreement co mmitments additional to those already
contained in the General Agreement and to qualify such additional commitments, not
however to reduce their commitments under ot her provisions of that agreement. . . .
[T]he Panel found that Article II:1(b) does not permit contracting parties to qualify
their obligations under other provisions of the General Agreement and that the
provisions in the United States GATT Schedul e of Concessions can consequently not

justify the maintenance of quantitative restrictions ... inconsistent with the application
of Article XI:1
4.431 The Appellate Body reaffirmed this principle in its report on EC-Export Subsidies on Sugar .
Accordingly, any question with regard to whether China's measures are consistent with its schedule of
tariff commitments, and any materials used to inte rpret those commitments, are distinct from – and
not relevant to – the issue of whether or not China' s measures are consistent wi th other obligations of
China under the WTO Agreement.
(b) The dispositive issues in this dispute do not turn on GIR 2(a) or any other issue of tariff
classification
4.432 GRI 2(a) also provides no support for China' s defense because the dispositive issues in this
dispute do not turn on any issues of tariff classificat ion. In particular, the United States has shown
that China's measures are in breach of Article III of the GATT 1994, the TRIMs Agreement, and the
SCM Agreement, and that questions of tariff classi fication and tariff bindings under Article II are not
relevant to those claims.
4.433 Turning first to Article III:4, the Appellate Body has identified three distinct elements
required to establish a breach: (1) the imported and domestic products are "like products;" (2) the
measure is a law, regulation, or requirement aff ecting the internal sale, purchase, or use of the
imported and domestic like products; and (3) th e imported product is accorded less favorable
treatment than the domestic like product. In its first submission, the United States explained that
China's measures plainly meet each one of the th ree elements needed to establish a breach of
Article III:4. Questions of tariff classification play no role in the Article III:4 analysis, and China in
its submissions has not otherwise disputed an y of the elements which establish a breach of
Article III:4.
4.434 Moreover, China's main argument – that its charges are customs duties and that imported
parts may be classified as complete vehicles – does not even implicate any issue which might provide
a defense to this plain breach of Article III:4. In other words, even if China's charges were
considered "customs duties," and even if China we re correct that it was entitled under its tariff
bindings to charge a duty of 25 per cent on importe d parts used for manufacturing purposes, China's
measures would still constitute a breach of Article III:4 . The Article III:4 breach is based on the fact
that the charge on any particular auto part will change depending on the ty pes and value of other
imported parts used in a complete vehicle, a sy stem which creates a strong disincentive to the
purchase and use of imported parts. Similarly, the administrative burdens applicable only to users of
imported auto parts are inconsistent with Article III:4, regardless of whether or not China's charges
are considered "customs duties."
4.435 China's tariff classification defense is also not ap plicable to China's breach of Article III:5 of
the GATT 1994. And, as for the breach of Article III: 4, this breach of Article III:5 exists regardless
of any issue with respect to China's tariff bindings, or with respect to whether or not the extra charge
imposed by China is an internal charge or a customs duty.
4.436 Finally, turning to China's br each of the first sentence of Ar ticle III:2, China in its first
submission does present a defense. As will be explai ned below, this defense is without merit, and
GIR 2(a) – as for China's other breaches (other than with respect to the alternative claim of a breach of
Article II:1(a)) – again is not relevant to the analysis.

4.437 At the outset, however, the United States notes that China has not disputed that China's extra
15 per cent charge on imported parts (above and beyond ordinary customs duties) is inconsistent with
Article III:2 if – as the United States submits – the ch arge is an internal one, and not an ordinary
customs duty.
4.438 Turning to whether the additional charges are "o rdinary customs duties" or internal charges,
under the finding set out in Belgium Family Allowances and EEC – Parts and Components , China's
charges at issue in this dispute can only be consider ed as internal ones. China's charges are based not
on the goods as entered, and not even on the importer's declaration at the time of importation, but
instead on the goods as finally manufactured – within China
 – into whole vehicles. As the United
States emphasized at the first substantive meeting, China imposes at the border a revenue bond based
on the 10 per cent duty rate for parts, and applies the extra charge only if an imported part (1) is
actually used in the manufacture of a vehicle, and (2 ) only if that vehicle fails to meet the domestic
content requirements set out under China's measures. As in EEC – Parts and Components, the charge
must be evaluated based on its substance – not its title – and a charge which is assessed based on the
level of local content contained in an interna lly manufactured product can only be considered an
internal charge under Article III:2.
4.439 In its first submission, China tries to distinguish Belgium Family Allowances and EEC – Parts
and Components , but those efforts are unsuccessful. China argues that its measures are different
because its measures are impos ed for the purpose of collecting cust oms duties. As an initial matter,
China's argument is circular – the whole issue is whether or not the charg es are in fact "ordinary
customs duties" under Article II; China's argument simply assumes the conclusion. Furthermore, this
type of argument about the purpose of the charge was explicitly considered and rejected in EEC –
Parts and Components . To quote from that report: "[T]he Panel first examined whether the policy
purpose of the charge is relevant to determining the issue of whether the charge is imposed in
'connection with importation' in the meaning of Article II:1(b). . . . . The relevant fact . . . is not the
policy purpose attributed to the charge but rather whether the charge is due on importation or at the
time or point of importation or whether it is collected internally."
4.440 The United States would also emphasize that, ag ain, issues of tariff classification and the
meaning of GIR 2(a) have no relevance to the que stion of whether China's additional charges are
internal charges or instead are ordinary customs duties. That question turns only on the text and
interpretation of Article II a nd Article III of the GATT 1994. In contrast, questions of tariff
classification, and issues concerning the meaning of GI R 2(a) and its relevance to the interpretation of
China's schedule of tariff commitments, only arise if China's additional charges are considered
ordinary customs duties under Article II.
4.441 Finally, the United States notes that its additional claims – under Article 2.1 and
Paragraph 1(a) of Annex 1 of the TRIMs Agre ement, under Articles 3.1(b) and 3.2 the SCM
Agreement, and under Parts I.7.2 and I.7.3 of the Accession Protocol and paragraph 203 of the
Working Party Report – again do not turn on any issu es of tariff classification or the meaning of
GIR 2(a).
4.442 To summarize, the United States has establishe d breaches of Article III:2, III:4, and III:5 of
the GATT 1994, of the TRIMs Agreement, and of th e SCM Agreement. China's only defense – that
its classification of imported parts as whole vehicles is correct under the principles set out in GIR 2(a)
– is not even relevant to analysis under those provisions of the WTO Agreement.

(c) GIR 2(a) would not provide China with a defense under Article II of the GATT 1994
4.443 As the United States has explained, China's additional charges on imported auto parts are
internal charges, subject to obligations under Article III:2 of the GATT 1994, and not "ordinary
customs duties" under Article II of the GATT 1994. Even aside from this fact, GIR 2(a) of the
Harmonized System would not provide a defense to China's plain breach of its tariff commitments (if
the charges are considered tariffs) in its schedule.
4.444 Before proceeding to a consideration of GIR 2(a) itself, the United States emphasizes that
China's entire defense under Article II is based on GI R 2(a). In other words, China does not contest
that its measures apply tariffs on auto parts that are higher than the 10 per cent rate generally
applicable to auto parts under China's schedule of tariff commitments. Rather, China's only defense is
that under its tariff schedule, when read in conjunc tion with GIR 2(a), China reserved itself the right
to treat imported parts used for manufacturing purposes as if those parts were complete vehicles.
4.445 In addition, the United States notes its disagreem ent with China's contention that GIR 2(a)
should be considered as "context" for the purpose of interpreting China's schedule of tariff
concessions. The United States takes note of the Appellate Body findings in EC - Computer
Equipment and EC - Chicken Cuts. Those two reports, however, are quite careful and limited in their
reasoning, and do not express an across-the-board rule that the HS is "context" for the purpose of
every part of every Member's sch edule of tariff commitments. In EC - Computer Equipment , the
Appellate Body found that the Panel should ha ve examined the Harmonized System (including
Explanatory Notes), but the Appellate Body did not specify whether the HS fit under the customary
rules of interpretation reflected in Article 31 or under Article 32 of the Vienna Convention. In EC -
Chicken Cuts, the Appellate Body did find that the HS was "context" under the customary rules of
interpretation reflected in Article 31(2)(a) of the Vienna Convention, but the reasoning in that report
was carefully limited to the facts and circumstances of that particular dispute. In particular, the
Appellate Body emphasized that during the Urugua y Round, tariff negotiations for agricultural

products were based on the HS, and the Appellate Body refers to a "Modalities" document –
applicable only to agriculture – which confirmed this understanding of the negotiators. The Appellate
Body reasoned that these particular facts and ci rcumstances established an "agreement" among all
parties that the HS would be used in the inte rpretation of scheduled commitments on agricultural
products. In short, these findings in EC-Chicken Cuts regarding the HS are only directly applicable to
schedules negotiated during the Uruguay Round, and only with respect to agricultural products.
4.446 Accordingly, the findings and reasoning in EC - Chicken Cuts do not apply directly to the
present dispute, because this dispute does not involve a schedule negotiated during the Uruguay
Round and does not involve agricultura l products. And, China has presented no basis for finding that
there was a comparable "agreement" (like the one during the Uruguay Round on agricultural products)
among WTO Members concerning China's tariff negotiations on industrial goods.
4.447 The United States does agree, however, that th e HS can certainly be relevant in the
interpretation of China's schedule. In particular, under the customary rules of interpretation reflected
in Article 32 of the Vienna Convention , the HS can be a "supplementary means of interpretation".
Given that China's schedule is plainly based on the HS nomenclature, the HS Convention can in
appropriate cases amount to "prepa ratory work and the circumstances of conclusion" with regard to
the negotiation of China's tariff schedule.
4.448 Turning now to China's tariff classification argument based on GIR 2(a), the argument does
not withstand scrutiny. GIR 2(a) states in full:

Any reference in a heading to an article shal l be taken to include a reference to that
article incomplete or unfinished, provide d that, as presented, the incomplete or
unfinished article has the essential character of the complete or finished article. It
shall also include a reference to that artic le complete or finished (or falling to be
classified as complete or finished by virt ue of this rule), presented unassembled or
disassembled.
4.449 Two aspects of GIR 2(a) are apparent on its f ace. First, although China has based its case
entirely on a "circumvention" theory, nothing in this rule of interpretation mentions anything about
"circumvention." Second, the rule uses the la nguage "as presented" and "presented," which makes
clear that customs authorities are to classify the goods in the co ndition as presented to customs upon
importation. There is no notion in GIR 2(a) that a customs authority should seek out all entries of
diverse parts, by different importers, from different s uppliers, at different times, and even of different
national origin, and then proceed to collect them in to some fictitious unassembled product, to then be
classified as the assembled product. To the contrary, if China's interpretation of GIR 2(a) were
adopted, the words "as presented" and "presented" would be rendered absolutely without meaning.
4.450 China also ignores the object and purpose of the HS Convention. In relevant part, the
Preamble to the Convention provides:
THE CONTRACTING PARTIES TO THIS CONVENTION, established under the
auspices of the Customs Co-operation Council,
DESIRING to facilitate international trade,
DESIRING to facilitate the collection, comparison and analysis of statistics, in
particular those on international trade,
DESIRING to reduce the expense incurred by redescribing, reclassifying and
recoding goods as they move from one classification system to another in the course
of international trade and to facilitate th e standardization of trade documentation and
the transmission of data,
CONSIDERING the importance of accurate and comparable data for the purposes of
international trade negotiations,
CONSIDERING that the Harmonized System is intended to be used for the purposes
of freight tariffs and transport statistics of the various modes of transport, . . .
CONSIDERING that the Harmonized System is intended to promote as close a
correlation as possible between import a nd export trade statistics and production
statistics . . . .
4.451 Two aspects of the object and purpose of the Convention, as set out above, are notable for the
purpose of this dispute. First, nowhere is there any mention of "circumvention" or any other similar
concept. Indeed, the notion of "circumvention" is not set out anywhere in the Convention.
4.452 Second, two key objects and purposes of the Co nvention are (i) to establish uniform tariff
nomenclature rules for the purpose of comparing tr ade statistics (between exports and imports, and
between different parties to the Convention), and ( ii) to facilitate international trade. China's
interpretation of GIR 2(a), however, is totally at odds with these express objects and purposes of the
Convention. Under China's interpretation, every party to the Convention must classify bulk imports
of manufacturing parts as whole products, based on criteria to be developed and applied by each
party. If this were true, the comparability of trad e statistics collected by different members would be
destroyed. Also, the comparability between import and export statistics would be destroyed – China's
measures apply only to imports, and do not app ear to require that China perform a similar
"automobile parts characterized as complete vehicles" analysis for exports of auto parts.

4.453 China's interpretation of GIR 2(a) is also at odds with the object and purpose of facilitating
trade. Under China's measures, goods are not classifi ed as imported at the border, but only after the
goods have been used in manufacturing, and only af ter the manufacturer has completed and verified a
complex analysis of the local content of the final product. This intricate, complicated system for
classification destroys the certainty and predictab ility of tariff classification, and can only serve as a
serious impediment to trade.
4.454 China's submissions also wrongly ignore that the Convention is an international agreement
that imposes obligations on its Members; the Conve ntion does not, as China implies, serve as some
sort of instrument that provides "permission" to WTO Members to depart from WTO obligations or to
classify products at will. The pertinent obligations in the Convention are as follows:
Article 3: Obligations of Contracting Parties
1. Subject to the exceptions enumerated in Article 4:
(a) Each Contracting Party undertakes, except as provided in subparagraph (c) of this
paragraph, that from the date on which this Convention enters into force in respect of
it, its Customs tariff and statistical nomenc latures shall be in conformity with the
Harmonized System. It thus undertakes that, in respect of its Customs tariff and
statistical nomenclatures:
 (i) it shall use all the headings and subheadings of the Harmonized System
without addition or modification, together with their related numerical codes;
 (ii) it shall apply the General Rules for the interpretation of the Harmonized
System and all the Section, Chapter and Subheading Notes, and shall not
modify the scope of the Sections, Chapters, headings or subheadings of the
Harmonized System; and
 (iii) it shall follow the numerical sequence of the Harmonized System.
4.455 These obligations require parties to the Conven tion to "use all the headings and subheadings
of the HS without addition or modification, together with their related numerical codes," and to apply
the GIRs. As the United States and its co-complai nants have pointed out, China in its submissions
ignores the most fundamental of the GIR's: GIR 1 provides that "classification should be determined
according to the terms of the headings and any rela tive section or chapter notes." The United States
submits that the reason China in its submissions ha s ignored GIR 1 is plain: China's measures are
directly contrary to GIR 1. In particular, the HS has headings specific to auto parts, but instead China
under its measures classifies auto parts as whole vehicles.
4.456 Furthermore, the fact that the application of the GIRs is obligatory undercuts China's
arguments. That is, if China is right that GIR 2( a) provides for the classification of bulk auto parts
used in manufacturing as the complete, manufactured product, then the obligation to classify parts in
this manner would apply to each and every party to the Convention. Yet, China has failed to provide
any evidence that any other party to the Convent ion has adopted measures at all comparable to
China's measures on auto parts. Moreover, China has conceded that even China itself does not use
similar classification schemes for parts other than auto parts. In sum, either (a) every party to the
Convention, and China itself with respect to all goods except auto parts, is acting inconsistently with
the obligations under the Convention to apply the GIRs (including GIR 2(a)), or (b) GIR 2(a) – as it
plainly states in the text – applies to goods "as pr esented," and China's treatment of auto parts is
inconsistent with GIR 2(a). For the reasons stated above, the United States submits that ( b) –
GIR 2(a) applies to goods as presented upon importation – is the only possible answer.

K. S
ECOND WRITTEN SUBMISSION OF CANADA
1. Introduction
4.457 China has attempted to turn a dispute respecting the consistency of the measures with China's
WTO obligations into a dispute where the main issue is the interpretation of a single, and non-
binding, WCO document.
4.458 China has skirted a number of key issues in its de fence. It has not disproved that the measures
give rise to clear domestic-content requirements. It has not provided any evidence that "tariff
circumvention" even exists as a legal concept, nor explained how the simple process of importation
can last for as long as the measures provide. Ho wever, China agrees that the volume and value
thresholds in the measures can be applied to produc ts imported into China by a third-party supplier
even though China admits those parts should be the s ubject of national treatment. This demonstrates
how arbitrary and discriminatory the measures truly are.
4.459 Canada emphasizes that it is the WTO Agreement th at is at issue in this dispute. China is
strictly bound by the negotiated concessions for auto parts, as understood at the time of its accession.
Members cannot manipulate tariff concessions so as to undermine the certainty afforded to traders by
the GATT discipline of non-discrimination, which Ch ina does by relying incorrectly on Article II of
the GATT 1994 so as to reduce the scope of its obligation under Article III of the GATT 1994.
Canada demonstrates this by reference to the prin ciples of treaty interpretation. China also cannot
justify its measures under Article XX(d) of the GATT 1994.
2. Importation and the scope of national treatment
(a) China ignores the principle of non-discrimination in international trade
4.460 The principle of non-discrimination informs Articles I, II and III of the GATT 1994.
However, China has failed completely to reconcile its manipulation of negotiated tariff concessions
with the very object and purpose of the GATT's non-discrimination provisions. Article II of the
GATT 1994 cannot be read in isolation. It forms part of the universe of non-discrimination provisions
that support the very legal and commercial certainty that the measures undermine. Article III exists to
prevent discrimination against imported products, by protecting expectations of an equal competitive
relationship between imported and domestic products.
4.461 While China insists that it is merely "enforci ng" undisputed tariff lines, the heart of this
dispute remains the limited extent to which or dinary customs duties imposed in accordance with
Article II:1(b) may impinge on the broad protection against discrimination provided by Article III of
the GATT 1994, and China's failure to provide that protection.
(b) Ordinary customs duties may only be imposed based upon the physical state of products as
they arrive at the border
4.462 Ordinary customs duties can be imposed on imported products "on their importation",
meaning based upon the state of a product as presen ted at the border. The reference to "on"
emphasizes a single event. The ordinary meaning of "importation" refers to the physical act of
products being brought across the border into a country, an interpretation supported by the
GATT 1994 generally, GATT acquis, the WTO Appellate Body and even the WCO.

4.463 Border charges other than ordinary customs duties have a greater (although still temporally
limited) period during the "importation" stage during which they can be assessed. This is evident from
the difference in language used to describe when such charges may be imposed ("in connection with"
the importation; or "at any time on the importation"). But once a product has entered the territory of a
Member and is available for internal use within a Member, any charges on the imported product based
on its state must comply with the national treatment obligations of Article III, and Article II is in no
way applicable.
4.464 As China alleges that its measures impose ordina ry customs duties, any flexibility during the
"importation" stage is not relevant to this dis pute. Regardless, the measures apply well after the
process of importation is complete and therefore must be internal measures.
4.465 Even if there were some flexibility to de fer assessments of ordinary customs duty on a
product past the point of its physical entry into Ch ina (which Canada says there is not), none of
China's justifications withstand scrutiny.
4.466 China says that the charges are really applied at the border because vehicle manufacturers are
required to self-evaluate whether a vehicle is d eemed imported prior to importing parts for that
vehicle. But that self-evaluation amounts only to a prediction of what will happen in the
manufacturing process. Self-evaluation is theref ore nothing more than a mechanism for the
administration of an internal charge, whether or not at the border.
4.467 China suggests that products may be in "custo ms control", and by necessary implication not
in the internal market, by the simple expedient of imposing financial security and bookkeeping
requirements. This suggestion is without merit, as the "bonding" in the measures does not restrict the
internal use of the products.
4.468 The measures do not impose charges based on the state of products as they arrive at the
border, as is demonstrated by an examination of the ordinary meaning of Article II of the GATT 1994,
read in the context of Article III of the GATT 1994 and in the light of the object and purpose of
China's Schedule. Therefore, they are not ordi nary customs duties, nor are they other charges
permitted by Article II of the GATT 1994. As a result, the measures can only be internal charges
applied in violation of Article III and the TRIMs Agreement.
(c) China misapplies the HS and its Explanatory Notes in imposing charges to auto parts as
presented at the border
4.469 The HS of classification and its Explanatory Notes, as they were used in negotiating a
Member's Schedule, are to be taken into account as context for the interpretation of the meaning of
that Schedule. Contrary to China's suggestion, th ere is no discretion to ignore selected Explanatory
Notes.
4.470 Classification is relevant in interpreting the obligation in Article II:1(b) of the GATT 1994
not to charge duties greater than the amount set out in China's Schedule, because classification of the
proper category of a product is an essential first step for assessing duty.
4.471 In order to classify properly a product as it is pr esented at the border, it is first necessary to
look to the appropriate headings. Significantly for th is dispute, a "chassis fitted with engine" (87.06)
is clarified in that heading's Explanatory Note as covering
 "motor vehicles without bodies".

