CHINA – MEASURES AFFECTING IMPORTS OF AUTOMOBILE PARTS
Document: Reports of the Panel Addendum
Date: 18 July 2008
Document codes: WT/DS339/R/Add.1; WT/DS340/R/Add.1; WT/DS342/R/Add.1; 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

Addendum

 This addendum contains Annex A to the Repor ts of the Panel to be found in documents
, and Annexes B, C, D and E can be found in Add.2.

ANNEX A

RESPONSES AND COMMENTS OF PARTIES TO QUESTIONS FROM THE PANEL

CONTENTS PAGE
Annex A-1 Responses and Comments of Parties to Questions from the Panel
following the First Substantive Meeting
A-2
Annex A-2 Responses and Comments of Parties to Questions from the Panel
following the Second Substantive Meeting
A-176
Annex A-3 Responses and Comments of Parties to an Additional Question from
the Panel 6 August 2007
A-360
Annex A-4 Response of China to a Question from the United States following
the Second Substantive Meeting
A-371

ANNEX A-1

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

A. M
EASURES AT ISSUE AND PRODUCTS AT ISSUE
1. In respect of the criteria set out in Articles 21 and 22 of Decree 125:

(a) (China) Could China elaborate on the rationale behind these specific criteria.

Response of China

1. The rationale behind these specific criteria is to specify the groups of imported auto parts and
components that China considers to have the essen tial character of a motor vehicle under General
Interpretative Rule 2(a).
(b) (All parties) Are these types of criteria commonly used as standards by customs offices
in determining whether parts and components of a product should be considered as a complete
product?

Response of China

2. As discussed in response to question 117, th ere are a variety of factors that customs
authorities consider in evaluating whether an incomp lete or unfinished article (whether assembled or
unassembled) has the essential character of the comp lete article. The types of criteria set forth in
Articles 21 and 22 are consistent with these factors.
Response of the European Communities (WT/DS339)

3. The European Communities is not aware of any other WTO member using the same or
similar criteria and such criteria are certainly not used by the EC.
4. Leaving aside that China is using the criteria intern ally within China, the use of the criteria in
tariff classification would lead to a violation of Article II GATT as they do not respect the HS
nomenclature (in particular rule 1 of the general ru les for the interpretation of the Harmonized System
and, to the extent rule 2(a) is relevant, the "as presented" and "essential character" criteria there
under).
5. The only circumstances in which parts could be classified as the complete article could be in
the context of certain knocked down kits, but th at would require a case-by-case analysis. In this
respect reference is made to the reply to question 47.
Response of the United States (WT/DS340)

6. The criteria set out in Articles 21 and 22 of Decree 125 are not the types of criteria commonly
used as standards by customs o fficials in determining whether parts and components of a product
should be considered as a complete product. The United States follows the long-standing principle
that goods should be classified based on its condition as entered, regardless of what occurs to the
goods after entry. US Customs officials apply General Interpretative Rule (GIR) 1 and classify

merchandise in accordance with the terms of the headings and the relevant section and chapter notes.
When components and parts of a motor vehicle are entered, US Customs officials will determine
whether they meet the terms of a particular head ing. For example, a vehicle body is specifically
described by the terms of heading 87.07, which pr ovide for: "Bodies (incl uding cabs), for the motor
vehicles of headings 87.01 to 87.05". A gasoline e ngine is specifically described by the terms of
heading 84.07, which provide for: "Spark-ignition reciprocating or rotary internal combustion piston
engine".
7. In situations where a finished good is entere d unassembled (e.g., a complete kit to make 1
good), the United States will classify the imported good that is unassembled as if it were complete
under General Interpretative Rule 2(a). In situati ons where incomplete or unfinished merchandise is
imported, US Customs authorities will examine the merchandise as presented at the time of
importation to determine whether the incomple te or unfinished merchandise has the essential
character of the complete or finished good. For example, see General Explanatory Note to Chapter 87
(JE-37).
Response of Canada (WT/DS342)

8. No. Canadian customs officials perform assessme nts on a case-by-case basis of those parts as
presented together at the border. They do not base th eir classification of those parts on a formula that
is linked to the number of imported assemblies, much less the percentage of imported volume or value
of parts used in imported assemblies. This is partic ularly the case with vehicles since they consist of a
great number of individual parts, including assemblies and sub-assemblies.
Comments by the United States on China's response to question 1(b)
9. In its response, China refers to its response to the Panel's question 117. However, the factors
that China relies on as justification for classifying the different combinations of auto parts and
components is in contradiction to the terms of th e Harmonized System and the proper application of
the General Interpretative Rules. As demonstrat ed in the US Response to question 47, customs
officials cannot group some assemblies together and claim that they have the essential character of a
complete motor vehicle. For example, a single component (e.g., diesel engine sub-assembly A or
sub-assembly B as described in Exhibit CHI-3) entered is classified under the terms of a heading that
describes that component (e.g., heading 8409). If a group of components are entered together (e.g.,
diesel engine sub-assembly A and sub-assembly B as described in Exhibit CHI-3) that may form an
assembly (e.g., a complete diesel engine), the Un ited States would classify it under the heading that
describes that assembly (e.g., heading 8408). If a group of components do not form an assembly, they
are individually classified (e.g., a crankshaft and side panel would not constitute an assembly and
would be individually classified). None of the assemblies listed in Exhibit CHI-3 ever constitutes
incomplete or unfinished motor vehicles within th e meaning of General Interpretative Rule 2(a);
instead, they would be individually classified in accordance with the terms of General Interpretative
Rule 1 (e.g., spark-ignition reciprocating or rota ry internal combustion piston engines of heading
84.07, transmission shafts of heading 84.83, chass is fitted with engines of heading 87.06, bodies
(including cabs) of heading 87.07).