4.472 The measures ignore these headings and impo se three separate thresholds for domestic
content, all of which are inconsistent with China's WTO obligations.
4.473 Article 21(1) of Decree 125 considers that parts imported as CKD and SKD kits are
automobile parts characterized as complete vehicl es. China's Accession Protocol requires that such
parts be charged at a 10 per cent rate, regardless of classification.
4.474 Article 21(2) of Decree 125 considers that parts in a vehicle are Automobile parts
characterized as complete vehicles if a certain number of Assemblies are Deemed Imported. These
thresholds present two violations of Article II of the GATT 1994. First, deemed imported assemblies
are classified based upon the number or value of key parts even though for the most part there is no
heading for such assemblies, and d espite the thresholds being very selective. Second, even assuming
that all the parts in a Deemed Imported Assembly are imported and contained in a single shipment,
the thresholds do not accurately classify parts.
4.475 Article 21(3) of Decree 125 considers that parts used in a vehicle are automobile parts
characterized as complete vehicles if they constitute more than 60 per cent of the value of all parts
used in manufacturing the vehicle. There is nothing in any part of the HS that suggests that value may
be used to classify products. As a result, the appli cation of Article 21(3) inevitably leads to duties
imposed based on an incorrect classification, and consequently violates Article II of the GATT 1994.
4.476 As it is the general practice of customs author ities to classify goods based on their state as
presented at the border, it is not necessary to look to the isolated customs cases cited by China. But, in
any event, China has not shown a pattern of acts sh owing subsequent practice of other Members that:
(1) is common, consistent and discernible; and (2) must imply agreement among WTO Members to
support key controversial aspects of the measures. Notably, China has not shown that:
• a WTO Member may deem that parts have the "essential character" of the complete
vehicle based on the volume thresholds contained in the measures; nor that
• value thresholds can be used as a classification tool.
4.477 The only feature of the measures that could be accepted customs classification is the
classification of parts as a complete vehicle where those parts, contained in a single shipment, have
the essential character of a whole vehicle (CKD or SKD kits). Ironically, such parts have been
exempted from coverage under the measures, so the only use of the measures has been to classify
parts contrary to Article II:1(b).
(d) Article II of the GATT 1994 does not allow Members to impose higher ordinary customs
duties on separate shipments of auto parts on the theory that they can be classified as a whole
vehicle
4.478 China also claims that it may classify as one product multiple shipments of parts from
different exporters to different destinations and at different times. Again, China has not demonstrated
a common, consistent and discernible practice among WTO Members that ordinary customs duties
permitted under Article II of the GATT 1994 may be applied to separate ship ments classified as if
they arrived together.
4.479 In the absence of any subsequent practice, Ch ina has relied heavily on a passing statement by
the HS Committee to the effect that split shipme nts are permitted under national law. But that
reference to split shipments was not included in th e GIRs or the Explanatory Notes, was based on

isolated practice that did not include motor vehicl es or their parts, specifically was not intended to
cover parts used for the manufacturing process, has not been shown to have been relied upon when
negotiating China's tariff commitments, and was not reflected in Member practice at the time of
China's accession.
4.480 China has also cited the anti-dumping practice of the European Communities and the United
States. However, that practice cannot be evidence of subsequent practice to interpret Article II:1(b),
first sentence, nor China's Schedule.
(e) Regardless of classification, China is required by its commitments on accession to charge
unassembled or partially assembled vehicles a duty rate of 10 per cent
4.481 All parties agree that paragraph 93 of the Working Party Report creates binding obligations
on China.
4.482 The ordinary meaning of that paragraph, read in the light of its object and purpose, would be
ignored if China were at liberty simply never to introduce a separate tariff line for CKD and SKD kits.
Further, since the purpose of the paragraph is to address the particular concern of Members to
maintain preferential treatment for CKD and SK D kits, a good-faith interpretation, based on the
understanding of Members at the time of China's accession, requires China to apply the 10 per cent
rate to these products.
4.483 This understanding is confirmed by the circumstances surrounding the conclusion of the
Accession Protocol. Prior to its accession, China provided preferential tariff treatment to parts with
the essential character of whole vehicles in two ways: classifying them as parts, or classifying them in
a separate tariff line at a lower rate than for assembled vehicles.
4.484 The understanding of the parties at the time of China's accession was that the 25 per cent duty
for complete vehicles would apply only to vehicles imported in assembled condition . As a result,
China's denial of a 10 per cent rate of duty to pa rts, imported together in one shipment with the
essential character of a whole vehicle, is a violation of paragraph 93 of the Working Party Report.
(f) Non-violation nullification and impairment
4.485 If the Panel finds, contrary to Canada's submi ssions, that paragraph 93 of the Working Party
Report allows China both to classify CKD and SKD k its as whole vehicles and to charge them a duty
of 25 per cent, this must constitute a non- violation nullification and impairment under
Article XXIII:1(b) of the GATT 1994 of Canada's legitimate expectation to a 10 per cent tariff rate for
CKD and SKD kits.
3. The measures cannot be justified under Article XX(d) of the GATT 1994
(a) China has mischaracterized a Article XX(d) of the GATT 1994 defence to an Article III
violation as a defence under Article II
4.486 China concedes that it must rely on Article XX(d) to defend all aspects of the measures which
are internal. However, it suggests that auto part s imported directly by vehicle manufacturers may be
covered by the measures pursuant to Article II. In truth this argument is simply an Article XX(d)
defence to a violation of Article III of the GA TT 1994 and the TRIMs Agreement: that it has enacted
the measures to "enforce" China's Schedule to preven t "tariff circumvention". China's whole defence

to Canada's complaint could only validly be br ought under Article XX(d) if China showed an
independent GATT-consistent law or regulation that the measures are designed to enforce.
4.487 Further, even if any aspect of the measures is properly considered to be ordinary customs
duties (which Canada disputes), the measures violat e Article II by providing less favourable treatment
for auto parts than required under China's Schedule. Again, China can only defend that violation if it
can establish that Article XX(d) applies.
(b) Test for justifying measures under Article XX(d)
4.488 GATT Article XX(d) allows a Member to enact a WTO-inconsistent measure if it is
necessary to enforce WTO-consistent laws, including laws relating to "customs enforcement". China
must show both that the measures are provisionally justified under paragraph (d) and that they are
applied in a manner consistent w ith the requirements imposed by the chapeau of Article XX. China
has not and cannot do so.
(c) The measures are not justified under of Article XX(d)
4.489 When read collectively, in the light of Po licy Order 8 and on their face, the measures are
clearly designed to promote China's domestic auto parts industry. Only in rare cases do the thresholds
under the measures apply to what are properly classifi ed as whole vehicles. As such, they cannot be
designed to secure compliance with China's Schedule.
4.490 The measures are also not "necessary", as is demons trated by reference to the various factors
that establish the necessity for GATT-inconsistent measures. China says that tariff arbitrage
constitutes "circumvention", but that is not a rec ognized concept in customs practice and China has
not explained why importers should not be able to take advantage of tariff rates mutually agreed to by
Members. In any case, China has presented no eviden ce that this "tariff circumvention" is happening.
There is no legal foundation to the claim that tariff ar bitrage is improper. China has presented no real
evidence that this arbitrage, even if styled as "tariff evasion", actually occurs with any frequency, let
alone with any intent. And China simply alleges th at it should be receiving additional tariff revenues.
The measures cannot contribute to rectifying a problem that does not exist.
4.491 Further, the measures are significantly trade-restricting. They apply to all imported auto parts
based on arbitrary thresholds that presume tariff arbitrage in all instances. Not only must companies
plan to avoid importing parts at levels that approach the threshold limits, but the measures also require
auto parts manufacturers that import auto parts to sign contracts with vehicle manufacturers
guaranteeing levels of domestic conten t in the parts they supply. In sum, it is clear that the measures
are not necessary to secure compliance, do not protect vital or common interests, and are excessively
trade-restricting.
(d) The measures do not satisfy the requirements of the chapeau of Article XX
4.492 The measures result in both arbitrary and unjustif iable discrimination. They are rarely, if
ever, applied to imported parts that could properly be classified as complete vehicles. Equally
important, China has failed to give any justification for the discrimination against imported auto parts,
aside from ex post facto rationalizations that the measures are appropriate because some vehicle
producers apparently use imported parts that exceed the thresholds in the measures.
4.493
 The measures are also a disguised restricti on on trade. China has admitted the measures
apply to auto parts that are in internal trade. Th ere is no question that the application of the measures

adversely affects the conditions of competition betw een imported and domestic parts. And, as noted
above, the primary purpose of the restriction is to afford protection to the domestic automotive
industry from imported competition.
L. S
ECOND WRITTEN SUBMISSION OF CHINA
1. Introduction
4.494 China considers that the parties' submissions and statements to the Panel have significantly
narrowed the scope of the parties' disagreements concerning the challenged measures.
4.495 First, the complainants can no longer deny th at there is a legitimate issue of customs
administration concerning the relationship between motor vehicles and parts of motor vehicles.
4.496 Second, the complainants now appear to acknow ledge that there are circumstances in which
the importation of parts and components in multiple sh ipments can constitute a form of tariff evasion.
The complainants also appear to acknowledge that customs authorities can undertake "investigations,"
and consider "evidence," to determine whether mu ltiple shipments of parts and components have the
essential character of the complete article.
4.497 Third, the parties now appear to agree that the time and place at which a charge is collected is
not the determinative consideration in evaluating whet her that charge is subject to the disciplines of
Article II or Article III. Rather, the issue is whethe r the charge is one that a Member is allowed to
impose by reason of the importation of the product, or, alternatively, whether the charge relates to the
status of a product after it has been imported.
4.498 Finally, China considers that the complainants ' submissions have revealed their true position
on when China's higher bound duty rates for motor vehicles would apply. The answer is "never."
4.499 As China will demonstrate in this rebuttal subm ission, China considers that this re-framing of
the issues and claims before the Panel leads to th e conclusions that (1) the challenged measures must
be analysed in the light of China's rights and ob ligations under Article II of the GATT 1994; and that
(2) so analysed, the challenged measures give eff ect to a proper interpretation of China's tariff
commitments for "motor vehicles" and do not result in the imposition of ordinary customs duties in
excess of those set forth in China's Schedule of Concessions.
2. The challenged measures do not impose ordina ry customs duties in excess of those set
forth in China's Schedule of concessions
4.500 In particular, China considers that the central issue before the Panel is whether China can
interpret the term "motor vehicles" to include the importation, in multiple shipments, of auto parts and
components that have the essential character of a motor vehicle within the meaning of GIR 2(a).
4.501 The Panel has now had the benefit of extensive discussion of GIR 2(a) by the parties. The
complainants have challenged two distinct aspects of how China has interpreted and applied GIR 2(a)
in the context of Decree 125. First, the complainants have challenged where China has drawn the line
for purposes of the essential character test under GIR 2( a), an issue of parts vs. wholes. Second, the
complainants have challenged China's application of GIR 2(a) to classify multiple shipments of parts
and components on the basis of their common assembly into a finished article, an issue of form vs.
substance.

4.502 GIR 2(a) provides the rules by which cust oms authorities define the boundaries between
complete articles and parts of those articles, i.e., between parts and wholes. At the outset of this
dispute, the EC took the position that there is a "c lear separation" between motor vehicles and parts of
motor vehicles. This argument leads to the conclu sion that China's tariff rates for motor vehicles
apply in only one circumstance: When the importe r imports a completely finished motor vehicle,
fully assembled, with absolutely no parts missing. Th e absurdity of this position is apparent. In this
regard, the complainants do not agree among themselves.
4.503 China draws the Panel's attention to this apparent disagreement among the complainants
because it illustrates two important points concerning the application of GIR 2(a). First, the
complainants cannot reasonably take the position that there is a "clear separation" between complete
motor vehicles and parts of motor vehicles. Sec ond, this apparent disag reement among the parties
highlights the critical context that GIR 2(a) provid es in resolving the relationship between complete
articles and parts of those articles.
4.504 For China's tariff provisions for motor vehicles to have any meaning whatsoever, it is self-
evident that China must apply GIR 2(a) to resolve the relati onship between parts and wholes. The
complainants' case against the challenged measures therefore cannot arise from the fact that China has
drawn a line between motor vehicles and their part s. Rather, the complainants' case against the
challenged measures must concern where China has drawn the line.
4.505 China considers that the principal issue in th is dispute is whether customs authorities may
classify multiple shipments of parts and component s on the basis of their common assembly into a
single article.
4.506 In China's view, the resolution of this form vs. substance issue is informed by three
considerations: (1) the interpretation of the term "as presented" in GIR 2(a); (2) the complainants'
own practice and admissions in respect of the applic ation of GIR 2(a) to multiple shipments; and (3)
the practices of the complainants and other WTO Members in respect of measures to prevent the
evasion of higher duty rates that apply to complete articles.
4.507 Specifically, the interpretive i ssue is whether the term "as presented" allows customs
authorities to base a classification determination upon evidence that a shipment of parts and
components is related to other shipments of pa rts and components through their common assembly
into a single article. As early as 1960s, the No menclature Committee of the Customs Cooperation
Council (the precursor to the WCO) decided that the application of GIR 2(a) to goods assembled from
multiple shipments of parts and components, incl uding parts and components arriving from different
countries, was a matter "to be settled by each country in accordance with its own national
regulations." In 1995, the HS Committee reaffirmed this prior interpretation of GIR 2(a) within the
context of the HS.
4.508 Under Article 8 of the HS Convention, any "advice on the interpretation of the Harmonized
System and recommendations to secure uniformity in the interpretation and application of the
Harmonized System" that the HS Committee adopts ar e "deemed to be approved" by the WCO if no
member objects to its adoption within a speci fied period. The 1995 decision concerning the
interpretation of GIR 2(a) was unanimously adopt ed by the HS Committee, and no member objected
to its adoption within the specified period. It is therefore an authoritative interpretation of GIR 2(a)
adopted by the WCO.
4.509 As China explained in its answers to Panel questions, the Appellate Body has specifically
affirmed the relevance of decisions adopted by the HS Committee, and by the WCO itself, concerning

the interpretation of the General Interpretative Rules. In this case, the WCO has adopted an
interpretation of GIR 2(a) that is directly relevant to the interpretive issue before the Panel. The
necessary consequence of the WCO's decision is that the term "as presented" does not preclude
consideration of whether the parts and components in a particular shipment are related to other
shipments of parts and components through their common assembly into a complete article.
4.510 Indeed, without some means of enforcing th e boundaries between parts and wholes that
customs authorities establish in accordance with GIR 2(a), an importer could choose its preferred
tariff classification even in respect of a single shipment of parts and components. GIR 2(a) would
serve no effective purpose within the HS.
4.511 China does not consider that the complainan ts have offered a plausible alternative
interpretation of the term "as presented" that is consistent with the interpretation adopted by the
WCO, or that is consistent with the purpose of the rule within the HS. Not surprisingly, their
preferred strategy is to try to avoid the implica tions of the WCO's interpretation by dismissing it as
"not legally binding." These attempts to dismiss the significance of the WCO's interpretation of GIR
2(a) miss three important points. First, as explai ned above, the Appellate Body has expressly referred
to interpretations of the GIRs adopted by the HS Committee and the WCO as relevant to a panel's
assessment of how the GIRs affect the interpretation of a Member's Schedule of Concessions.
Second, the complainants have failed to take in to account Article 8 of the HS Convention, which
provides that interpretations of the GIRs adopted by the HS Committee are deemed to be approved by
the WCO if no member objects to their adoption. Third, and most fundamentally, their argument
misses the point of the decision itself. The nature of the interpretation that the WCO has adopted is
not one that would "bind" members of the WCO, in the sense that it would compel them to reach a
specific classification determination on the facts of particular cases. The significance of the WCO's
interpretation, as pertinent to this dispute, is that the term "as presented" does not preclude the
application of GIR 2(a) to multiple shipments of parts and components, whether or not a particular
WCO member chooses to apply GIR 2(a) in this manner.
4.512 The complainants' second line of defense is to mischaracterize the interpretation of GIR 2(a)
adopted by the WCO. Oddly, the complainants focus on the decision of the HS Committee as it
relates to split consignments, and pay almost no a ttention to the decision of the HS Committee as it
relates to the "classification of goods assembled from elements originating in or arriving from
different countries."
4.513 Despite their best efforts to confuse the i ssue, the complainants cannot refute the only
straightforward reading of the WCO's interpretation of GIR 2(a) – that the classification of goods
assembled from multiple shipments of parts and components is a matter to be decided by each country
in accordance with its national laws and regulations.
4.514 As China will demonstrate next, the credibility of the complainants' interpretation of GIR 2(a)
suffers a further blow when it is compared to thei r own statements and practice. The complainants'
own statements and practices are not fully in accord with their understanding of GIR 2(a) as stated
before the Panel in this case.
4.515 As China demonstrated in its first written subm ission, the measures that it has adopted to
prevent the evasion of its higher duty rates on motor vehicles are indistinguishable from measures that
other WTO Members, including the complainants, have adopted to prevent the evasion of both
ordinary customs duties and anti-dumping duties. It is important to recall the specific purpose for
which China cited the practice of WTO Members in respect of measures to prevent the circumvention
of anti-dumping duties. The subsequent practice th at China established is that WTO Members have

adopted measures to address the circumstance in which a complete article is subject to a higher rate of
duty than the rate of duty that applies to parts and components of that article.
4.516 The subsequent practice that China has establishe d, and that no party has disputed, is that
WTO Members have adopted measures to ensure that the importation and assembly of parts and
components cannot be used to evade the higher rate of duty that applies to the complete article. The
only question is whether the validity of this pr actice, from a WTO perspective, should depend upon
the type of duty that gives rise to the differential in duty rates between the complete article and parts
of that article.
4.517 The complainants' primary assertion is that "anti-dumping duties and the circumvention of
such duties are governed by the rules of Article VI of the GATT 1994 and the Anti-Dumping
Agreement, not Article II of the GATT 1994." The pr oblem with these contentions is that there are,
in fact, no "rules" in either Article VI of the GATT 1994 or the Anti-Dumping Agreement that
address the question of whether WTO Members can impose anti-dumping duties on imports of parts
and components of a product that is subject to an anti-dumping measure. The suggestion that the
"rules" of Article VI and the Anti-Dumping Agreement "legally recognize" this practice, in contrast to
the "rules" of Article II, is simply false.
4.518 The complainants also invoke the remedial purpose of anti-dumping duties as a reason why
the resolution of the parts vs. whole and form vs. substance issues should be different in the context of
anti-dumping duties as compared to ordinary customs du ties. This is, in China's view, a curious form
of results-oriented reasoning. It is beyond dispute that ordinary customs duties serve a "purpose."
The problem with the complainants' "remedial purpose" argument is that they have yet to explain why
the purpose of anti-dumping duties is more important than the acknowledged purpose of ordinary
customs duties.
4.519 The United States suggests that there is some meaningful difference between ordinary
customs duties and anti-dumping duties because anti-dumping duties are defined by reference to the
scope of the investigation, not by reference to tari ff lines. This is yet another distinction without a
difference. Anti-dumping measures and tariff provisions both refer to specific products.
4.520 Finally, the complainants refer to the Decision on Anti-Circumvention adopted at the
conclusion of the Uruguay Round to support their view that measures to prevent the circumvention of
anti-dumping duties are "different." However, the complainants do not appear to agree on what the
significance of this decision is. The European Communities, for its part, states that the Decision on
Anti-Circumvention "recognises that uniform rules on anti-circumvention of anti-dumping measures
have not been defined." This would suggest that there are no rules that would either allow or disallow
the application of anti-dumping duties to the parts a nd components of a product that is subject to an
anti-dumping measure.
4.521 The complainants have failed to establish why the practices of WTO Members in respect of
anti-dumping duties (or countervailing duties, for that matter) are not relevant to the interpretation of
China's Schedule of Concessions, a nd to a consideration of the t ypes of measures that China may
adopt to prevent the evasion of the higher duty rate for motor vehicles that it negotiated.
4.522 The Appellate Body has recognized that "a basic object and purpose of the GATT 1994, as
reflected in Article II, is to preserve the value of tariff concessions negotiated by a Member with its
trading partners, and bound in that Member's Sche dule." The Appellate Body has likewise observed
that the tariff concessions negotiated by Members are intended to be "reciprocal and mutually
advantageous."

4.523 As China has explained, it is consistent w ith this object and purpose of the GATT 1994 to
interpret the term "motor vehicles" in China's Sc hedule of Concessions in a manner that preserves the
value, from both a revenue and market access perspective, of the higher bound duty rates that it
negotiated for motor vehicles. On the contrary, th e logical conclusion of the complainants' arguments
in respect of paragraph 93 of the Working Party Re port is that China's tariff provisions for motor
vehicles would never apply. This conclusion cannot possibly be consistent with the object and
purpose of preserving the value of reciprocal and mutually advantageous tariff concessions. The
effective resolution of the customs relationship betw een a complete article and parts of that article
does not pose a systemic risk either to the security of tariff concessions under Article II, or to the
national treatment disciplines of Article III. As Chin a has explained, the resolution of this issue does
not lead to the result that Members may classify arti cles on the basis of their end-use, and it does not
lead to the result that Members may impose discrim inatory measures on imported products merely by
characterizing the measures as border measures under Article II. China's position is simply that
Members may interpret and enforce their Schedules of Concessions in accordance with the rules of
the HS, and in accordance with the principle that tariff arrangements should have meaningful effect.
3. The challenged measures are subject to the disciplines of Article II of the GATT 1994
4.524 China believes that the parties have reached s ubstantial agreement on the principles that are
relevant to determining whether a pa rticular measure or charge is subject to the disciplines of Article
II or to the disciplines of Article III. As China w ill discuss below, measures and charges that China is
allowed to adopt within the framework of Artic le II cannot be challenged under Article III or the
TRIMs Agreement.
4.525 The term "on their importation" in Article II:1( b), first sentence, is not limited to the exact
point in time and space at which products from another country cross the border. Because the scope
of Article II is not defined by the time or place at which the charge is collected, there must be some
other basis to determine whether a particular charge or measure applies to imported products "on their
importation" into the customs territory of a Member . Applying this understanding of the term "on
their importation," the characterization of a particular charge in relation to Article II will depend upon
the reason or event that triggered the imposition of the char ge. If the measures fulfil a "valid customs
liability," they are measures that are subject to the disciplines of Article II of the GATT 1994.
4.526 This inquiry returns the analysis to the interp retation of China's tariff provisions for "motor
vehicles," and, in particular, to the question of wh ether China may classify multiple shipments of auto
parts and components on the basis of their common assembly into a complete article. An important
part of this analysis is the meaning of the term "as presented" in GIR 2(a), and the practice of other
WTO Members in resolving the relationship between complete articles and parts of those articles in
the context of customs administration. Under Decree 125, the fact that a shipment of auto parts is one
of a series of related shipments of auto parts is evident on the face of the customs declaration when
the goods are presented at the border. By declaring th at a shipment of auto parts is for a registered
vehicle model, the manufacturer is declaring (1) that the shipment is one of a series of shipments of
auto parts that the manufacturer w ill assemble into a specific motor ve hicle; and (2) that through this
series of shipments, the manufacturer will import a group of auto parts and components that, in their
entirety, have the essential character of a motor ve hicle. For these reasons, the charges that China
assesses and collects pursuant to Decree 125 fulfil a valid customs liability.
4.527 The conclusion that the challenged measures are subject to the disciplines of Article II is
reinforced by the fact that the challenged measures do not constitute a form of internal regulation, and
do not impose internal charges, within the meani ng of Article III of the GATT 1994. The delineation
between Articles II and III of the GATT 1994 requir es an understanding of the terms "importation"

and "imported." Until these customs formalities, u nder the challenged measure, are complete, the
CGA retains customs control over these entries, and the parts and components are not in free
circulation within China. Therefore, the custom s duties are not charges that China imposes upon auto
parts and components from other countries after they are "imported."
4.528 There is a critical threshold issue before th e Panel concerning the characterization of the
challenged measures in relation to China's rights and obligations under Article II and Article III of the
GATT 1994. China has demonstrated above that the challenged measures are subject to the
disciplines of Article II because they relate to and impose charges that China is allowed to impose by
reason of the importation of products into its customs territory. Chin a has further demonstrated that
the challenged measures impose charges on products " on their importation" into its customs territory,
and not on "imported" products. If the challenged measures are subject to the disciplines of Article II,
China does not consider that the challenged meas ures can be analysed under Article III of the
GATT 1994 or the TRIMs Agreement.
4.529 The United States takes the position that the ch aracterization of the charges that China
collects under the challenged measures is irreleva nt to whether these charges are subject to the
disciplines of Article III. Canada, at a minimum, appears to reject the United States' argument
outright. China believes that if a particular measure implements and collects a charge that a Member
is allowed to impose in accordance with Article II, it cannot be the case that the same charge must be
in conformity with the requirements of Article III. The Appellate Body in EC - Banana III , which is
relied upon by the US, did not find that the same aspects of a particular measure can be subject,
simultaneously, to the requirements of both Article II and Article III. The Appellate Body report in
EC – Bananas III confirms the critical importance of identifying the specific purpose of a particular
measure or charge in relation to a Member's rights and obligations under Article II and Article III.
4.530 While Canada rejects the United States' claim that the characterization of a charge is
irrelevant to whether that charge should be anal ysed under Article II or Article III, it nonetheless
contends that "the administrative burdens imposed by the measures on imported auto parts must be
assessed under Article III:4." Again, China believes that if a Member imposes a customs procedure to
ensure the collection of customs duties that it is allowed to impose under its Article II commitments,
those measures are necessarily customs measures. Customs procedures do not violate Article III
merely because the importer might consider these procedures to be a burden.
4.531 The European Communities asserts that "t he TRIMs Agreement does not require a
preliminary assessment as to whether a measure is a 'border measure' or an 'internal measure'." To
establish a violation of Article 2 of the TRIMs Agreement , the complaining Member must
demonstrate the application of a trade-related inv estment measure "that is inconsistent with the
provisions of Article III or Article XI of the GA TT 1994." Neither the EC nor any other party has
alleged a violation of Article XI of the GATT 1994. The European Communities' claim under the
TRIMs Agreement must therefore rest on its claim that the challenged measures violate Article III of
the GATT 1994. To establish a claim of violation under Article III, the European Communities must
demonstrate that the measures at issue are "interna l measures." China therefore does not perceive any
basis for the EC's position that the TRIMs Agre ement, unlike the GATT 1994, does not require a
threshold determination as to whether the measures at issue are within the scope of Article II or
Article III.

4. The complainants have failed to establish a prima facie violation of the commitment that
China made in paragraph 93 of the Working Party Report
4.532 The complainants have failed to establish a prima facie violation of the commitment that
China made in paragraph 93 of the Working Party Report. A necessary element of this claim is a
showing that China has created separate tariff lines for CKD/SKD kits. The complainants have failed
to demonstrate that China has created separate ta riff lines for CKD/SKD kits. Therefore, this claim
must fail. China considers that the Panel should stop its analysis at this juncture, as it is evident that
the complainants' claim under paragraph 93 lacks foundation.
5. The complainants have failed to establish a violation of the SCM Agreement
4.533 China does not understand the basis for the cl aim of the United States and the European
Communities concerning revenue fore gone under Article 1.1(a)(1)(ii) of the SCM Agreement. The
Appellate Body has stated that "the comparison under Article 1.1(a)(1)(ii) of the SCM Agreement
must necessarily be between the rules of taxation contained in the contested measure and other rules
of taxation of the Member in question." The b asic problem with the argument of the United States
and the European Communities is that they have fa iled to "identify and examine fiscal situations
which it is legitimate to compare."
6. The challenged measures would be justified under Article XX(d) if the Panel were to
identify any violation of the covered agreements
4.534 China considers that the challenged measures prope rly interpret and give effect to its tariff
provisions for motor vehicles, in accordance with th e rules of the HS and in accordance with the
practice of other WTO Members under like circumstances; and, therefore, are fully consistent with its
rights and obligations under Article II of the GATT 1994.
4.535 China has explained that the issue of "circumvention" in this case is a question of ensuring the
proper tariff classification of parts and components that have the essential character of a motor
vehicle. Canada and the United States, at leas t, appear to recognize that breaking parts and
components into multiple shipments can constitute a form of "tariff evasion".
4.536 China does not consider that WTO Members mu st have recourse to Article XX(d) of the
GATT 1994 in order to interpret and enforce th eir tariff schedules in accordance with the HS.
However, the Panel may nonetheless consider that China needs a separate b asis within WTO law to
enforce its tariff rate provisions for motor vehicles. The Panel may also find that, contrary to China's
explanations, the rules of the HS do not provide a b asis for China to give meaningful effect to the
higher duty rates that it negotiated for motor vehicl es, because these rules provide no basis for China
to distinguish between motor vehicles and parts of motor vehicles, whether in one shipment or in
multiple shipments. Finally, the Panel may find that one or more elements of the challenged measures
result in the imposition of internal charges, or othe rwise constitute an impermissible form of internal
taxation or internal regulation, in violation of Article III of the GATT 1994 or the TRIMs Agreement.
In any such circumstance, or in respect of any other violation of the covered agreements that the Panel
may identify, China considers that the challenge d measures are justified under Article XX(d) as
measures that are necessary to secure compliance with China's customs laws.
4.537 The complainants cannot credibly dispute, at th is stage in the proceedings, that there is a
legitimate and complex question of tariff classification and customs administration concerning the
relationship between motor vehicles and parts of moto r vehicles. In addition, China has demonstrated
that, in the absence of any means of defining a nd enforcing the boundary between motor vehicles and

parts of motor vehicles, China's tariff provisions for motor vehicles are essentially unenforceable. If
China had no means of looking past these ploys the importers may adopt, the result would be that
importers would never have to pay the tariff rates app licable to motor vehicles. In effect, there would
be no "motor vehicles" entering China – only "parts".
4.538 China believes that GIR 2(a), as interpreted by the WCO, has already resolved these issues of
customs interpretation and enforcemen t, such as "parts vs. wholes" and "form vs. substance." But if
GIR 2(a) did not exist, China (along with other customs authorities) would still need a means of
defining and enforcing the boundary between parts an d wholes. This is what the challenged measures
do – they ensure the effective enforcement of Chin a's tariff provisions for motor vehicles by defining
what constitutes a motor vehicle, as distinct from parts of a motor vehicle, and by enforcing that
boundary without regard to the manner in which the importer structures or documents its import
transactions.
4.539 In its first written submission, China reviewed the jurisprudence concerning the meaning of
"necessary" under Article XX(d). To summarize, the Appellate Body has described the term
"necessary" as involving a weighing and balancing of: (1) the relative importance of the interests or
values furthered by the challenged measure; (2) the contribution of the measure to the realization of
the ends pursued by it; and (3) the restrictive im pact on international commerce. The challenged
measure must be compared to other "reasonably available", WTO-consistent alternatives.
4.540 With respect to the first factor, it cannot be dou bted that the collection of tax revenues is an
important interest of WTO Members, and especially for developing country members. Likewise, the
enforcement of negotiated tariff concessions is al so an important objective for Members, and for
developing country Members in particular. With respect to the second factor, China has presented
clear evidence that the challenged measures furt her China's objective of ensuring the effective
enforcement of its tariff provisions for motor vehicles. China has documented specific motor vehicle
models that are assembled in China from impor ted parts and components that have the essential
character of a motor vehicle, and that are imported into China in multiple sh ipments. In the absence
of the challenged measures, auto manufacturers w ould evade the higher duty rates that apply to motor
vehicles because of the manner in which they have structured their imports of parts and components
for these and other vehicle models. China has also presented evidence that the specific circumstance
referred to by the United States – an auto manufact urer "who is splitting a CKD shipment into two or
more separate boxes" – is a specific circumstance to which the challenged m easures have responded.
While China does not consider that this is the only circumstance in which customs authorities can
respond to the evasion of higher duty rates that apply to a complete article, it is certainly a
circumstance that is addressed by the challenged me asures. In respect of the third factor under the
"necessary" standard, China has already noted that the measures do not materially affect imports of
motor vehicles or motor vehicles parts, other than in the entirely legitimate respect that importers
must pay the higher tariff rates for motor vehicl es when they import collections of parts and
components that have the essential character of a motor vehicle. Notwithstanding the "burden" that
complainants claim that the measures impose, ma jor car manufacturers and auto parts manufacturers
have reported that the measures have had little or no impact on their operations in China. The only
auto manufacturers who are affected are those who assemble motor vehicles in China from imported
parts and components that have the essential character of a motor vehicle.
4.541 Finally, in respect of the existence of other reasonably available, WTO-consistent
alternatives, China has already e xplained why the challenged measures are not inconsistent with its
rights and obligations under Article II, or with the rules of the HS. As the predicate for this discussion
is that the Panel has found otherwise, at least in some respect, China does not believe that there are

other reasonably available alternatives to secure compliance with its tariff provisions for motor
vehicles.
4.542 The chapeau to Article XX permits WTO Members to invoke the general exceptions listed in
items (a)-(j) "[s]ubject to the requirement that such measures are not applied in a manner which would
constitute a means of arbitrary or unjustifiabl e discrimination between countries where the same
conditions prevail, or a disguised restriction on international trade …". The challenged measures do
not discriminate between countries where the same conditions prevail. The challenged measures
apply equally to all imported auto parts and com ponents, regardless of their origin. The measures
entail no discrimination, let alone discrimination that is arbitrary or unjustifiable in relation to
countries where the same conditions prevail. No r do the challenged measures constitute a disguised
restriction on international trade.
4.543 In respect of the chapeau to Article XX and the Appellate Body's statement in US – Shrimp ,
China considers that the question before the Panel is whether China has drawn these lines in a manner
that preserves the tariff provisions that it negotiate d for motor vehicles, while at the same time giving
meaningful effect to its separate tariff rates for parts and components of motor vehicles. China
submits that the balance it has struck in the cha llenged measures is a reasonable one, and gives "due
regard both to the legal duties of the party claiming the exception and the legal rights of the other
parties concerned." China is allowed to give effect to its tariff provisions for motor vehicles, and to
ensure that substance prevails over form, while the complainants will continue to export large
quantities of auto parts to China that are not in an y way affected by the measure, and that are subject
to the applicable duty rates for parts.
4.544 Under Article 29 of Decree 125, an auto ma nufacturer who purchases imported parts and
components from a third party in China, and uses these parts and components in the assembly of a
registered vehicle model, is liable for the differe nce between the amount of any duty that the importer
has already paid in relation to the importation of those parts and components, and the duty rate
applicable to a collection of imported parts and co mponents having the essential character of a motor
vehicle. China considers that any charges that it collects pursuant to Article 29 of Decree 125 relate
to the administration and enforcement of China's tari ff provisions for motor vehicles, as they relate to
the proper classification of a specific collection of imported parts and components that, in their
entirety, have the essential character of a motor vehi cle. China has acknowledged, however, that this
aspect of Decree 125 is conceptually different in relation to Article II, because the original importer of
these third-party parts and components has, in most cases, already completed the customs formalities
in respect of these imports, and the goods are no longer subject to control.
4.545 China considers that Article 29 of Decree 125 is justified under Article XX(d) for reasons that
are similar to those set forth above. In the absen ce of Article 29 of Decree 125, auto manufacturers
could evade duty liability for complete motor vehi cles by arranging to import parts and components
through suppliers. As China explained at the first su bstantive meeting, this is of particular concern in
the automobile industry, in light of the close commercial relationships among auto manufacturers and
parts suppliers.
7. Conclusion
4.546 For the reasons set forth in this submission, China requests the Panel to reject the claims
raised by the European Communities, the United States, and Canada.

M. O
RAL STATEMENT BY THE EUROPEAN COMMUNITIES AT THE SECOND SUBSTANTIVE MEETING
OF THE PANEL
1. Introduction
4.547 This case is about local content requirements a nd discrimination against imported products in
blatant violation of the TRIMs Agreement and Artic le III of the GATT 1994. This is not a technical
case concerning tariff classification as China would like to have it although even the tariff
classification arguments of China entirely fail. This case is about protectionist measures that violate
the very core principles of the whole system established by the WTO Agreement.
2. The automotive industry
4.548 As the European Communities has demonstrated already on many occasions56, China attempts
to paint a picture of the automotive industry that has nothing to do with reality. Vehicles and their
parts are simply not manufactured in one country and by one company and its affiliates, and then
shipped to China in parts for a mere assembly in China with the sole purpose of avoiding China's
higher tariff rates for complete vehicles. In the global economy, vehicle manufacturers are simply not
able even to consider such a business model. They necessarily have to rely on highly specialised parts
manufacturers that are located in almost all parts of the world.
4.549 Because of fierce competition, vehicle manuf acturers are obliged to standardise the
production of their vehicle models in order to r each volumes of production sufficient to generate
economies of scale which are absolutely vital to remain competitive. Many parts fit not only different
models of the same manufacturer but different models of different manufacturers.
4.550 The identification of imported parts that belong to a given specific vehicle model is an
entirely fictitious condition imposed by the measu res. The normal business strategy of a vehicle
manufacturer is to order parts in bulk, some of which will be used in the manufacture of different
vehicle models, some as spare parts. Under the m easures these identical parts will be charged entirely
differently depending on their end use in China and in particular whether they are fitted to a vehicle
model that contains a certain combination or proportion of Chinese-made parts.
3. The applicable provisions
(a) Is there a threshold issue? The TRIMs Agreement as an answer
4.551 As the European Communities h as repeatedly demonstrated, there is no threshold issue in
these Panel proceedings for the purposes of examining Article 2 of the TRIMs Agreement . T h i s
provision does not require an ex-ante analysis as to whether a Measure is an internal or a border
measure. On the basis of its clear wording, all it requires is an examination of whether the contested
measures are (a) investments measures, (b) trade-relate d, and (c) fall within the Illustrative List. If
they fall – like the Chinese measures – under both pa ragraphs of the Illustrative List, they must be
considered to fall under Articles III:4 and XI:1 of the GATT 1994 and to violate Article 2 of the
TRIMs Agreement.

56 See inter alia paragraphs 9 to 17 and 68 to 74 of the first written submission of the European
Communities, paragraphs 4 to 8 of the European Co mmunities' response to the question of the Panel and
paragraphs 8 to 19 of the second written submission of the European Communities.

(b) Article III vs. Article II of the GATT 1994
4.552 China stated in its rebuttal submission that it believes "that the parties have reached
substantial agreement on the principles that are rele vant to determining whether a particular measure
or charge is subject to the disciplines of Ar ticle II or to the disciplines of Article III".
57 This is not
true. Whereas China continues to rely on pure formalism , such as the involvement of "customs"
authorities, so-called "bonds" and other labels att ached under its domestic law, in order to bring its
Measures within the scope of Article II of the GATT 1994, the European Communities has
demonstrated on the basis of clear substantive criteria why the Chinese measures are internal
measures falling under Article III of the GATT 1994, and not ordinary customs duties imposed "on
importation".58
4.553 First, the charges on imported auto parts are not determined at the time or point of
importation, but internally after assembly and manufacture, i.e. at a significantly later stage.
4.554 Secondly, the Chinese measures do not impose charges "on importation" since the charges are
not due because of importation of the auto parts, but because of other internal events and criteria.
Their imposition depends on whether "the Verificati on Center, after verifications, concludes that the
imported automobile parts should be characterized as complete vehicles" (Article 28 of Decree 125)
which in turn depends on whether the imported parts were fitted into vehicles with an insufficient
level of local content.
4.555 Thirdly, the internal nature of the measures is further illustrated by the fact that they apply
directly only to vehicle manufacturers, rather than to the importers of auto parts.
4.556 However, the fact that the Chinese measures ar e internal measures falling under Article III of
the GATT 1994 does not mean that Article II of the GATT 1994 does not play any role for the
resolution of this dispute.
4.557 First, the European Communities considers that the standard treatment of certain CKD and
SKD kits under Article 2 of Decree 125 could be ex amined solely as a violation of Article II of the
GATT 1994 while the rest of the measures breach, in addition to Article 2 of the TRIMs Agreement,
Article III, paragraphs 2, 4 and 5 of the GATT 1994. Secondly, the European Communities is of the
view that the inconsistency of the Chinese measure s with China's Schedule of Concessions plays an
important role under Article XX(d) of the GATT 1994, which China invokes, albeit in a very
superficial manner, as an alternative defence.
4. Article II of the GATT 1994
4.558 The interpretation given by the WCO secretariat on the words "as presented" under point 1 of
the reply is materially identical to the positio n taken by the European Communities in these
proceedings and by the Appella te Body in its report in EC – Chicken Cuts . Indeed, any other reply
would have been highly surprising. According to th e WCO secretariat "as presented" refers to "the
moment at which the goods are presented to customs or other officials with a view to classifying the
goods concerned in the customs tariff or in the tr ade statistics nomenclatures". The Appellate Body
has framed this principle in similar terms as follows: "in characterizing a product for purposes of tariff

57 China's second written submission, para. 100.
58 European Communities' second written submission, paras. 35 to 56.

classification, it is necessary to look exclusively at the 'objective characteristics' of the product in
question when presented for classification at the border".
59
4.559 The interpretation of the now so famous d ecision of the HS Committee in 1995 is also
clarified. The reply demonstrates once and for all that China has entirely invented its theory on
"multiple shipments". The WCO secretariat has now cl arified that the phrase "elements originating in
or arriving from different countries" in that decisi on have absolutely nothing to do with the "multiple
shipments" theory China has invented for the purposes of these Panel proceedings.
5. Article XX (d) GATT 1994
4.560 The European Communities is of the view that China's arguments relating to Article II of the
GATT 1994 are more appropriately addressed under Article XX(d) of the GATT 1994. This is
because in our view there can be no doubt about the fact that the measures violate Article 2 of the
TRIMs Agreement and Article III, paragraph 2, 4 and 5 of the GATT 1994.
4.561 China's explicit arguments relating to Article XX(d) of the GATT 1994 are very cursory both
in its first and second written submissions. The ar guments fall manifestly short of fulfilling China's
obligations on the burden of proof and therefore the analysis should stop there. As a matter of
principle, it is not for the complaining parties to develop further China's passing references to
Article XX(d).
4.562 In any event, China has not shown that there is in reality a problem of tariff evasion that needs
to be addressed. Second, in order to be jus tified under Article XX(d), the measures should be
necessary to secure compliance with the 25 per cen t duty on complete vehicles. However, as
demonstrated by the European Communities in its first and second written submissions, the measures
treat imported auto parts less favourably than provi ded for in China's Schedule. The measures cannot
be suitable to enforce China's tariff schedule sinc e they impose charges which directly conflict with
China's tariff schedules instead of enforcing them.
4.563 As regards China's passing arguments in relati on to the chapeau of Article XX of the GATT
1994, they are made for the first time only in China's second written submission, which is nothing but
another demonstration of China's tactics to delay or avoid addressing difficult issues. Therefore and in
view of the fact that China entirely fails to meet the first condition of provis ional justification under
Article XX, a couple of remarks will suffice.
4.564 In US – Gasoline, the Appellate Body held that the object and purpose of the chapeau of
Article XX is to prevent the misuse or abuse of the exceptions of Article XX.
60 Even a restriction that
formally meets the requirements of one of the speci fic exceptions listed in Article XX, which is not
the case here, will constitute an abuse if it is in f act only a disguise to conceal the pursuit of trade-
restrictive objectives. 61 This is precisely what China tries to do: to conceal the trade-restrictive
objective of its measures, which is apparent in view of the various clear statements in the measures
that directly point to the objective of providing protection to domestic production of auto parts.62

59 Appellate Body Report on EC – Chicken Cuts, para. 246.
60 Appellate Body Report on US – Gasoline, para. 22.
61 Panel Report on EC – Asbestos, para. 8.236.
62 See, for instance, Articles 4 and 52 of the Automotive Policy Order 2004.