2. ( China) What were China's bound and applied tariff rates for "CKD and SKD kits",
"motor vehicles" and "auto parts" prior to Ch ina's accession to the WTO and at the time of
China's accession to the WTO?

Response of China

10. Prior to China's accession to the WTO, there were no bound tariff rate for "CKD and SKD
kits," "motor vehicles" and "auto parts".
11. In 2001, immediately prior to China's accession to the WTO, the average applied tariff rate
for "motor vehicles" was 63.6%, and the average applied tariff rate for "auto parts" was 24.7%. There
were no separate tariff lines for "CKD and SKD ki ts" in China's Tariff Code. CKD and SKD kits
were classified as complete vehicles according to GIR 2(a) and the applied rates were identical to the
tariff rates applicable to the corresponding complete vehicle model.
12. In 2002, at the time of China's accession to th e WTO, the average bound tariff rate for "motor
vehicles" was 49.4%, and the average bound tariff rate for "auto parts" was 20.4%. Again, there were
no separate tariff lines for "CKD and SKD kits" in Chin a's Tariff Code, and these were classified as
motor vehicles in accordan ce with GIR 2(a). In 2002, the average applied tariff rate for "motor
vehicles" was 42.2%, and the average applied tariff rate for "auto parts" was 18.1%. These details can
be summarized as follows:
 Complete Vehicle CKD/SKD Kits Parts
2001 Bound Rate None None None
2001 Applied MFN Rate 63.6% 63.6% 24.7%
2002 Bound Rate 49.4% 49.4% 20.4%
2002 Applied MFN Rate 42.2% 42.2% 18.1%

Comments by the United States on China's response to question 2
13. In its response, China explained that immediately prior to its accession to the WTO on
11 December 2001, "the average applied tariff rate for 'motor vehicles' was 63.6%, and the average
applied tariff rate for 'auto parts' was 24.7%. There were no separate tariff lines for 'CKD and SKD
kits' in China's Tariff Code. CKD and SKD kits we re classified as complete vehicles according to
GIR 2(a) and the applied rates were identical to the tariff rates applicable to the corresponding
complete vehicle model." While the United States does not dispute China's statements regarding the
applied tariff rates for motor vehicles, it does dis pute China's explanation regarding parts and CKD
and SKD kits as being both inaccurate and incomplete.
14. From 1992 to 1995, China did maintain separate tariff lines for CKDs and SKDs. As China's
exhibit CHI-30 shows, these tariff lines established ta riff rates that were the same as the scheduled
tariff rates applicable to motor vehicles. However, China normally did not apply these rates. Instead,
the applicable rate for CKDs a nd SKDs was negotiated between an individual auto manufacturer and
the Chinese authorities. The key factors in this negotiation were the amount of the auto
manufacturer's investment in China and the extent to which the auto manufacturer used local content
in the assembly of its vehicles, both at the time of the negotiation and under the auto manufacturer's
future plans. Normally, an auto manufacturer wi th a larger amount of investment and a larger
percentage of local content would be able to ne gotiate a lower tariff rate than would an auto
manufacturer with a smaller amount of investment and a smaller percentage of local content.
Particularly for the auto manufacturers that th e Chinese authorities viewed as committed to China
based on these factors, the negotiated tariff rates for CKDs and SKDs were substantially below the