N. O
RAL STATEMENT BY THE UNITED STATES AT THE SECOND SUBSTANTIVE MEETING OF THE
PANEL
4.565 China's rebuttal submission, though lengthy, adds very little to the substantive discussion of
the issues in this dispute. Rather, China's submission mostly relies on rhetorical devices. First, China
relies on rhetorical catch-phrases – such as "substanc e over form" and "parts versus wholes." These
phrases are nowhere contained in the WTO Agreement, or even in the HS, and are not helpful in
resolving the issues in dispute. The second rh etorical device used in China's second written
submission is to mischaracterize complainants' positi ons. Most notably, China repeatedly claims that
the complainants agree with China on various issues and the issues thus have been "narrowed," and
then China proceeds to build arguments based on these false premises.
1. Article III of the GATT 1994 and the TRIMs Agreement
4.566 As the United States has explained, China's measures amount to straightforward
inconsistencies with China's national treatment ob ligations under Article III of the GATT 1994 and to
a domestic content requirement that is inconsiste nt with China's obligations under Article 2.1 and
Paragraph 1(a) of Annex 1 of the TRIMs Agreement. China's defense to the Article III issues is based
solely on its argument that its measures involve cu stoms duties, and that Article III cannot apply to a
measure that involves customs duties. China has not otherwise even attempted to assert a defense –
aside from a vague reliance on Article XX(d) – to these breaches of its WTO obligations.
4.567 In its rebuttal submission, China phrases its ar gument as follows, with the emphasis in the
original: "If a particular measure implements and collects a charge that a Member is allowed to
impose in accordance with Article II, it cannot be the case that the same charge must be in conformity
with the requirements of Article III." This stat ement has no basis in logic or the text of the
GATT 1994. In fact, it is routine for a measure to be examined under the obligations set out under
various provisions of the WTO Agreement in disputes under the DSU. The fact that a measure is or is
not consistent with one obligation does not necessar ily determine whether the measure is or is not
consistent with a different obligation.
4.568 Perhaps China implies that there is somethi ng special in Article II of the GATT 1994 that
somehow "allows" (as China puts it) Members to de part from other GATT obligations. But that issue
has been considered, and rejected, by prior Pane ls under the GATT 1947 a nd by the Appellate Body
under the GATT 1994. As found in those disputes, Article II of the GATT 1994 and a Member's
schedule of tariff commitments impose additional ob ligations on a Member, and consistency with
those obligations cannot serve as a defense to breaches of other WTO obligations.
4.569 China's charges (whether internal charges or cu stoms duties) are straightforward violations of
Articles III:4 and III:5 of the GATT 1994, as well as th e TRIMs agreement. This is because the level
of China's charges increases if the local content of a vehicle manufactured in China does not exceed
certain thresholds. As such, the measures provide less favorable treatment to imported parts with
respect to laws affecting their internal sale, pur chase, distribution and use under Article III:4, and
impose a domestic mixing requirement within the meaning of Article III:5.
4.570 Consider a vehicle manufacturer in China that has imported an auto part; call it Part A. Under
China's measures, the importer/manufacturer must po st a security for the 10 per cent parts rate. Once
Part A enters into inventory, the manufacturer h as a decision with regard to what to do with this
imported part. The manufacturer may decide to use the imported part in the production of a particular
complete vehicle. However, the manufacturer must always be mindful of China's local content
thresholds. If the use of Part A in manufacturing would result in a vehicle that exceeds the thresholds,

then all other imported parts used in that vehicle w ould be subject to the 25 per cent charge. By tying
the use of Part A to increased charges on other pa rts, China's measures serve as a disincentive on the
use of Part A in manufacturing. And, this disincentive is in
addition to, and separate from, the level of
the charge imposed on Part A itself. No comparab le regulations affect the use of a comparable
domestic Part A. Accordingly, China's measures are a violation of Article III, as a law affecting the
use within China of an imported product.
4.571 China is wrong in asserting that customs duties w ould always constitute "a violation of the
non-discrimination principles under Article III." The same type of discrimination does not apply to
customs duties regularly imposed by WTO Members. That is, the level of charges on other imported
products does not depend on how an imported part is used within the Member's territory.
4.572 This discrimination not only applies to the "use" of the imported product, but also applies to
the "internal sale, offering for sale, purchase, or distribution" under Article III:4. If the importer in the
above example were instead a parts distributor or a parts producer, then the importer would want to
sell or distribute imported Part A to manufacturers within China. Under China's measures, however, a
manufacturer in China will have a disincentive to purchase imported Part A from the distributor.
Thus China's measures adversely affect the "interna l sale, offering for sale, purchase, or distribution"
of imported parts, with no comparable effect on domestic parts.
2. Internal charges vs. customs duties
4.573 The additional charges at issue in this dispute are internal charges, not "ordinary customs
duties." Under EEC – Parts and Components , charges are internal charges subject to Article III:2 of
the GATT 1994 when based on the product as manufactured internally, regardless of the label adopted
by the implementing Member. In this case, China' s charges are based not on the goods as entered but
instead on the use of the goods in manufacturing a vehi cle within the territory of China. When a part
is presented at the border, China imposes a revenue bond based on the 10 per cent duty rate for parts,
and applies the extra 15 per cent charge only (1) if the imported part is actually used in the
manufacture of a vehicle, and (2) if the amount of imported content in that vehicle exceeds the
thresholds set out in China's measures. China's measures are focused on the amount of local content
in the final assembled vehicle - the who, what, where, and hows of importation are irrelevant.
4.574 In its second submission, China argues that its charges are just like regular customs duties
because: "The classification of the import entry, a nd the assessment of the applicable duty rate, is
based on the status of the auto parts and component s when they were entere d and declared to the
Customs General Administration." This statement, how ever, is inconsistent with the actual content of
China's measures. The charge is based on how the part is actually used internally, and not on the
condition of the part as imported.
4.575 As the United States understands it, China's argu es in its rebuttal submission that no parts are
actually "imported" until the final duties are assessed after manufacturing, because as a formal matter
China (in most but not all cases) will not have settle d – until after the final manufacture of a complete
vehicle – the financial guarantee required upon entry. This argument is not and cannot be correct.
Otherwise, a Member could avoid its Article III disciplines by the simple ruse of structuring its
customs laws so that no product is actually "impor ted" – as China proposes the term be interpreted –
until after discriminatory internal charges and ot her discriminatory measures had been applied.
Rather, the only sensible way to view "imported" in this context is with its normal meaning, that is,
the time when the product enters the Member's customs territory.

4.576 The United States also would note that if the Panel in fact were to agree with China's apparent
argument that no parts are to be considered "im ported" until after manufacturing, then the measures
would amount to import restrictions under Article XI of the GATT 1994, as alleged in the US request
for the establishment of a panel. This result w ould follow from the fact that China's measures are
mandatory for vehicle manufacturers who wish to im port parts. And, if those measures prohibit the
importation of parts until after the completion of a manufacturing operation, the measures would
amount to restrictions on the ability of manufacturers to import parts.
3. GIR 2(a) would not provide China with a defense under Article II of the GATT 1994
4.577 China's additional charges on imported auto parts are internal charges, subject to obligations
under Article III:2 of the GATT 1994, and not "ordinar y customs duties" under Article II:1(a) of the
GATT 1994. Even aside from this fact, GIR 2(a) of the HS would not provide a defense to a breach
by China of its tariff commitments.
4.578 As the United States has explained, China's tariff classification argument based on GIR 2(a) is
entirely without merit. The US explanation incl udes that China's interpretation of GIR 2(a) is
inconsistent with the object and purpose of the HS Convention to establish uniform tariff
nomenclature rules for the purpose of comparing tr ade statistics (between exports and imports, and
between different parties to the Convention). In fact, under China's interpre tation, the comparability
of trade statistics collected by different Members, and between import and export statistics, would be
destroyed. China has never responded to this explanation of how China's interpretation is inconsistent
with the object and purpose of the HS Convention.
4.579 China's argument that only Chin a's interpretation would allow "substance" to triumph over
"form" is meaningless, and completely ignores th e reality of modern automobile manufacturing.
Manufacturers import bulk shipments of parts because th is is the usual and most efficient means of
conducting large-scale automobile manufacturing, a nd not because manufacturers are trying to avoid
duties owed on the import of knock-down kits.
4.580 The United States also has three additional points on China's tariff binding argument based on
GIR 2(a). First, China's submission repeatedly claims that GIR 2(a) is addressed to the issue of "parts
vs. wholes." This characterization of GIR 2(a) is incorrect. Rather, the HS addresses "parts vs.
wholes" under the HS tariff nomenclature: that is, whole articles and parts (and assemblies) of
articles are classified in separate headings. Accord ingly, the general issue of "parts vs. wholes" is
governed by GIR 1, which provides that articles mu st be classified in accordance with the relative
headings. In contrast, GIR 2(a) is only addressed to the limited issue of the classification of articles
presented unassembled or disassembled, and does not address the classification of bulk parts
shipments.
4.581 Second, the United States recognizes that the WCO Secretariat has no formal role under the
Convention to provide definitive in terpretations of the HS, nor to provide definitive advice to other
bodies. The United States does note, however, that the response of the WCO Secretariat to the Panel's
questions acknowledges the point made by th e United States regarding the phrase "elements
originating in or arriving from different countries," as used in th e HS Committee decision cited by
China. In particular, the Committee's discussion of "elements" from different countries was in the
context of discussing the application of rules of origin, and does not in any way indicate that the
Committee was considering a measure (such as Ch ina's) that would artificially combine bulk
shipments of parts from different countries in order to create a fictional collection of parts to be used
in the assembly of a complete vehicle.

4.582 Third, the only pertinence of the HS Convention in this dispute is to assist in determining the
common intent of WTO Members with respect to Ch ina's tariff commitment on specific auto parts,
such as radiators and brakes. Regardless of any issues raised by China regarding the precise meaning
of HS interpretive notes and WCO discussions of in terpretive notes, nothing in the HS Convention
could support an interpretation of China's WTO tariff commitments such that bulk shipments of
brakes and radiators should receive the same tariff treatment as whole automobiles.
4. China's Article XX(d) defense
4.583 China, as the disputing party asserting an affirmative defense under Article XX(d) of the
GATT1994, has the burden of proving each element of the defense. China has not met that burden.
4.584 China's basic argument under Article XX(d) is that its measures are "necessary to secure
compliance with laws or regulations" needed to collect the 25 per cent duty that China is permitted
under its tariff bindings to collect on the importation of whole vehicles. China uses this language to
mean two very different things – neither one of them supports an Article XX(d) defense.
4.585 First, China uses this language to mean that under its domestic tariff schedule, China is to
charge a whole-vehicle rate of dut y on any imported part, so long as that part is used to manufacture
within China a vehicle with a foreign content that exceeds the thresholds under China's measures. As
the United States has explained, there is no possi ble interpretation of China's national treatment
obligations under Article III, nor of China's WTO Schedule, that would allow for China to impose a
25 per cent duty on bulk shipments of parts impor ted for manufacturing purposes. Accordingly,
China's purported Article XX(d) defense fails to present any "laws or regulations which are not
inconsistent with the provisions of this Agreement," as required by Article XX(d).
4.586 Second, China uses the same language – about en suring its ability to collect the 25 per cent
whole-vehicle duty – to mean something entirely di fferent: namely, that China must be able to
address certain limited, though still hypothetical, exam ples of "evasion" (as China puts it), such as the
case of a CKD split into two shipments, or a whole vehicle entered with the tires removed. To be
absolutely clear, the United States does not agr ee, as China claims, that a hypothetical measure
intended to address split shipments of kits would be consistent with China's WTO obligations.
Rather, China in fact has not adopted any such meas ures in this dispute, and it is not meaningful for
the United States (nor the Panel) to engage in an analysis of hypothetical, vaguely defined measures
not actually adopted by China.
4.587 For two reasons, China's asserted rationale fails to meet the requirement of necessity under
Article XX(d). First, China has still failed to show a single instance where any importer ever engaged
in the specific practices id entified by China. In fact, China's c ourse of conduct has shown that it has
not been concerned about tariff evasion at all. Rather, Chinese authorities have controlled the tariff
process by requiring auto manufacturers to negotiate the rates that would be applicable for all types of
kits and parts, with the key factors in the outcome of that negotiation being a manufacturer's
commitment to investing in China and using local content in assembling vehicles.
4.588 Second, China's asserted "circumvention" rationale does not match the scope of China's
measures. China's measures sweep broadly to cove r all imports of bulk parts for manufacturing
purposes, not just instances of what China calls "tar iff evasion." Given the far broader scope of the
measures China has actually adopted, they cannot be considered "necessary" under Article XX(d) to
meet China's asserted policy concern with "evasion."

O. O
RAL STATEMENT BY CANADA AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL
4.589 Canada has explained how the measures are in consistent with Article III of the GATT 1994:
with Article III:2, for applying internal charges on imported auto parts in excess of those applied to
domestic auto parts; with Article III:4, for accordin g less favourable treatment to imported parts with
respect to requirements affecting internal sale, pur chase, distribution and use; and with Article III:5,
for requiring specified amounts or proportions of pa rts for vehicle manufacturing in China to come
from domestic sources. This domestic-content requirement leads in turn to a violation of Article 2 of
the TRIMs Agreement. China has not addressed these arguments. Its central position remains its
Article XX of the GATT 1994 defence presented as an argument under Article II.
4.590 China's mischaracterization of the complainants' arguments does not address the claims
before the Panel. The complainants' arguments rai se the fundamental issue of how one auto part can
become a motor vehicle by virtue of its use in the internal market, when another, identical part does
not. China does not deal with this. It alleges that th e complainants would deny it the right to apply its
motor vehicle tariff because they have asked China to honour its tariff commitments for auto parts.
China tells the Panel that everyone does as it does. There is no evidence to support this proposition,
which is legally irrelevant even if there were.
4.591 China also alleges that the comp lainants have selectively ignored the GIRs and its efforts to
reframe the complainants' clai ms under Article II of the GATT 1994. The GIRs, which the
complainants have addressed in full and in context, are not relevant to this dispute, because this
dispute is not about applicable tariffs or Article II, but discrimination against imported auto parts.
4.592 Canada has already demonstrated the nature of China's violation of Article III of the
GATT 1994 and the TRIMs Agreement, and will examin e in more detail four persistent problems
with China's defence: (1) the serious systemic im plications of China's Article II claim; (2) basic
inconsistencies in China's argument; (3) the inc onsistency of China's defence with accepted customs
practices; and (4) the absence of any Article XX defence for the measures.
4.593 China's argument concerning the flexibility that GIR 2(a) should afford to a Member to
interpret its Schedule would, if accepted, allow Me mbers to justify with impunity the circumvention
of the national treatment obligation in Article III. According to China, whenever a Member's tariff
commitments for parts are lower than those for complete products, that Member may presume that the
difference will lead to tariff circumvention and c onsequent economic loss. This would legitimize the
application of domestic-content th resholds linked to the imposition of the tariff rate for a completed
product to parts used to produce that product.
4.594 Following China's logic, imported auto parts can on ly receive the benefit of a parts tariff in
two circumstances. One is where those parts are never used to manufacture a complete product (as in
the case of spare parts). The other is where enough domestic content is incorporated in the complete
product so that imported parts after further processing no longer have the "essential character" of the
completed product.
4.595 China has not presented any evidence of a problem with competition, and, even if there was a
problem, such a problem is appropriately resolved by specific means for which specific disciplines
exist, such as safeguards and anti-dumping duties, and not through additional illegal tariffs.
4.596 In its rebuttal submission, China erroneously cl aims that the complainants would deny it the
opportunity to enforce its tariff rate for motor vehicles . Canada is happy for China to apply its tariff
rate for motor vehicles to actual
 motor vehicles as understood in the HS, instead of to alternators or

steering wheels. China's argument relies on GIR 2(a), while ignoring the express language of
Article II of the GATT 1994 and the context for the operation of the GIRs as demonstrated by the
complainants.
4.597 The Appellate Body has said clearly that the broad purpose of Article III is to avoid
protectionism in the application of internal tax a nd regulatory measures. To realize that purpose, we
apply the tests set down in, for example, Japan – Alcoholic Beverages II so as to determine whether
an imported good is like a competing domestic one that may be receiving better treatment in the
domestic market. However, if a Member can extend its consideration of the character of an imported
good to some indefinite point after physical importa tion, in order to evaluate how or by whom the
good is used, any Article III test becomes an exercise in relativity.
4.598 Under China's approach, one imported good may be identical to both another imported good
and a domestic equivalent. Yet, a Member may gr ant different treatment to the first imported good
because it was bought by company X and not company Y, or was used in a process that included over
60 per cent imported parts, whereas the other impor ted good was used mostly with domestic parts. If
we are examining the imported a nd domestic goods under, say, Article III:4, tariff classification and
the physical characteristics of the good are now unrelated. Under the measures, two otherwise-
identical imported goods are given two different tariffs solely on the basis of their end-use.
4.599 China tries to confuse this fact by arguing that, if the classification of a particular motor
vehicle at the border is not obvious, the complainants would limit China to considering that motor
vehicle as a collection of parts. In fact, China goes further than that, to sugg est that the complainants
contend that removing something as simple as a wiper blade requires the classification of the vehicle
as a collection of parts. China is entitled to classi fy parts that have the essential character of a
finished vehicle, as they are presented in a single shipment at the border, as a finished vehicle;
however, it is not China's right to withhold a decision on essential character until it sees fit.
4.600 China's argument is that the scope of Artic le II should be expanded, and the scope of
Article III narrowed. China attempts to justify this by wrapping its Article II defence in an erroneous
interpretation of WCO, not WTO, obligations. A nd that defence can be reduced to two flawed
notions: first, that a Member may unilaterally char acterize and artificially extend the "importation"
stage to have a Measure covered under Article II; and, second, that a duty liability can relate to any
point in time during this artificial "importation" stage.
4.601 Canada has shown in its written submissions th at both notions are wrong in law. To accept
otherwise would allow a Member to undermine its tariff commitments by affording protection to
domestic production through an extension of the cove rage of Article II to whatever point after
physical importation suits the interests of the importing Member. China's defence does not address the
central arguments presented by the complainants, and fails to explain why this logic applied to China's
automobile industry should not also be true for other types of commercial operations that use parts
charged at a lower rate than finished goods.
4.602 China maintains that its Schedule serves to protect it from a clear violation of Article III of
the GATT 1994, and by extension Article 2 of the TRIMs Agreement, through the presentation of an
anti-circumvention argument that is found nowhere in the WTO Agreement. The Appellate Body in
EC – Export Subsidies on Sugar reaffirmed that a Member cannot rely on its Schedule to cure a
violation of another provision of a covered agreement.
4.603
The measures effectively nullify WTO disciplines on domestic-content requirements.
Consider the discipline set out in Article III:5 of the GATT 1994 concerning the application of

internal quantitative regulations, something that China simply ignores. If a Member applies a
threshold for domestic content, it would still be subj ect to the discipline imposed by Article III:5.
Since China cannot marry the restriction on imposing such measures in the inte rnal market with an
argument that the threshold is necessary to permit th e application of tariff lines, it avoids the issue
entirely.
4.604 Further, the broad scope for Article II:1(b) of the GATT 1994 that China has invented cannot
exist in the same legal universe as, for example, the clear restriction in Article III:4 against
discrimination in the internal sale, offering for sal e, purchase or distribution of an imported good.
Canada has established, and China has not denied, that the measures discriminate in each of these
ways against the sale, purchase and distribution of fo reign auto parts. China has maintained that
Articles II and III are binary. This ignores the fact that Article III can, in certain instances, apply at
the border, such as with Article III:4. Nothing in the text of Article II authorizes the operation of the
measures in the face of the prohibition in Article III:4, and China does not address this.
4.605 China argues that the measures are justified as th ey are consistent with widespread Member
practice, that it can classify goods on the basis of their end-use, and that it can establish different
points in time at which importation may occur. It suggests that documentation it requires can justify
this. And it argues, in the context of the term "as pr esented", that it can link the distinct legal concepts
in Article II into one indistinguishable whole. Ther e is no practice, and no lega l justification in either
the text of Article II or the statements of the complainants to support these claims.
4.606 All parties, as well as the WCO, agree that pr oper classification is made on the basis of the
state of a good when it is presented at the border. Yet China "classifies" parts based on their status
once they are assembled in a final vehicle by a vehicl e manufacturer. There is nothing in the text of
Article II to justify this reading of the WTO Agreement.
4.607 Canada has argued that the general process of im portation under Article II is distinct from the
single point of assessment for ordinary customs duti es. This is evident from the distinction between
the term "impose as a condition of" that China sugg ests can be read into Article II:1(b) of the
GATT 1994, first sentence, and the term "on their impor tation" that is actually there. China argues,
incorrectly, that the fact that a good may be rel eased into an importer's custody prior to payment of
duties justifies the conclusion that any duty sub sequently assessed can relate to the use of the good
after release. In China's words, "the character ization of a particular charge … will depend upon the
reason or event that triggered the imposition of the charge".
4.608 The reason for imposing a charge is legally irrelevant, as EEC – Parts and Components
makes clear. And there can only be one "event" under Article II:1(b), first sentence, namely the
assessment of the product in a given shipment b ased on its objective characteristics at the border.
That reason or event does not change for ordinary cu stoms duties, despite China's attempt to conflate
the first and second sentences of Article II:1(b).
4.609 China argues that the flexibility to impose othe r charges under Article II applies to ordinary
customs duties, and tries to link its measures to other charges levied at importation, including anti-
dumping duties, countervailing duties and other duties or charges. But this case is about the 10 per
cent rate of ordinary customs duty that China is permitted to levy against imported auto parts, and no
more.
4.610 Canada has demonstrated that documentary ev idence in context is only one aspect of this
assessment. Yet China continues to argue that the documentation required under the measures is a
justification for its classification practices, claiming that "a customs declaration or other documentary

evidence" is sufficient, in order to classify importe d auto parts as automobile parts characterized as
complete vehicles. This ignores the fact that im porters are required to submit this documentation as a
means to obtain an import licence. And he measure s deem parts to be whole vehicles even in the
great majority of instances under the HS Classification where they should be considered as parts.
4.611 Given that the proper classification is based on the state of the goods in a single shipment at
the border, China's recourse is to stretch a singl e WCO decision to stand for a general proposition that
Members may classify split shipments as if they arrived together.
4.612 Considering both the reality of the automobile market and the nature of China's defence under
GATT Article XX as applied to the whole of the me asures, the only reasonable conclusion is that
Article XX does not offer a defence to China. The measures are designed to support and develop
China's domestic industry in a manner inconsistent w ith the requirements of Article XX(d). They are
arbitrary in application and expressly designed to restrict trade.
4.613 Canada has shown that China's Article II ar gument is an Article XX(d) of the GATT 1994
defence by another name. Even if one accepts th at the measures may be considered in respect of
Article II, the measures are applied such that some identical products receive different tariff treatment
in a manner that is inconsistent with China's Sche dule. In respect of goods presented at the border,
this would result in a breach of Article II; since the Schedule itself (or its incorporation into Chinese
law) seems to be the grounds for China's invocatio n of Article XX(d), its misapplication can hardly
then be the reason for turning to Article XX(d) in the first place.
4.614 By arguing that there is an effort by vehicle manufacturers to get around the tariff rates that it
negotiated, China creates a legal problem that does not exist, namely tariff "circumvention". It
establishes arbitrary thresholds to define a motor ve hicle, which allows it to presume "circumvention"
if the artificial thresholds are reached.
4.615 According to China, there should be special rul es applied to auto manufacturers in respect of
otherwise-clear tariff headings, simply because a company may have sourced a large quantity of parts
outside China. The reason for this, says China, is that manufacturers could evade duty liability for
complete motor vehicles by arranging to import parts and components through suppliers.
4.616 This position is untenable. Canada demonstrat es this with a series of slides focussing on
sourcing of the key parts for a brake system which, under the measures, constitute a Deemed Imported
Brake Assembly. The normal chain of supply is a complex web of parts manufacturers, joint
ventures, commercial linkages and temporary or pe rmanent integration of operations within and
across borders, often with a single company playing multiple roles.
4.617 Slide 1 describes what China says is happening: all the parts necessary to assemble a vehicle
are together at one location abroad. Instead of bei ng shipped together, the shipment is separated into
two shipments. Those parts are then received by one joint-venture vehicle manufacturer, which uses
the parts to assemble a complete vehicle. China has presented no evidence that this ever happens.

Slide 1: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Chinese Scenario of « Circumvention »)
Outside Chinese
Customs Territory
Inside Chinese
Customs Territory
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
Brake Assembly and
all other parts necessary to
assemble a Whole
Vehicle Ford/
Mazda/
Changan
Legend:
= Previously shown business transaction
= Newly shown business transaction
= Foreign Owned
= Sino-Foreign Joint Venture
= Chinese Owned
Shipment 1
Shipment 2
Parts Manufacturer
Controlled by Ford or
Mazda
Internal Market

4.618 Now let us look at the real commerc ial world, at how parts sourcing actually operates in the
auto industry. In every scenario , the measures deem the resulting br ake assembly manufactured by a
vehicle manufacturer to be imported, with the con sequence of the application of the motor vehicle
tariff.
4.619 Slide 2 shows a specialized parts manufacturer abroad that ships a full brake assembly
directly to a vehicle manufacturer in China. Th e vehicle manufacturer needs to source separately all
other parts for the vehicle.
Slide 2: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 1)
Tier 3
Outside Chinese
Customs Territory
Inside Chinese
Customs Territory
Tier 2
Tier 3
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
Full Brake Assemblies
Manufactured in US, EC, Japan
e.g. by Japan Brake (Japan),
Brembo (EC)
Ford/
Mazda/
Changan

4.620 Slide 3 depicts separate shipments from differe nt specialized parts manufacturers often in
different countries, all of which are shipped directly from abroad to joint venture vehicle
manufacturers in China.
Brake Master Cylinders
Manufactured in US, Canada, Japan,
Korea, EC
e.g. by Delphi (US), FTE (EC)
Slide 3: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 2)
Tier 2
Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese
Customs Territory
Ford/
Mazda/
Changan
Toyota/
FAW
Tier 2
Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC)
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada,
Japan, Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada
(Canada), Swi Tong (Chinese Taipei),
Hyundai Mobis (Korea)
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC) Hyundai/
Beijing Auto
VW/FAW
GM/
SAIC
Suzuki/
Changan

4.621 Slide 4 depicts a scenario in which three ke y parts are shipped to foreign-owned parts
manufacturers in China, to be incorporated with parts produced in China by those companies and then
shipped to vehicle manufacturers, which combines tho se parts with other brake parts shipped directly
to them from abroad.
Brake Master Cylinders
Manufactured in US, Canada, Japan,
Korea, EC
e.g. by Delphi (US), FTE (EC)
Slide 4: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 3)
Tier 2
Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese
Customs Territory
Wholly Owned Subsidiaries of
Foreign Parts Manufacturers
e.g. Delphi, Bosch
Ford/
Mazda/
Changan
Toyota/
FAW
Tier 2
Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC)
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan,
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada),
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)
Hyundai/
Beijing Auto
VW/FAW
GM/
SAIC
Suzuki/
Changan

4.622 Slide 5 adds the involvement of fore ign-owned suppliers in China that also produce parts for
the brake system, with material and parts sourced both in China and abroad. The part for the brake
system is then shipped either to a foreign-owne d parts manufacturer or directly to a vehicle
manufacturer, and is incorporated into the brake assembly of a vehicle.
Brake Master Cylinders
Manufactured in US, Canada, Japan,
Korea, EC
e.g. by Delphi (US), FTE (EC)
Slide 5: Deemed Imported Brake Assembly– Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 4)
Tier 2
Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese
Customs Territory
Wholly Owned Subsidiaries of
Foreign Parts Manufacturers
e.g. Delphi, Bosch
Ford/
Mazda/
Changan
VW/FAW
GM/
SAIC
Toyota/
FAW
Tier 2
Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC)
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan,
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada),
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)
Suzuki/
Changan
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)
Hyundai/
Beijing Auto
Chinese Owned
Tier 3 Chinese Owned
Tier 3
Foreign Owned
Tier 2

4.623 Slide 6 adds the involvement of joint ventures in the parts industry, which import some key
parts, source others parts within China, and ship e ither to foreign parts manufacturers or directly to
vehicle manufacturers.
Brake Master Cylinders
Manufactured in US, Canada, Japan,
Korea, EC
e.g. by Delphi (US), FTE (EC)
Slide 6: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Real-market Scenario 5)
Tier 2
Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese
Customs Territory
Wholly Owned Subsidiaries of
Foreign Parts Manufacturers
e.g. Delphi, Bosch
Ford/
Mazda/
Changan
VW/FAW
GM/
SAIC
Toyota/
FAW
Tier 2
Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC).
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan,
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada),
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)
Suzuki/
Changan
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)
Hyundai/
Beijing Auto
Tier 3 Tier 3
Tier 2
Joint Ventures between Foreign
Parts Manufacturers and Domestic
Chinese Companies
e.g. CSG/TRW, TBK/FAW,
CAS/SAIC. AGP/FTE
Joint Venture
Tier 2

4.624 Slide 7 adds the involvement of wholly ow ned Chinese parts manufacturers. The assembly
still has enough imported key parts to be Deemed Imported.
Brake Master Cylinders
Manufactured in US, Canada, Japan,
Korea, EC
e.g. by Delphi (US), FTE (EC)
Slide 7: Deemed Imported Brake Assembly – Illustrative sourcing from
independent parts manufacturers (Most Likely Real-market Scenario)
Tier 2
Tier 3 Tier 3
Outside Chinese
Customs Territory
Inside Chinese
Customs Territory
Wholly Owned Subsidiaries of
Foreign Parts Manufacturers
e.g. Delphi, Bosch
Ford/
Mazda/
Changan
VW/FAW
GM/
SAIC
Toyota/
FAW
Tier 2
Tier 3
Tier 2
VW/SAIC
Process of Importation
Point of Classification
Parts Manufacturers
 Vehicle Manufacturers
ABS Valve Blocks
Manufactured in EC, Korea, Japan, US
e.g. by Aisin (Japan), CAS (EC).
Other parts constituting collectively a key part
Manufactured in US, EC, Korea, Canada, Japan,
Australia, Chinese Taipei
e.g. by Borg Warner (EC), TRW Canada (Canada),
Swi Tong (Chinese Taipei), Hyundai Mobis (Korea)
Suzuki/
Changan
Brake Boosters
Manufactured in US, EC
e.g. by Bosch (EC)
Hyundai/
Beijing Auto
Tier 3 Tier 3
Tier 2
Joint Ventures between Foreign Parts
Manufacturers and Domestic Chinese
Companies
e.g. CSG/TRW, TBK/FAW, CAS/SAIC.
AGP/FTE
Chinese Owned Companies, both
Wholly Independent (e.g. Wanxiang,
Shandong Gold Phoenix) or owned
by Chinese Vehicle Manufacturers
e.g. CAFF, DETC
Tier 2
Chinese Owned
Tier 2

4.625 The last diagram emphasizes just how artificia l the entire Chinese circumvention argument
really is. China argues that it can aggregate the im ported content of all brake parts in China, even
though those parts pass through multip le independent parties in the internal market and are combined
with domestic parts. China insists that every imported part must be linked by a vehicle manufacturer
to a specific production model, at the same time as it is aggregated in what China characterizes as a
broad effort to circumvent the motor vehicle rate. It is impossible to reconcile this with China's
Article XX(d) argument. Commercial reality is far removed from the environment in which China
suggests circumvention is a serious, if unfounded po ssibility. Simply, there is no necessity to justify
the measures, and China's defence fails entirely.
P. O
RAL STATEMENT BY CHINA AT THE SECOND SUBSTANTIVE MEETING OF THE PANEL
4.626 The central issue in this dispute is whether China's tariff provisions for motor vehicles have
any meaningful effect. The complainants' argument leads to the conclusion that China cannot, in
practice, apply its tariff for motor vehicles becau se importers can manipulate at will the boundary
between a motor vehicle and parts of a motor vehicl e to obtain the lowest rate of duty. The Panel
must reject this argument and its conclusion.
4.627 China's tariff provisions for motor vehicles must be interpreted to have meaningful effect
under the terms of Article II of the GATT 1994. This necessarily entails drawing a line between
motor vehicles and the parts of motor vehicles, and between the form and the substance of what is
imported in order to reflect commercial reality of the transaction.
4.628 The question before the Panel is whether the complainants have demonstrated that the manner
in which China has drawn these two lines is inc onsistent with China's WTO obligations. The

complainants have failed to meet this burden, especia lly in light of their own practices and in light of
the WCO's responses to the Panel's questions.
1. The line between complete motor vehicles and parts of motor vehicles
4.629 Within the HS, the line between parts and w holes is expressed in terms of the "essential
character" test under GIR 2(a). The complainants have failed to demonstrate that the measures at
issue are inconsistent with application of the "essential character" test.
4.630 The WCO's responses to the Panel's questions strongly confirm this conclusion. The WCO
has explained that Chapter 87 of the HS "presents unique classification challenges" in light of its
simultaneous provision for motor vehicles and for va rious parts and assemblies of motor vehicles.
The WCO has explained that "the borderlines among these headings" have not been examined by the
HS Committee.
4.631 The WCO response has made clear that there is a difficult issue of classification involved in
distinguishing between motor vehicles and parts of mo tor vehicles, and that the application of GIR 1
does not, by itself, resolve this classification issue. The WCO has also confirmed that the application
of the essential character test reflected in GIR 2(a) to a specific set of facts is "within the purview of
national customs administrations."
4.632 The complainants opted not to raise a dispute concerning the application of Decree 125 to
specific combinations of motor vehicle parts and com ponents. They have also failed to offer a clear
position on the factors that are relevant in applyi ng the essential character t est. The complainants
have, therefore, failed to demonstrate that the ch allenged measures necessarily result in an improper
application of the essential character test to motor vehicle parts and components.
2. The line between form and substance
4.633 Under GIR 2(a), the condition of goods "as presente d" at the border defines the parameters in
which customs authorities may evaluate the goods con cerned. The interpretation of "as presented"
defines the extent to which China can classify a shipment of auto parts and components on the basis
of evidence that it is one of a series of shipments th at, taken together, have the essential character of a
motor vehicle and can be assembled into a motor vehicle within the parameters of the assembly
operations described by GIR 2(a).
4.634 According to the WCO, the HS "is silent" on the meaning of the term "as presented". China
considers that the central issue befo re the Panel, at this juncture, is how it should proceed to resolve
the present dispute in light of the absence of an agreed interpretation of this term by the WCO, and in
the absence of the complainants' failu re to establish an interpretation of this term that plainly results
from the application of customary principles of international law.
4.635 The question of whether the challenged measur es result in proper classification of motor
vehicles under GIR 2(a) is central to the resolution of the present dispute. Both sides of this dispute
have placed significant weight on their respectiv e understandings of the term "as presented." The
complainants' basic thesis is that the challenged measures do not result in the collection of a valid
customs duty because the charges are not based on the condition of auto parts and components "as
presented" at the border. Therefore, in their vi ew, the challenged measures impose "internal" charges
subject to the disciplines of Article III and th e TRIMs Agreement. China, on the other hand,
considers that the measures are based on a proper understanding of the term "as presented," because
the classification is based on the declaration of the importer that an entry of parts and components is

related to other entries of parts and component s through their common assembly into a complete
article. China therefore considers that the challe nged measures collect ordinary customs duties on
motor vehicle parts and components on their importation into its customs territory, and that the
collection of these duties is consistent with its rights and obligations under Article II.
(a) The complainants have not articulated an interpretation of the term "as presented"
4.636 The complainants have offered only circular de finitions of the term "as presented". Their
definitions refer to goods "as presented" to custom s or to the "state of a product upon arrival at the
border". These definitions beg the question of what the term "as presented" means. They do not
clarify whether the term refers solely to the physic al characteristics of a single container, to the
contents of multiple containers, or whether it can encompass a consideration of the documentary
evidence accompanying the shipment.
4.637 As the complaining parties in this dispute, the burden is on the complainants to establish that
the challenged measures are inconsistent with China' s obligations under the relevant provisions of the
covered agreements. In the absence of any articula tion of the term "as presented," and in the absence
of any substantiation of this term in accordance wi th customary principles of international law, the
complainants have no basis to assert that Decree 125 is inconsistent with the HS or with international
customs practice.
(b) The complainants' implicit interpretation of GIR 2(a) lacks foundation
4.638 The complainants implicitly propose an interpretation of GIR 2(a) requiring customs
classification according to the form in which the importer "presents" a collection of parts and
components. On this interpretation, importers can "present" parts and components of an article in
whatever form they wish, and customs authoriti es must accept the proposed classification without
regard to other evidence which shows that the im porter is importing parts and components that have
the essential character of the complete article.
4.639 The complainants have failed to provide any support for the proposition that GIR2(a)
precludes the consideration by customs authoritie s of whether multiple shipments of parts and
components are related to each other through their common assembly into a complete article. The
complainants have merely asserted this interpretation of GIR 2(a). It is an interpretation that fails to
give effect to the role that GIR 2(a) plays within the HS, as it leaves the relationship between
complete articles and parts of those articles entirely at the discretion of the importer. It is, moreover,
an interpretation that is contradicted by the complainants' own arguments and customs practices.
3. Three paths toward the resolution of this dispute
4.640 The complainants have advanced claims that the challenged measures violate Article III and
the TRIMs Agreement, as well as Article II. In order to establish any of these claims, the
complainants must demonstrate that the challenge d measures do not collect ordinary customs duties
that China is allowed to collect under its Schedule of Concessions. The complainants have failed to
meet this burden. China, by contrast, has demonstrat ed that it is consistent with the context of GIR
2(a) to interpret the term "as presented" in a ma nner that allows customs authorities to draw a line
between the substance of what an importer brings in to the customs territory and the form in which it
does so.
4.641 The WCO has advised the Panel that there is no agreed interpretation of the term "as
presented" in GIR 2(a). This suggests that th ere is a known and unresolved ambiguity within

GIR 2(a) concerning the line between form and substance in the classification of parts and
components. The ambiguity in GIR 2(a) is suggested not only by the absence of an authoritative
interpretation of the term "as presented" within th e WCO, but also by the complainants' inability to
articulate and substantiate what this term means under established international norms, or by reference
to other interpretive principles under the Vienna Convention . China does not consider that it is
consistent with Article 3.2 of the DSU to resolve th ese types of policy questions within the context of
dispute settlement.
4.642 There are three possible ways forward for the Panel to resolve this case. First, the Panel could
find that the complainants have failed to meet thei r burden of demonstrating the inconsistency of the
measures at issue with China's WTO obligations.
4.643 Second, the Panel could recognize that China, unlike the complainants, has articulated an
understanding of the term "as presented" in GIR 2(a), and has demonstrated that this interpretation is
supported by the interpretive principles of the Vienna Convention. This interpretation supports
China's position that the challenged measures are consistent with its rights and obligations under
Article II.
4.644 Third, the Panel could that find that the resolution of this dispute is contingent upon the
interpretation of a term that, at present, remains ambiguous. This is precisely the circumstance in
which the doctrine of in dubio mitius is applicable. In the present context, the application of this
doctrine supports an interpretati on of the term "motor vehicles" in China's Schedule of Concessions,
and an interpretation of the term "as presented" in GIR 2(a), that preserves China's sovereign authority
to define and enforce the boundaries between motor vehicles and parts of motor vehicles, and to
ensure that all of its tariff provisions have effect. By the same principle, th e complainants' implicit
interpretation of these terms, which would deprive China's tariff provisions for motor vehicles of any
meaningful effect, must be rejected as inconsistent with the doctrine of in dubio mitius . This
ambiguity can be resolved, either by the WCO (as the WCO has suggested) or by the General Council
in accordance with Article IX:2 of the WTO Agreement. Once there is a clear resolution of this issue,
it would be possible for a WTO dispute settlement pa nel to evaluate Decree 125 in relation to the
standards that are adopted.
V. ARGUMENTS OF THE THIRD PARTIES
5.1 The arguments presented by Argentina, Australia , Brazil, Japan and Mexico in their written
submissions and oral statements are reflected in the summaries below.
63
A. THIRD PARTY SUBMISSION BY ARGENTINA
1. The challenged measures are not border measures under Article II of the GATT 1994
5.2 One of the main points in dispute is whether the measures 64 at issue constitute either border
measures governed by Article II of the GATT 1994 or rather internal taxes ruled by Article III:2 of
the GATT 1994 or internal regulations referred to in Article III:4 of the GATT 1994.

63 The summaries of the third par ties' arguments are based on the executive summaries submitted by
the third parties to the Panel, in the case of Argentina and Japan; and on the oral statements submitted by
Australia, Brazil and Mexico. Footnotes in this section are those of the third parties.
64 The Measures challenged are: "Automotive Policy Order 2004"(Exhibit JE-18); "Decree
125"(Exhibit JE-27); "Announcement 4" (Exhibit JE-28).

5.3 In order to be considered a border measure under Article II:l(b) such measure should be a
duty or duties charged upon "importation into the te rritory" or in "connection with the importation".
65
Under the measures in dispute, a duty for whole vehicles is charged upon assembly of the imported
parts. The fact that the duty is charged after th e verification by the authorities and once the vehicle
was manufactured is a feature that tells that the condition for the application of the duty is the
assembly and manufacture of the vehicle and not the importation of the parts.
5.4 China suggests that its measures are conditione d upon importation because the auto parts are
not in free circulation up until the point where the pa rts and components are as sessed at the tariff rate
for motor vehicles if the manufacturer uses the imported parts and components as part of a larger
collection of imported parts having the essential character of a motor vehicle. 66 The panel in EEC -
Parts and Components understood that the treatment of imported goods as not being "in free
circulation" cannot support the conclusion that the duties are being levied "in connection with
importation" within the meaning of Article II:l(b).67
5.5 Furthermore, China seeks to demonstrate that the charges collected after the importation are
border measures because the collection is administra ted by Customs. Argentina considers this should
be carefully assessed since a Member could circ umvent its Article III of the GATT 1994 obligations
simply by appointing the Customs Office as the collector agency of an internal charge.
5.6 The manner in which the measures at issue in this dispute work suggests that they are internal
taxes and internal regulations applicable only to imported parts. Therefore such measures fall under
the provisions of Article III:2 and Article III:4 of the GATT 1994. If the Panel were to find any
inconsistency of the measures with the above men tioned provisions regardin g national treatment, a
finding on the consistency of Chin a's measures with Part 1, paragr aph 7.2 of the Accession Protocol
of China would also be relevant.
2. China's measures are not similar to anti- dumping or countervailing anti-circumvention
measures
5.7 Argentina considers it is not appropriate to make a parallelism between ordinary customs
duties and antidumping or countervailing anti-circum vention measures. China makes such parallelism
in order to justify its measures as being anti-circumvention measures.
5.8 Under an antidumping or countervailing anti-ci rcumvention measures the duties are charged
at the border at the time of importation and not sub sequently or dependent upon their incorporation to
whole parts. The difference between China's measures and AD/CVD anti-circumvention measures
suggests that China's measures are not anti-circumve ntion ones, and that therefore there is not a
common, consistent or discernible practice.68
5.9 Admitting that China's measures are imposed to prevent circumvention of ordinary customs
duties69 would lead to include within Article II of the GATT 1994, measures that involve burdensome
administrative procedures prior and after importa tion only applicable to manufacturers of imported
parts, as well as duties charged conditioned upo n how and which imported parts the manufacturer
decides to fit in the final product. This would allo w restrictions to imports of other Members' goods

65 See GATT Panel Report on EEC - Parts and Components, para 5.8.
66 China's first written submission, para 46.
67 GATT Panel Report on EEC - Parts and Components, para 5.7.
68 Appellate Body Report on US - Gambling, para 192.
69 China's first written submission, para. 112.

not committed in their Schedules of Concessions under-covered by the protection of an alleged
anti-circumvention measure.
70
3. The measures are not justified under Article XX(d).
5.10 China states that the challenged measures are justified under Article XX(d) of the
GATT 1994 as measures that are necessary to secu re compliance with China's customs law. 71 I n
order for a measure to be considered "necessary" un der Article XX(d) one of the features involved in
the "weighing and balancing" is the respective impact of the measure on international commerce.72
5.11 The differential treatment granted to imported pa rts results in a restriction on the entry of
imported parts in the Chinese automobile market. The Appellate Body in Korea -Various Measures
on Beef found that: "A measure with a relatively slight impact upon imported pr oducts might more
easily be considered as 'necessary' than a meas ure with intense or broader restrictive effects. ''73 The
effects the challenged measures have on imported parts result in a restriction to commerce. Therefore
the "necessity" test is not satisfied, preventing China to justify the measures under Article XX (d).
5.12 Finally, if the Panel where to analyse the ju stification of the measures under the chapeau of
Article XX, Argentina considers pertinen t the rulings of the Appellate Body in US - Shrimp and US -
Gasoline regarding the prevention of "abuse of the exceptions of Article XX."74
B. THIRD PARTY SUBMISSION BY JAPAN
1. Article III of the GATT 1994 applies to the measures
5.13 The duties imposed under China's measures are appropriately classi fied as internal charges
under Article III:2 of the GATT 1994 and the measures as internal regulations under Article III:4.
Under GATT and WTO jurisprudence, it is not the labe l that Members attach to trade measures that is
determinative of whether they constitute internal measures or border measures, but their actual
operation.
(a) Relevant WTO and GATT case law
5.14 In EC – Bananas III, the EC argued that its import licensing system was a border measure not
subject to Article III. The Appellate Body, how ever, confirmed the Panel's conclusion that the
procedures went "far beyond" the "mere requirements" needed to administer a tariff-rate quota system
and thus fell within the scope of Article III of the GATT 1994.75
5.15 Several GATT Panels also confirm this approach. At issue in EEC – Parts and Components,
was an EC regulation intended to prevent circumven tion of anti-dumping duties. Pursuant to the EC
regulation, duties were payable on assemblies produ ced in the EC that contained a significant
proportion of imported parts, when the finished product imported from the country would have been

70 See also Japan's third party submission, para.35.
71 China's first written submission, para. 201.
72 China's first written submission, para. 208.
73 Appellate Body Report on Korea -Various Measures on Beef, para. 163.
74Appellate Body Report on US - Shrimp, para. 116, quoting Appellate Body Report on US - Gasoline,
page 22.
75 Appellate Body Report on EC - Bananas III, para. 211.

subject to anti-dumping duties. According to the GATT Panel these "anti-circumvention duties" were
not imposed conditional on importation or at the time of importation of the product.
76
5.16 Similarly, in EEC – Animal Feed Proteins , the Panel decided that a security deposit for the
importation of vegetable protei ns should be examined under Article III, not Article II. 77 The Panel's
conclusion was in significant part based on its evaluation of whether the charges at issue were
"collected at the time of, and as a condition to, the entry of the goods into the importing country."
78
5.17 Finally, in Belgian Family Allowances, the Panel found that the disputed levy was an internal
charge subject to Article III, not a tariff subject to Article II. The Panel noted that the levy was
"charged, not at the time of importation, but when the purchase price was paid", and that the levy was
assessed "only on products purchased by public bodies for their own use and not on imports as
such."
79
(b) The Chinese measures result in violations of Article III of the GATT 1994
5.18 The duties imposed under the measu res are internal charges and not customs duties as they
are not imposed conditional merely on importation of the parts, but rather on the way the finished car
is assembled or produced in China and thus the way in which the imported parts are used. Several
features of the measures demonstrate this.
5.19 First, the measures require the collection of ch arges only after auto parts have been imported
and assembled into a complete vehicle, not upon th eir presentation at the border. Under Decree 125,
the duty on a part is assessed following assembly and production, rather than directly upon
importation (cf. Arts. 7, 11, 27-35). The level of the duty on imported parts thus depends on their
final assembly into a completed vehicle in China. If the imported parts will be incorporated in a car,
which, pursuant to Decree 125, does not have suffi cient local content, the imported parts will be
subject to customs duties that are normally pa yable on a completely built up imported car (cf.
Decree 125, Arts. 21 and 22); the final duty on the pa rts is only assessed after their assembly into
entire automobiles (cf. Art 28); whether a part bears the features of a complete vehicle is determined
after the parts have been assembled (cf. Art 5).
5.20 Second, the charges are applicable primarily to automobile manufacturers, rather than the
importers of specific auto parts. Manufacturers are responsible for the payment of duties even if the
parts were purchased in the domestic market from th e suppliers that previously imported them (cf.
Decree 125, Arts. 27-35).
5.21 Third, verification by customs authorities at the site of the manufacturer (cf. Decree 125,
Arts. 17-20) occurs following assembly and production. When viewed in combination with the other
elements listed here it certainly confirms the internal character of the measures.
5.22 Finally, duties are levied according to how impor ted auto parts are incorporated in domestic
production (cf. Decree 125, Arts. 21-24). Indeed, the "tariff" rate of the part can change during the
production of the vehicle, if the mix of imported parts used in assembly changes (cf. Decree 125,
Art. 20). Accordingly, duties payable under Decree 125, while in name "customs duties", are in fact

76 GATT Panel Report on EEC – Parts and Components, para. 5.5.
77 GATT Panel Report on EEC – Animal Feed Proteins.
78 Id., para. 4.16 (b) (citing Reports of the Sub-Committee at the Havana Conference at pages 62-63).
79 GATT Panel Report on Belgium Family Allowances, para. 2.

internal charges subject to Article III:2 of the GATT 1994, rather than customs duties subject to
Article II.
(c) China's first written submission does not refute the evidence that the challenged measures are
internal charges subject to Article III of the GATT 1994
5.23 In China's First Written Submission (hereinafter referred to as FWS China), China argues that
three factors suggest that the measu res in dispute impose customs duti es, not internal charges. (cf.
FWS China, para. 44) Japan submits some obs ervations as to why China's assertions are not
convincing.
5.24 First, China asserts that the importer "will ordinarily declare at the time of importation
whether an entry of auto parts and components will be used to assemble a complete imported
vehicle."
80 The fact that a measure requires some action at the time of importation does not mean that
the measure is therefore a border measure. Indeed, in EEC – Animal Feed Proteins , a GATT Panel
found that a security deposit for the importation of a good should be examined under Article III.
Furthermore, it is important to note that the cha llenged measures require a declaration on the content
of the completed auto vehicle after it is manufactured in China, not on the contents of a particular
consignment upon importation. Thus, even if a cons ignment contains only engines, the importer must
declare it to be a "deemed complete vehicle" depe nding on what other parts the engine will be paired
with as part of the manufacturing process.
5.25 Second, China argues that under the measures, auto parts entering China remain in bonded
status and are not in free circulation in its customs territory. (cf. FWS China, para. 46) However, this
assertion is irrelevant to the Panel's consideration. The GATT Panel in EEC – Parts and Components
concluded that "[t]he fact that the EEC tr eats imported parts and materials subject to
anti-circumvention duties as not being 'in free circulation' … cannot … support the conclusion that the
anti-circumvention duties are being levied 'in conne ction with importation' within the meaning of
[GATT] Article II:1(b)". 81 To find otherwise, said the panel, would mean that the basic objectives
underlying Article II and III could no longer be achieved.
5.26 Finally, China asserts that the "challenged measures are administered by the Customs General
Administration of China" and that "duties collected pursuant to Decree 125 are classified as ordinary
customs duties. (cf. FWS China, para. 47) This ass ertion is not relevant either. The GATT Panel in
EEC – Parts and Components specifically expressed concern that if the description or categorization
of a charge under domestic law were relevant to wh ether the charge is covered by Article III of the
GATT 1994, a Member "could in particular impose ch arges on products after importation simply by
assigning the collection of these charges to the cu stoms administration and allocating the revenue
generated to their customs revenue." 82 The Panel thus rejected that the disputed charge was covered
by Article II.
2. Alternatively, Article II of the GATT 1994 applies to the measures
5.27 If the Panel were to characterize the charges at issue as customs duties, Japan supports the
view of the complainants that the Chinese measures are inconsistent with Article II of the GATT
1994.

80 See id. para. 45.
81 GATT Panel Report on EEC – Parts and Components, para. 5.7 (original emphasis).
82 GATT Panel Report on EEC – Parts and Components, para. 5.7.

(a) China's measures result in a prima facie violation of its tariff commitments
5.28 China's Schedule of Concession on autos and auto parts is based on the nomenclature
prescribed in Chapter 87 of the HS Code titled "vehic les other than railway or tramway rolling-stock,
and parts and accessories thereof". The ordinary me aning of these headings within their context is
clear: when a good constitutes one of the parts descri bed in headings 8706 – 8708 it is to be classified
under those headings. As a car body without en gine and certain other components cannot be
considered a "motor car or other motor vehicle" w ithin the ordinary meaning of these terms, but only
as a part or parts of it, it cannot be classified as a whole vehicle but only as its individual component
part.
5.29 As China acknowledges, the " essential character" rule as form ulated in the HS and its
Explanatory Notes constitute relevant context in interpreting its tariff schedule. (cf. FWS China,
para. 84). Under this rule, only if imported parts possess the "essential character" of the complete or
finished article, will they be considered the comple te or finished article. Any application of the
measures imposing whole vehicle duties on parts that do not have the essential character of the whole
vehicle violates Article II.
(b) China inappropriately combines goods imported separately
5.30 In keeping with its 'anti-circumvention' theo ry, China asserts that th e key interpretive issue
before the Panel is whether its challenged measur es are based on a valid interpretation of the term
"motor vehicles". China's defense is based on the no tion that all it is doing is to assess the nature of
imported products based not on the form in which th ey are imported but on the extent to which they
are combined with other imports in the end product. China suggests that this would be consistent with
Article II of the GATT 1994 and with the customs practices of other Members.
5.31 In reality, there is nothing in the ordinary meaning of China's classification headings for
vehicles or auto parts to support any distinction in tariff rates depending on the ultimate use of
imported car parts. Indeed, in interpreting China's tariff schedule, the Panel has to give meaning not
only to China's commitment on "motor vehicles" but equally to its commitments on motor vehicle
"parts".
5.32 As to context, the "essential ch aracter" rule under the HS whic h is incorporated in China's
Schedule, stipulates that, if imported parts "as presented" possess the "essential character" of the
complete or finished article, they will be considered the complete or finished article. Thus, where a
consignment of imported car parts possesses the essential character of a motor car or other motor
vehicle as they are presented to customs, they can be considered covered by heading 8702-8704.
However, if they constitute "as presented" a "veh icle chassis fitted with engines and bodies" covered
by headings 8706–8708 or "auto part[s]" covered by headings 8407-8408, then such imported parts
cannot be considered as covered by headings 8702-8704.
5.33 Subsequent practice of Members also shows that goods presented in multiple consignments
cannot be considered together as one article. As a rule, Japan's customs authorities, for example, base
their classification decisions on the imported produc ts at the time of customs clearing; and goods
imported in different consignments are classified jointly only in exceptional cases. Japan understands
that the same is true in the EC
83.

83 European Court of Justice, Case C-35/93, Develop Dr. Eisbein GmbH & Co , 16 June 1994,
ECR [1994] I-2655, para. 19, held that "(a)n article is to be considered to be imported unassembled or

5.34 Where China refers to the US and EC rules on sp lit consignments, it fails to clarify that these
are exceptional provisions. These are applied at the request and to the benefit of an importer, who
wants to avoid for instance the administrative burden of having to file separate customs declarations
for one consignment that has been divided up in diff erent shipments. (cf. FWS China, para.157-159)
Such rules apply in limited cases, and are designed no t to counter circumvention but are applied at the
importer's choice to ensure that the importer of record is not penalized for a carrier's decision to split
shipments.
5.35 Accordingly, even if the duties imposed under the measures are considered customs duties,
any application of the measures where part(s) im ported into China (in one consignment) do not
possess the essential character of the whole vehicle r esults in a violation of China's Schedule and
Article II of the GATT 1994.
3. Tariff classification of CKD and SKD Kits
5.36 In addition to the general violations menti oned above, the measures' blanket treatment of
CKD/SKD kits as "whole vehicles" irrespective of the precise content and condition of such kits also
leads to a specific violation of Article II and Paragraph 93 of the Working Party Report ("WPR").
(a) China's tariff treatment of CKD and SKD k its under the challenged measures violates
Article II of the GATT 1994
5.37 CKD and SKD kits range from kits that include certain but not nearly all parts of a motor
vehicle and that still need substantial assembly a nd production work, to kits that are essentially entire
motor vehicles that have simply been disassembled to facilitate transport. Thus, CKDs/SKDs may in
certain circumstances constitute the "whole vehicle" but in many others will not.
5.38 The measures, however, impose a blanket ru le that CKD and SKD kits are among the
combinations of parts and components that are deemed to constitute a whole vehicle. China's blanket
treatment of CKD and SKD kits as "whole vehicles" therefore will necessarily lead to violations of
Article II of the GATT 1994. China's defense is contradictory. On the one hand, it argues that the
measures do not apply to CKD and SKD kits. (cf. FWS China, para.37) On the other hand, the plain
text of Article 21 of Decree 125 very clearly includes such kits as combinations of parts that are
automobile parts characterized as complete vehicles.
(b) China's treatment of CKD and SKD kits violates paragraph 93 of the Working Party Report
5.39 In addition, China's treatment of CKD and SKD kits also leads to a violation of its
commitment under the Working Party Report. Japan supports the view expressed by certain of the
complainants in this regard. The measures have effectively created a new tariff line for CKD and
SKD kits with a 25 per cent tariff, as all kits are now subject to this tariff. (cf. FWS US, para.122)
This constitutes a violation of China's commitments flowing from paragraph 93 of the Working Party
Report. China was not obliged to establish a new ta riff line for kits; but if it did formulate a generally
applicable tariff, it was bound to impose a 10 per cent tariff.
5.40 It would be no defense for China to say that it did not formally open a new tariff line for CKD
and SKD kits, as it did not amend its tariff schedule. Effectively, the measures have created a new

disassembled where the component parts, that is the parts which may be identified as components intended to
make up the finished product, are all presented for customs clearance at the same time (…)."

tariff for such kits. China is obliged to implem ent its WTO obligations, including the commitments
flowing from the Working Party Report, in good faith.
4. Article XX of the GATT 1994 does not justify the measures
5.41 China argues that the measures were designed to secure compliance with its customs laws and
regulations. (cf. FWS China, para. 203-204) Th e measures, however, nowhere refer to any such
objective to counter circumvention of China's custom s rules. Indeed, China merely refers to the
generic language in its Policy Order 8that China will "strictly levy import duties at tariff rates
applicable to complete vehicles and parts, so as to prevent tariff evasion." (cf. FWS China, para. 24)
It is unclear how this would be re levant, let alone provide any kind of justification for the measures.
Moreover, it specifically refers to both "whole vehicles and parts" and makes no reference whatsoever
to CKD or SKD kits or any particular risk of circumvention relating to such kits.
5.42 China has provided no evidence that China-b ased car manufacturers, having legitimately
benefited for many years from China's lower duties on auto parts through local assembly operations,
recently shifted to customs fraud by importing complete vehicles as auto parts. If anything, China has
shown that major car manufacturers have abided by China's customs ru les, whether these are
WTO-compatible or not. Thus, China has noted that major car manufacturers have imported CKD
and SKD kits into China under tariff classifications consistent with China's customs rules. (cf. FWS
China, para. 39)
5.43 In addition, the effect on trade from the measures is severe. They are framed very broadly,
covering multiple shipments from various sources a nd to various parties within China. China's
measures impose a blanket rule that if imports are us ed in certain proportions with other imports they
will always be treated as "whole vehicles", and theref ore subject to higher customs duties. Indeed,
China will treat combinations of parts imported fro m different suppliers or even different national
origin as one single "whole vehicle" for these pur poses. The measures also do not distinguish
between parts imported into China by the manufactur er of the vehicle and parts imported into China
by third parties, such as parts suppliers. This particular element merits a closer look.
C. T
HIRD PARTY SUBMISSION BY MEXICO
1. Introduction
5.44 The Government of the United Mexican States (Mexico) is grateful for the opportunity to
present its views in this dispute. Mexico is particip ating as a third party owing to its trade interest in
this case. Mexico notes with concern the failure of China to comply with its obligations under the
WTO, particularly in view of the fact that the Mexican auto parts industry accounts for an important
part of its manufacturing sector's gross domestic product.
5.45 Mexico agrees with the arguments presented by the United States, the European Communities
and Canada according to which the imposition of measures that favour domestic auto parts over
imported parts amounts to a violation of the fund amental WTO principles of non-discrimination.
Through three specific instruments that are challeng ed in this dispute today (the measures), China
imposes additional charges and administrative burdens on imported auto parts that are not imposed on
auto parts produced in Chinese terr itory. This inevitably alters th e conditions of competition between
domestic and imported products, which in its turn provides automob ile producers with an incentive to
use domestic auto parts rather than imported auto parts.

5.46 In particular, the measures imposed by Chin a violate the GATT 1994, the TRIMs Agreement,
SCM Agreement, and certain provisions of its Accession Protocol.
2. The GATT 1994
5.47 In Mexico's view, the measures adopted by China are "internal measures" that are inconsistent
with Article III of the GATT 1994 in that they prov ide for less favourable treatment for imported auto
parts than for domestic auto parts. Contrary to what China contends in its first submission
84, the
measures at issue are not "border measures", but "internal measures". Considering that these
measures are applied once the product has been im ported and not upon its im portation, this Panel
should conclude that by their nature, the measures are internally applied measures.
5.48 More specifically, China's measures with respect to auto parts are inconsistent with the
following paragraphs of Article III:
(a) Paragraph 2, in that they result in inte rnal charges in excess of those applied to
domestic products;
(b) paragraph 4, in that they are measures which affect the sale, purchase, transportation,
distribution and use in the domestic market85;
(c) paragraph 5, in that they are quantitative regulations that require that a specified
amount or proportion of a product be supplied from domestic sources.
5.49 Paragraphs 2, 4 and 5 of Article III of the GA TT 1994 set out the different ways in which to
comply with the national treatment obligation. Accordingly, the measures imposed by China are
inconsistent with these three scenarios of the principle of national treatment.
3. TRIMs Agreement
5.50 The measures adopted by China also violate WTO disciplines from the point of view of trade-
related investment measures (TRIMs).
5.51 In Mexico's view, the challenged measures are in consistent with the TRIMs agreement, in the
order of analysis applied by the Panel in Indonesia – Autos. 86 The Panel in that dispute considered
that the inconsistency of the measures should be analy sed in two stages: first, by determining if the
measures at issue were TRIMs, which involved de termining whether they were (i)"investment
measures" and (ii) "trade-related" measures; and secondly, to examine whether the TRIMs violated
Article III of the GATT 1994.
5.52 Regarding the first stage, Mexico considers th at the measures adopted by China are indeed
trade-related investment measures. As indicated in Indonesia – Autos , a measure that is "aimed at
encouraging the development of a local manufacturing capability for finished motor vehicles and parts
and components" is an "investment measure".
87 This same Panel affirmed that measures that are local

84 See China's first written submission, paras. 41-70.
85 Regarding the term "affecting" in Article III:4 of the GATT 1994, Mexico considers that the view of
the Panel in India –Autos (DS175) (paragraph 7.197) applies to this case. In that dispute, the Panel interpreted
"affecting" as being able to occur when an incentive is provided to purchase local products or when the
conditions of competition between the domestic and imported products are modified.
86 Panel Report on Indonesia – Autos para. 14.72.
87 Ibid., paragraph 14.80.

content requirements "would necessarily be 'trade-related'".
88 Consequently, in the case at issue, both
of the requirements for a TRIM are met.
5.53 Regarding the second stage, in the light of the cons iderations set forth above, Mexico is of the
opinion that the measures imposed by China violate Article III of the GATT, namely the requirements
set forth in paragraphs 2, 4 and 5 thereof. Con sequently, the measures at issue are inconsistent in
terms of the analysis of the Panel in Indonesia – Autos.
5.54 Moreover, Article 2 of the TRIMs Agreement states that no Member shall apply any TRIM
that is inconsistent with the provisions of Article III of the GATT 1994 (National Treatment).
Article 2.2 clarifies the point by referring to the "Illustrative List" of TRIMs that are considered
inconsistent with the national treatment obligation.
5.55 The measures at issue fall squarely into paragraph 1(a) of the Illustrative List, which concerns
TRIMs that have local content requirements. Speci fically, paragraph 1(a) refers, as an example of
TRIMs that are inconsistent with Article III of the GATT 1994, to those compliance with which is
necessary to obtain an advantage, and which require:
the purchase or use by an enterprise of products of domestic origin or from any
domestic source , whether specified in terms of particular products, in terms of
volume or value of products, or in terms of a proportion of volume or value of its
local production. (Emphasis added).
5.56 In this context, it is clear that the challenge d measures meet the description in paragraph 1(a)
of the Illustrative List since (i) they are necessary to obtain an advantage, and (ii) they require as a
condition the use of products of domestic origin.
4. China's Accession Protocol
5.57 China's commitment to comply with Article III of the GATT 1994 and the TRIMs Agreement
is clearly established in its Accession Protocol. Regarding the obligation to comply with Article III of
the GATT 1994, paragraph 7.2 of the Accession Protocol states as follows:
In implementing the provisions of Artic les III and XI of the GATT 1994 and the
Agreement on Agriculture, China shall eliminate and shall not introduce, re-introduce
or apply non-tariff measures that cannot be justified under the provisions of the WTO
Agreement. (...) (Emphasis added).
5.58 Regarding the TRIMs Agreement, paragraph 7.3 of the Accession Protocol states as follows:
China shall, upon accession, comply with the TRIMs Agreement, without recourse to
the provisions of Article 5 of the TRIMs Ag reement. China shall eliminate and cease
to enforce trade and foreign exchange balancing requirements, local content and
export or performance requirements made effective through laws, regulations or other
measures. (Emphasis added)
5.59 According to the cited provisions, upon acce ssion to the WTO China assumed the obligation
to bring its measures into conformity with WTO disciplines, including Article III of the GATT 1994
and the TRIMs Agreement.

88 Ibid., paragraph 14.82.

5. Conclusion
5.60 For the above reasons, Mexico considers that Chin a is acting in a manner inconsistent with its
WTO obligations by maintaining measures that favour the use of domestic auto parts in preference to
imported auto parts. These measures violate th e commitments that China assumed upon acceding to
the WTO, and hence undermine the legitimate expectations of the other Members.
D. O
RAL STATEMENT BY ARGENTINA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
1. The challenged measures are not border measures under Article II of the GATT 1994
5.61 One of the main points in dispute is whether the measures 89 at issue constitute either border
measures governed by Article II of the GATT 1994, or rather internal taxes ruled by Article III:2 of
the GATT 1994 or internal regulations referred to in Article III:4 of the GATT 1994.
5.62 In order to be considered a border measure under Article II:1(b) such measure should be a
duty or duties charged upon "importation into the territory" or in "connection with the importation" 90.
Under the measures in dispute, a duty for whole vehicles is charged upon assembly of the imported
parts. That is clear from the text of Decree 125 wh ich provides in its Article 28: "After the imported
automotive parts are assembled and manufactured into whole vehicles, automobile manufacturers
shall declare such items to Customs, and Custom s shall […] proceed with categorization and duty
collection". The fact that the duty is charged af ter the verification by the authorities and once the
vehicle was manufactured is a feature that tells that the condition for the application of the duty is the
manufacture of the vehicle and not the importation of the parts. Moreover, the fact that the duty
charged could be higher if the manufacturers decide to fit other imported parts into the model vehicle
registered91, or that a difference in duties is recogni zed if the parts were purchased from a local
supplier and not imported by the manufacturer 92 confirm that the goods' ta xable event takes place
upon assembly and not upon the entry of the product into the territory.
5.63 China argues that as the EC revised anti-circ umvention measure, the challenged measures
impose duties that are conditional upon the entry of goods into China, and are therefore border
measures subject to Article II of the GATT 1994. 93 As stated by China, the revised EC
anti-circumvention measure "applies the anti-dumping duty to the imported parts and components as a
condition of their importation". China suggest s that its measures are also conditioned upon
importation as the EC's one because the auto parts ar e not in free circulation until the tariff rate for
motor vehicles is assessed upon them , if the manufacturer uses the im ported parts and components as

89 By "Measures" Argentina refers to: The Policy on Development of the Automotive Industry, issued
on May 21, 2004, by China's National Development and Reform Commission (NDRC) as Order No.8.
("Automotive Policy Order 2004") (Exhibit JE-18); "Administrative Measures on Importation of the
Automotive Parts Deemed Whole Vehicles", issued as D ecree 125 on February 28, 2005 by China's General
Administration of Customs ("Customs"), NDRC, Ministry of Finance, and Ministry of Commerce in accordance
with the Automotive Policy Order ("Decree 125") (Exhibit JE-27); "Rules for Verifying whether imported
Automotive Parts are deemed Whole Vehicles", issued as Public Announcement No.4 by Customs on March 28,
2005, in accordance with Decree 125 ("Announcement 4") (Exhibit JE-28).
90 See GATT Panel Report on EEC – Parts and Components , where the Panel in paragraph 5.8
 found: "In the light of the above, the Panel found that the anti-circumvention duties are not levied " on or in
connection with importation " within the meaning of Article II:1(b ), and consequently do not constitute
customs duties within the meaning of that provision.
91 Article 20 of Decree 125.
92 Article 29 of Decree 125.
93 China's first written submission, para.61.

part of a larger assembly of imported parts having the essential character of a motor vehicle.
94 The
panel in EEC – Parts and Components understood that the treatment of imported goods as not being
"in free circulation" cannot support the conclusion that the duties are being levied "in connection with
importation" within the meaning of Article II:1(b).95
5.64 The wording of the norm such as "bonded goods" 96 or "at the import stage" 97 not necessarily
imply that the measures at issue are in fact border measures. Again, as the Panel held in EEC – Parts
and Components , "if the description or categorization of a charge under the domestic law of a
contracting party were to provide the required 'conn ection with importation', contracting parties could
determine themselves which of these provisions would apply to their charges."98
5.65 Furthermore, China seeks to demonstrate that the charges collected after importation are
border measures because the collection is administrate d by Customs. Argentina considers this should
be carefully assessed, given the possibility that this could provide for any Member to circumvent its
obligations under Article III of the GATT 1994, only by appointing the Customs Office as the one in
charge of collecting a tax that is in fact an inte rnal charge and not a border measure. This kind of
reasoning was also supported by the Panel in EEC – Parts and Components when it held that
Members "could in particular impose charges on pr oducts after their importation simply by assigning
the collection of these charges to their customs administration and allocating the revenue generated to
their customs revenue. With such an interpreta tion the basic objective underlying Articles II and III,
namely that discrimination against products from othe r contracting parties should only take the form
of ordinary customs duties imposed on or in connect ion with importation and not the form of internal
taxes, could not be achieved."99
5.66 The manner in which the measures at issue in this dispute work suggests that the measures are
internal taxes and internal regulations applicable only to imported parts ra ther than border measures
ruled by Article II of the GATT 1994. Therefore such measures fall under the provisions of Article
III:2 and Article III:4 of the GATT 1994. In Argentin a's written submission we have already made an
analysis of the measures under Articles III:2 and III:4 of the GATT 1994, therefore we do not wish to
repeat it here. Nevertheless, if the Panel where to find any inconsistency of the measures with the
above mentioned provisions rega rding national treatment, a finding on the consistency of China's
measures with Part 1, paragraph 7.2 of the Accession Protocol of China would also be relevant.
2. China's measures are not similar to anti- dumping or countervailing anti-circumvention
measures
5.67 Argentina considers that it is not appropriate to make a parallelism between ordinary customs
duties and antidumping or countervailing anti-ci rcumvention measures. China makes such
parallelism in order to justify its measures as being anti-circumvention measures.
5.68 Antidumping and countervailing anti-circumventi on measures are applied to goods that are
imported with the sole purpose of being assembled in to final products which imports are subject to
antidumping or countervailing duties, in order to prev ent the material injury or threat of material
injury or the retardation in the establishment of a domestic industry. Under an antidumping or

94 China's first written submission, para. 46.
95 GATT Panel Report on EEC – Parts and Components, para. 5.7.
96 Article 16 of Decree 125.
97 Article 28 of Decree 125.
98 GATT Panel Report on EEC – Parts and Components, para. 5.7.
99 Ibid, 5.7.

countervailing anti-circumvention measures the duti es are charged at the border at the time of
importation and not subsequently or dependent upon their incorporation to whole parts.
5.69 Contrary to what China asserts, antidumping and countervailing duties and AD or CVD
anti-circumvention duties are different to ordinary custom duties. AD/CVD duty and AD/CVD
anti circumvention duties are aimed to resolve a situa tion of injury within the domestic market caused
by products imported at discriminatory prices due to subsidization or due to a dumping practice.
5.70 Therefore, the difference between China' s measures and AD/CVD anti-circumvention
measures added to the fact that the later are duti es charged at the border and not upon assembly of the
goods, suggests that China's measures are not anti-circ umvention ones, and that therefore there is not
a common, consistent or discernible practice.
100
5.71 Admitting that China's measures are imposed to prevent circumvention of ordinary customs
duties101 would lead to include within Article II of the GATT 1994, measures such as these ones, that
involve burdensome administrative procedures - pr ior and after importation - only applicable to
manufacturers of imported parts, as well as duties charged conditioned upon how and which imported
parts the manufacturer decides to fit in the final product. This understanding would allow Members to
apply restrictions to imports of other Memb ers' goods not committed in their Schedules of
Concessions under-covered by the protection of an alleged anti-circumvention measure.102
3. The measures are not justified under Article XX(d).
5.72 China states that the challenged measures are justified under Article XX(d) of the
GATT 1994 as measures that are necessary to secu re compliance with China's customs law. 103
However, Article 1 of Decree 125 clearly states that the measures "are formulated […] with a view to
formalizing and strengthening the administration of the importation of automobile parts, and
promoting the healthy development of the automobile industry". 104 The text of the norm suggests that
there is not a clear "compliance" univocal objective in the norms as suggested by China throughout its
written presentation105. In order to a measure to be considered "necessary" under Article XX (d) one
of the features involved in the "weighing and balanc ing" is the respective impact of the measure on
international commerce.106
5.73 Argentina considers that the im pact these measures could have are far beyond to what could
be considered "slight". The fact that the measures r esult in higher tariff rates to those parts that are
finally assembled into whole vehicles, no matter whether the importation was done by the
manufacturer or by a local supplier whose only objectiv e is to import parts, results in a disincentive
for local purchasers and manufacturers to buy the im ported parts. Furthermore, the administrative
burden imposed to importers and manufactures of vehi cles that use imported parts helps to skew the
choice of manufacturers who are to decide betw een buying imported or domestic parts. The
differential treatment between local parts a nd imported ones obviously affects the competitive
conditions of the imported product on the Chinese market and more specifically, affects the conditions
of internal offering for sale or purchase of these produc ts. Altogether, this results in a restriction on

100 Appellate Body Report on US – Gambling, para. 192.
101 China's first written submission, para. 112.
102 See also Japan's third party submission, para.35.
103 China's first written submission, para. 201.
104 Article 1 of Decree 125, Exhibit CHI-2.
105 China's first written submission, paras. 202, 204, 205, 207, 208 and ff.
106 China's first written submission, para. 208.

the entry of imported parts in the Chinese automobile market. The Appellate Body in Korea – Various
Measures on Beef found that: "A measures with a relatively s light impact upon imported products
might more easily be considered as "necessary" t han a measure with intense or broader restrictive
effects."
107 The effects the challenged measures have on imported parts result in a restriction to
commerce. Therefore the "necessity" test is not satis fied, preventing China to justify the measures
under Article XX(d).
5.74 Finally, were the Panel to analyse the justification of the measures under the chapeau of
Article XX, Argentina considers the rulings of the Appellate Body in US – Shrimp and US – Gasoline
regarding the prevention of "abuse of the exceptions of Article XX", a guidance of relevance for that
task.108
4. Conclusion
5.75 To conclude, Argentina wishes to make the following remarks:
• First of all, Argentina is not convinced by China's argument on the fact that the
measures are border measures rather than in ternal taxes. Therefore, Argentina
believes the measures fall under the provisions of Article III:2 and Article III:4 of the
GATT 1994.
• Secondly, Argentina considers ther e is no similarity between AD/CVD
anti-circumvention measures and China's measu res because they deal with different
subject matters, they have different purposes and most importantly, the former
consists of duties charged upon importati on while the later is a duty charged upon
verification of the content of imported parts that had been put together into the locally
manufactured vehicle. Considering China's measures as tariff anti-circumvention
measures will allow members to call ordinary customs duties to taxes and charges that
depend upon manufacture and verification of goods containing imported parts and
calling ordinary custom duties to measures that entail burdensome administrative
procedures only applicable to users of imported goods. Such measures might entail
some sort of restriction to imports and would suppose broadening the scope of
interpretation of Article II, while leaving Article III with little or no application.
• Finally, Argentina is not convinced by China's argument that the measures fall under
the exception of Article XX(d), because the restrictive effects of the measures on
international commerce make China unable to fulfil the "necessity" test to justify the
application of the measures under Article XX(d).
E. ORAL STATEMENT BY AUSTRALIA AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
1. Introduction
5.76 The essence of the complainants' claims in this dispute is that China has re-introduced
discriminatory internal charges and administrative requirements on imported auto parts. Australia's
oral statement focuses on three key issues. Firs tly, the proper characteri sation of the challenged

107 Appellate Body Report on Korea – Various Measures on Beef, para. 163.
108Appellate Body Report on US – Shrimp , para. 116, quoting Appellate Body Report on US –
Gasoline, page 22.

measures. Secondly, the interpretation of China's tariff schedule. Thirdly, the general exception in
Article XX(d) of the GATT 1994.
2. Are the challenged measures border measures or internal measures?
5.77 The main contested issue before this Panel is whether the challenged measures are border
measures subject to Article II or internal measures subject to Article III of the GATT 1994. It appears
from China's first written submission
109 that its only defence to th e complainants' claims under
Article III of the GATT 1994, Article 2 of the TRIM s Agreement, and Part I of China's Accession
Protocol is that the challenged measures are border measures.
5.78 The three complainants in this dispute have submitted a common factual background section.
According to these facts, the challenged measures impose charges and administrative requirements on
imported auto parts based on the use of those importe d parts in vehicle manufacturing that takes place
after importation, rather than on the state of th e product upon presentation at the border. Australia
understands that these imported parts have entered into commerce and are in free circulation within
China once they have passed the border.
5.79 The commitment to binding tariff schedules provided for in Article II, and the national
treatment obligation contained in Article III, are two of the core provisions in GATT 1994. The
demarcation between these two provisions has been examined in a number of previous GATT and
WTO cases. In Australia's view, the guidance c ontained in previous cases, when applied to the
present facts, leads to the conclusion that Chin a's measures are internal measures and not border
measures. These prior cases also suggest that cons iderations of substance over form should also
factor highly in the Panel's analysis in the present dispute.
5.80 The purpose of Article III is to ensure that in ternal measures are not "applied to imported or
domestic products so as to afford protection to do mestic production". According to the Appellate
Body in Japan – Alcoholic Beverages II , the intention of Article III is "to treat the imported products
in the same way as the like domestic products on ce they had been cleared through customs.
Otherwise indirect protection could be given".110
5.81 In EEC – Parts and Components , a case with many similarities of fact to the present dispute,
a GATT Panel had to grapple with the question of whether a particular charge was a border measure
or an internal measure. 111 The impugned measure in that case imposed duties on finished products
assembled or produced in the EEC rather than on importe d parts or materials. In concluding that it
was an internal measure the GATT Panel made two key points.
5.82 Firstly, the GATT Panel held that the policy reason for the measure, namely to eliminate
circumvention of duties, was irrelevant in determin ing whether it was a border measure or an internal
measure. However, it was relevant whether the char ge was due at the time or point of importation or
whether it was collected internally.
5.83 Secondly, the GATT Panel held that the designation of the measure under domestic law as a
customs duty, along with treatment analogous to a customs duty, was not dispositive of its
characterisation as a border measure. Otherwise cont racting parties would be able to readily defeat

109 China's first written submission, paras. 169-174.
110 GATT Panel Report on Italy – Agricultural Machinery , para. 11; cited with approval in the
Appellate Body Report on Japan – Alcoholic Beverages II, page 16.
111 GATT Panel Report on EEC – Parts and Components, paras. 5.4-5.8.

the objective of Articles II and III, namely that discr imination against products from other contracting
parties is only permissible by way of ordinary cu stoms duties imposed on importation and not by way
of internal taxes.
5.84 Belgian Family Allowances is another case in which a GATT Panel found that the levy in
question was an internal measure. The fact that th e levy depended on the internal use of the product,
and was not charged at the time of importation, were influential in arriving at this result.
112 In EEC –
Animal Feed Proteins a GATT Panel again lent support to the notion that in order to constitute a
border measure a charge had to be collected at the time of, and as a condition to, the entry of the
goods into the importing country.113
5.85 In light of these previous cases, Australia supports the thrust of Canada's arguments regarding
the distinction between border measures and internal measures. 114 Broadly speaking, internal
measures regulate internal trade, while border measures regulate the process of importation. Internal
charges are imposed on activities occurring within the territory of a Member in relation to the normal
internal trade of a product, while border charges are imposed at the time or point of importation. A
Member may not, at its discretion, "deem" imported products not to have entered into their internal
commerce and thereby avoid its national treatment ob ligations, as China appears to have done in this
case with the use of a 'bond' on imports at the point of importation.
5.86 China has argued in this dispute that the challenged measures are designed to enforce its tariff
schedule and prevent circumvention of its tariff bindings for motor vehicles.
115 However, China has
not presented any evidence of a significant shift towards customs fraud in the automobile industry. 116
Furthermore, in Australia's view China has not e ffectively distinguished its challenged measures from
the anti-circumvention duties at issue in EEC – Parts and Components.117 In particular, China asserts
that imposing border charges after the time or point of importation is permissible, so long as the
charge fulfils a liability that arose as a condition of importation. 118 Presumably, in an attempt to
establish a nexus with importation, the measures at i ssue include a declaration made at the time of
importation. However, this declaration appears to be entirely focused on the way in which the
imported parts will be used internally within China, rather than on the contents of a consignment upon
importation. In addition, the charge is actually en forced after the point of manufacture once it can be
established that a manufactured vehicle contains a certain percentage of imported parts. Therefore, in
Australia's view, the liability attaches internally, after the vehicle has been manufactured.
5.87 Australia fully endorses the Eur opean Communities' systemic concern that, if the processing
and manufacturing of products af ter importation into the territory of a Member were generally
accepted as an intermediate step before tariff classi fication, the whole system of tariff classification
would be rendered meaningless.
119 In addition, Australia shares Japan's systemic concern that
acceptance of China's position would reduce the scope of the national treatment obligations in
Article III.120 In Australia's opinion such an interpreta tion would be incompatible with the object and
purpose of both the WTO Agreement and the GATT 1994.

112 GATT Panel Report on Belgium Family Allowances, para. 2.
113 GATT Panel Report on EEC – Animal Feed Proteins, paras. 4.13-4.18.
114 Canada's first written submission, paras. 78-86.
115 China's first written submission, paras. 3 and 43.
116 See also Japan's third party submission, para. 2.
117 See also Japan's third party submission, para. 19.
118 China's first written submission, paras. 49-70.
119 European Communities' first written submission, para. 140.
120 Japan's third party submission, para. 22.

5.88 In summary, Australia submits that China's meas ures at issue are properly characterised as
internal measures and are inconsistent with Article III of the GATT 1994.
3. What is the proper interpretation of China's tariff schedule?
5.89 However, should the Panel determine that the challenged measures constitute border
measures, Australia supports the complainants' al ternative argument that China's measures violate
Article II of the GATT 1994.
121
5.90 The complainants in this dispute claim that Ch ina's measures at issue classify imported auto
parts as automobile parts characterized as complete vehicles after importation, resulting in a tariff of
25 per cent. They argue that this violates China's commitment to apply a tariff of 10 per cent on
imported auto parts under Article II.122 In its defence against this claim, China argues that it has been
forced to impose the 25 per cent tariff on the autom obile parts characterized as complete vehicles to
prevent countries attempting to circumvent the higher tariff by importing disassembled cars in
multiple shipments.
5.91 The essence of China's argument is that custom s authorities should classify as a complete
article any group of parts that has the essential character of that article, regardless of their state of
assembly or disassembly. China argues that this is the case whether a group of parts enters the
customs territory in one shipment or in multiple shipments.
123 China asserts that this position is
supported by the "essential character" rule contained in GIR 2(a).124
5.92 Australia does not share China's interpretati on of the "essential character" rule for the
following reasons.
5.93 Firstly, China's view disregards the fundamental principle that when goods are classified in
the HS it is always done on the basis of the objec tive characteristics of the product at the time of
importation, that is, as imported and presented to Customs on a shipment-by-shipment basis. The
intentions of the importer and differing duty rates are irrelevant.
5.94 Secondly, China's view disregards the significance of the crucial phrase "as presented"
contained in the "essential character" rule. In fact, this phrase only appears once in China's
eighty-three page submission125 when China quotes the 'essential character' rule in full.
5.95 Thirdly, Australia notes that China refers to Australian practice in its submission. 126 For the
information of the Panel, Australian customs pract ice in relation to the "essential character" rule
underscores that the value of the parts in relation to the value of the completed good is irrelevant.
Rather, what is required is an examination of th e function, purpose and construction of the completed
good to determine its essential character, and then an assessment whether th e parts when assembled
also exhibit that essential character. For example, the essential character of a motor vehicle might
well be described as transporting pe ople and goods using a motor. To be classified as a motor

121 European Communities' first written submission, paras. 207-281; United States' first written
submission, paras. 116-122; Canada's first written submission, paras. 131-150.
122 European Communities' first written submission, para. 280; United States' first written submission,
123 China's first written submission, para. 2
124 Annexed to the International Convention on the Harmonized Commodity Description and Coding
System 1983.
125 China's first written submission, para. 84.
126 China's first written submission, para. 65.

vehicle, a collection of parts in a shipment, when assembled, must also exhibit that essential character.
If a shipment includes all the parts necessary to form a motor vehicle, other than the motor itself, the
parts would not have the essential character of a motor vehicle, and could not be classified as such.
127
5.96 Fourthly, China's view undermines the ordinary meaning of the terms in its tariff schedule
which provide for a clear separa tion between complete motor vehicles and parts thereof. In
Australia's view this is contrary to the principle of effectiveness in treaty interpretation.128
5.97 Therefore, in Australia's opinion, on a proper interpretation of China's tariff schedule, the
challenged measures are inconsistent with Article II of the GATT 1994.
4. Scope of the general exception under Article XX(d) of the GATT 1994?
5.98 China also asserts that the challenged measures are justified under Article XX(d) of the
GATT 1994 as measures that are necessary to secure compliance with China's customs laws.129
5.99 Australia, like Japan 130 and Argentina 131, finds China's Article XX(d) arguments
unconvincing. China's assertion that the 'challenge d measures have little or no restrictive impact on
international trade' 132 does not sit comfortably with the material contained in the complainants'
common factual background section. According to this material the challenged measures are
impacting on the complainants' trade. Moreover, the challenged measures are adversely affecting the
business of the Australian automotive components and parts industry.
5.100 Australia notes that China has not addressed the re quirements of the chapeau of Article XX.
This is significant as according to the Appellate Body the purpose of the chapeau is to prevent "abuse
of the exceptions of Article XX". 133 Further, as a respondent seeking to invoke an exception, China
bears the burden of proof under Article XX.134
5.101 Therefore, Australia submits that China's me asures should not be afforded protection under
Article XX(d) of the GATT 1994.
F. ORAL STATEMENT BY BRAZIL AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
5.102 The present dispute raises several questions of systemic interest to all WTO Members. In this
oral statement, Brazil offers some thoughts on what it considers a key interpretative question before
the Panel, namely: how should the Panel charact erize China's Policy Order 8, Decree 125, and
Announcement 4, as a matter of WTO law? In ot her words, are the measures at issue "border
measures", to be examined under Article II of the GATT 1994, or "internal measures", to be examined
under Article III of the GATT 1994?
5.103 Brazil notes that the parties to this dispute provide different answers to this question. At this
stage, Brazil does not express any views on the prope r characterization of the measures at issue.

127 Minister for Industry and Commerce v Zyfert and Collector of Customs for NSW v Putale Pty Ltd in
Full Federal Court of Australia.
128 Appellate Body Report on US – Gasoline, page 23.
129 China's first written submission, paras. 201-214.
130 Japan's third party submission of Japan, paras. 49-56.
131 Argentina's third party submission, paras. 28-36.
132 China's first written submission, paras. 213.
133 Appellate Body Report on US – Shrimp, para. 116.
134 Appellate Body Report on US – Wool Shirts and Blouses, page 14.

However, and bearing in mind the important dis tinction between the disciplines of Article II and
Article III of the GATT 1994, Brazil highlights key c onsiderations regarding the differences between
those articles.
5.104 Article II prevents Members from affording imported goods treatment that is less favorable
than the treatment set forth in the Member's Sche dule of Concessions. As the Appellate Body has
confirmed, "a Schedule is made an integral part of the GATT 1994 by Article II:7 of the GATT 1994.
Therefore, concessions provided for in that Schedule are part of the terms of the treaty."
135 Moreover,
those Schedules "represent a common agreement among all Members." 136 Since Schedules reflect the
balance of concessions negotiated by the Members, as the Panel in EC - Chicken Cuts137 stated, they
should not be subject to unilateral modification w ithout appropriate compensation. Thus, Members
cannot accord to the commerce of other Members treatment less favorable than the treatment provided
for in the relevant schedule. By contrast, Ar ticle III of the GATT 1994 gives expression to the
obligation not to discriminate between domestic and imported goods once the latter have been
"cleared through customs." 138 Under Article III, Members enjo y discretion to alter domestic
regulations provided that they respect their obligations related to non-discrimination.
5.105 In assessing whether measures fall under Article II or Article III of the GATT 1994, a panel
must give meaning to the different scope of those Ar ticles. In order to do so, Brazil submits that the
Panel should take into account the condition for the imposition of the measures. In this sense, the
characterization of a measure as a "border" or an "internal" measure will most likely depend on the
event that triggers its operation. For the sake of a bbreviation, Brazil will generally refer to this event
as the "taxable event".
5.106 The first sentence of Article II:1(b), which appli es to "ordinary customs duties," refers to "the
products... on their importation"139 The second sentence of Article II:1(b) applies to "all other duties
or charges of any kind imposed on or in connection with the importation." 140 This language reflects
the notion that the taxable event giving rise to the imposition of an "ordinary customs duty" is the
importation of a product. Similarly, the reference to "other duties or charges of any kind", in the
second sentence of Article II:1(b), establishes a conn ection between the taxable event and the act of
importation.
5.107 In contrast to a custom duty or other charge under Article II of the GATT 1994, an internal
tax or other internal charge in the sense of Article III:2 applies to products which have been "imported
into the territory of any contracting party." 141 Thus, the taxable event in Article III:2 is not the act of
importation. The same is also true of the triggeri ng event in the case of measures affecting internal
trade that are subject to Article III:4.
5.108 Hence, given that the taxable event is the ke y criterion in determining whether the measures
at issue fall under Article II or Article III of th e GATT 1994, the Panel must determine whether the
condition for the application of the measures is the importation of products or rather the use of those
products within China. In Brazil's view, the character ization of the taxable event in domestic law is
relevant, but not decisive of its character in WTO law.

135 Appellate Body Report on EC – Computer Equipment, para. 84.
136 Appellate Body Report on EC – Computer Equipment, para. 109.
137 Panel Report on EC - Chicken Cuts, para. 7.320.
138 GATT Panel Report on Italy – Agricultural Machinery , para. 11; cited with approval by the
Appellate Body in Japan - Alcoholic Beverages II, at page 16.
139 Article II:1(b) of the GATT 1994.
140 Id.
141 Article III:2 of the GATT 1994.

5.109 In assessing the taxable event for purposes of WTO law, some of the elements of the
measures highlighted by the parties and the third parties might help the Panel. In Brazil's view, those
elements include, among others: (i) the identity of the person liable to pay the charge imposed by the
measures (i.e., the importer or the manufacturer); (ii) the "in bond" versus "in free circulation" status
of the products within China; (iii) the time of collection of the duties; (iv) the agency or authorities
responsible for the administration of the measures; a nd (v) the title or legal definition of the measures
as characterized by China's legislation. In examin ing these, and other relevant elements, the Panel
should consider them in their appropriate context and having regard to relevant Chinese legislation
and GATT provisions.
5.110 In sum, Brazil considers that, as a preliminar y matter, the Panel must decide whether the
contested measures are to be considered under Ar ticle II or Article III of the GATT 1994. After
resolving this question, the Panel would examin e the substantive arguments and evidence submitted
by the parties and third parties regarding the WTO provisions that the Panel finds to be relevant.
G. O
RAL STATEMENT BY JAPAN AT THE FIRST SUBSTANTIVE MEETING OF THE PANEL
1. Argument
(a) Arguments relating to the GATT Panel Report in EEC – Parts and Components
5.111 First, we would like to address so me points on the China's argument on EEC – Parts and
Components, by expanding on the arguments in our written submission.
5.112 As discussed in our written submission, at issue in EEC – Parts and Components was an EC
regulation to prevent circumvention of anti-dumping duties. China states there are two reasons why
the reliance upon EEC – Parts and Components is misplaced142. First the measure at issue in EEC –
Parts and Components differed from the Chinese measures concerned. 143 Second, EEC – Parts and
Components interpreted Article II of the GATT 1994 to include charges imposed "conditional upon"
the importation, but did not find that charges collected after importation were necessarily excluded.
China further states that charges are considered to be imposed "conditional upon" importation as long
as they "bear[] an objective relationship to the ad ministration and enforcement of a valid customs
liability"144. Japan would like to comment on these statements of China.
5.113 First, China argues that the administration of the measures concerned is different from the
procedure identified by the panel in EEC – Parts and Components . Under the measures, China
argues, it first conducts a pre-investigation, then , following the pre-investigation, an importer is
required to declare whether imported parts will be used to assemble a vehicle model. Since the
importer's declaration is made at the time of im portation and such importation is secured by the
provision of bond, China considers that the duties are imposed conditional upon the entry of goods
into China
145.
5.114 As stated in our submission, the fact that a measure requires some action at the time of
importation does not mean that the measure is therefore a border measure. 146 The declaration by
importers made under the measures concerned focuses on what happens after the time of importation.

142 China's first written submission, para. 51.
143 id. para. 52.
144 id. para. 67.
145 id. para. 60.
146 Japan's third party submission, para. 16.

To put it differently, the declaration is based on the content of the completed auto vehicle after it is
manufactured and assembled in China, not the contents of a particular consignment upon importation.
5.115 Also the fact that auto parts concerned re main in bonded status does not support China's
argument. The panel in EEC – Parts and Components clearly stated that "the fact that the EEC treats
imported parts and materials subject to anti-circumve ntion duties as not being 'in free circulation' …
cannot …. support the conclusion that the anti-circumvention duties are being levied 'in connection
with importation' within the meaning of Article II:1(b)."
147 Therefore, China's explanation of the
measures in dispute does not distinguish them in any relevant way from the measures at issue in EEC
– Parts and Components and does not support China's claim that the measures are subject to Article II
of the GATT 1994.
5.116 Second, China states that, since the charge imposed under the concerned measure bears "an
objective relationship to the administration and en forcement of a valid customs liability," "the
challenged measures are border measures within the scope of Article II".148
5.117 This seems to be just an attempt to argue that when something is domestically categorized as
a customs rule, the imposition of charges under the rule should be considered to be covered by
Article II. However, the fact that a WTO Member treats certain measures as "customs practices" for
its domestic regulatory or administrative purposes does not have a bearing on the issue of whether the
measures are within the scope of Article II or III of the GATT 1994. Indeed, EEC - Parts and
Components demonstrates that all the measures c onducted by "customs authorities" are not
necessarily border measures for purposes of the GATT 1994 analysis.
5.118 The same is true with regard to China's asser tion that there are widespread practices of WTO
Members supporting its argument. Japan notes that the domestic practices of those Members are not
determinative as to whether charges imposed under a measure are covered by Article II or Article III
of the GATT 1994. Indeed, many of those practi ces may constitute internal regulations and not
border measures, just like the measure at issue in EEC – Parts and Components . The test concerning
Article II and III is an autonomous test the outcome of which is not determined by the choice of
Members to treat the measures as "customs measures" or "internal regulations" for domestic
administrative or regulatory purposes.
5.119 Moreover, China's measures are not comparable to the other measures to which China refers.
China's measures reach very far i ndeed. For example, foreign manufact urers in China are responsible
for "customs duty" payments even if they purchase parts in China's domestic market from suppliers
who previously imported the parts.
5.120 For the reasons stated above and in our writte n submission, Japan respectfully requests that
the Panel find that the measures in dispute operate as internal measures and impose charges subject to
Article III:2 of the GATT 1994.
(b) The challenged measure violate the TRIMs Agreement
5.121 Japan agrees with the EC's argument that the concerned measures are inconsistent with the
TRIMs Agreement.

147 GATT Panel Report on EEC – Parts and Components, para. 5.7.
148 China's first written submission, para. 67, 68.

5.122 China claims that the complainants fail to dem onstrate that the measures are inconsistent with
the TRIMs Agreement because the me asures are not internal measures
149. In this regard, Japan is of
the opinion that the measures should be examined under the TRIMs Agreement.
5.123 In Indonesia – Autos , the Panel indicated that the TRIMs Agreement required two elements
for showing a violation thereof; first, the existence of a Trade Related Investment Measure (TRIM)
and second, the inconsistency of the TRIM with Ar ticle III or Article XI of the GATT 1994. In
particular, as regards the second element, the chapeau of the Illustrative List of the TRIMs Agreement
states as follows:
"TRIMs that are inconsistent with the oblig ation of national treatment provided for in
paragraph 4 of Article III of the GATT 1994 include those which are mandatory or
enforceable under domestic law or under ad ministrative rulings, or compliance with
which is necessary to obtain an advantage, and which require:
(a) the purchase or use by an enterprise of products of domestic origin or from any
domestic source, whether specified in term s of particular products, in terms of
volume or value of products, or in terms of a proportion of volume or value of its
local production;"
5.124 It is important to note that, the Illustrative Li st provides that, if (i) the compliance with the
TRIMs at issue is necessary to obtain an adva ntage and (ii) the TRIMs include local content
requirements, the TRIMs " are inconsistent with the obligation of national treatment provided for in
paragraph 4 of Article III of the GATT 1994 ." Japan considers that the measures fit all these
conditions and, therefore, violate the TRIMs Agreement.
5.125 First, as pointed out in our submission, several provisions of Policy Order 8 shows that the
objective of the measures is to assist and protect the nascent domestic Chinese auto industry and to
provide incentives for foreign manufactures to locate an increasing proportion of their manufacturing
and supply base in China
150. The Policy Order 8 and its implementing measures, therefore, constitute
TRIMs under Article 1 of the TRIMs Agreement.
5.126 Second, with regard to an advantage, the panel in Indonesia – Autos found that "[t]he lower
duty rates are clearly 'advantages' in the meaning of the chapeau of the Illust rative List to the TRIMs
Agreement"; as such, the panel found that the Indonesian measures fell within the scope of the
TRIMs151. China's measures also provide lower duty rates, 10 per cent, to auto parts meeting criteria,
instead of 25 per cent for others without fulfilling the criteria. It is clear that the Chinese measures
fall within the scope of the TRIMs.
5.127 Finally, the measures require that "the aggr egate price of imported components attains 60 per
cent or less" in order to obtain the advantage. 152 This requirement clearly falls under the local content
requirements under paragraph 1(a) of the Illustrative List, which provides "the purchase or use by an
enterprise of products of domestic origin, … in terms of a proportion of … value of its local
production."

149 See id. para. 172.
150 Japan's third party submission, para. 51.
151 Panel Report on Indonesia – Autos, para. 14.89.
152 Art. 21 of Decree 125.