tariff rates for motor vehicles. In addition, th e Chinese authorities would normally apply the same
negotiated tariff rates to parts, as the negotiated tari ff rates were often also below the tariff rates for
parts set forth in China's tariff schedule.
15. After 1995, China eliminated the tariff lin es for CKDs and SKDs, as China's response
reflects. However, contrary to Ch ina's assertions, China even then did not apply tariff rates for CKDs
and SKDs that were the same as the scheduled ta riff rates applicable to motor vehicles. China
continued to apply tariff rates for CKDs and SKDs (and parts) that were negotiated between an
individual auto manufacturer and the Chinese author ities, just as it had in the period from 1992 to
1995.
16. These same tariff practices continued through the time of China's accession to the WTO and
post-accession until China began to implement the measures at issue in this dispute.
17. From 1992 until the implementation of the measures at issue in this dispute, China pursued
these tariff practices because it was focused on bui lding up its capacity for the local assembly of
motor vehicles, and it did not have sufficient domestic manufacturers of auto parts to supply domestic
auto manufacturers. China therefore welcomed an d encouraged imports of CKDs and SKDs (and
parts) that could be assembled into motor vehicles in China, particularly by auto manufacturers that
demonstrated a commitment to China.
18. China's policy of encouraging imports of C KDs and SKDs (and parts) that could be
assembled into motor vehicles locally was facilitated by China's policy of maintaining import quotas
on motor vehicles. In this regard, China maintained import quotas on vehicles prior to its accession to
the WTO in 2001, and it negotiated the right to maintain import quotas on motor vehicles for three
years after its accession, i.e., until 1 January 2005, as reflected in Part I, pa ragraph 7.1, and Annex 3
of China's Protocol of Accession, as explained more fully below under question 14(b).
19. China's tariff practices relating to CKDs a nd SKDs (and parts) during the period from 1992
until China's accession to the WTO at the end of 2001 help to explain w hy paragraph 93 of the
Working Party Report accompanying China's Protocol of Accession reads the way it does. As the
panel will recall, paragraph 93 provides:
In response to questions about the tariff treatment for kits for motor vehicles, the
representative of China confirmed that China had no tariff lines for completely
knocked-down kits for motor vehicles or se mi-knocked down kits for motor vehicles.
If China created such tariff lines, the tariff rates would be no more than 10 per cent.
20. When negotiating this provision in the year s leading up to China's WTO accession, WTO
Members, including the United States, knew that China had separate tariff lines for CKDs and SKDs
that scheduled tariff rates that were the same as those for motor vehicles from 1992 to 1995, and that
China eliminated these tariff lines effective 1 Ja nuary 1996. WTO Members also knew that the
Chinese authorities had nevertheless been applying substantially lower tariff rates for CKDs and
SKDs (and parts) than for motor vehicles, both wh en China had separate tariff lines for CKDs and
SKDs and when it did not. In negotiating paragrap h 93, therefore, WTO Members wanted to ensure
that China would continue to treat CKDs and SKDs essentially as parts for tariff purposes after
acceding to the WTO and that China would be unable to re-establish separate tariff lines for CKDs
and SKDs, at higher rates, if its policy focus changed as its domestic auto industry evolved.
3. (All parties) Do automobile manufacturers themselves also assemble or manufacture the
so-called "assemblies" listed in Article 4 of Decree 125? If so, how common is this in the

automobile industry in general or in the Ch inese automobile industry? Is there a clear
distinction between automobile manufacturers and parts manufacturers?
Response of China

21. It is a common practice in China for automobile manufacturers to assemble some or all of the
assemblies listed in Article 4 of Decree 125. For inst ance, a majority of auto manufacturers in China
produce the body assembly by themselves. Many auto manufacturers in China have their own
assembly lines for engines and transmissions.
22. Auto manufacturers and part manufacturers, however, are distinct in some respects. First,
auto parts manufacturers normally focus on one particular type or series of parts, while auto
manufacturers focus on the overall assembly of the ve hicle. Second, auto manufacturers are normally
in a position to articulate and define the parameters of parts and their quality standards, which must be
met by their auto part suppliers.
23. The complainants have stated, and China agr ees, that the auto parts industry is highly
fragmented in China.
1 This makes most of the part suppliers dependent, legally or financially, on one
auto manufacturer. All top auto manufacturers in Ch ina have stable and long-term supply chains for
auto parts, as well as complex corporate structur es in which many of the necessary auto parts are
produced by subsidiaries and joint ventures. This feature, as China understands it, is common in
Asian auto industries.
Response of the European Communities (WT/DS339)

24. The answer as to whether automobile manufacturers themselves also assemble or manufacture
the so-called "assemblies" listed in Article 4 of Decree 125 depends on the business strategy of each
manufacturer. However, the European Communities unders tands that in the most typical situations at
least some elements of the "assemblies" would be manufactured by the manufacturer of the complete
vehicle. This concerns in particular the vehicle body, which is an element of a vehicle that is usually
separate for each model. In contrast, for exampl e the steering system and the brake system are
typically assembled and manufactured by suppliers and sold to the vehicle manufacturer. However,
there are no general rules that apply to all manufacturers and all models.
25. There is no difference between the automobile industry in general and the Chinese automobile
industry with the very important exception of the way in which the contested measures affect the
strategy of vehicle and parts manufacturers in Chin a. As explained by the European Communities in
its first written submission the Chinese measures fo rce vehicle manufacturers to depart from their
normal business strategies in the rest of the world (in particular paragraphs 68 to 74). The measures
require in all situations that the vehicles contain a certain proportion or combination of locally made
parts and components (or "assemblies"). If th e necessary local content is not ensured, the
manufacturer will be obliged to pay the 25 % duty on all imported parts, which due to very small
profit margins will mean that the given model will not be competitive in the Chinese market.
26. With regard to the distinction between vehicle manufacturers and parts manufacturers the
answer again depends on the specific context. Sometimes parts manufacturers may belong to the
same industrial group as the vehicle manufacturers but more often the parts manufacturers are
independent and provide parts to many different vehicle manufacturers. Indeed, there are far more

1 Canada's first written submission, para.17; EC's first written submissions, para.18; US's first written
submission, para.21.

parts manufacturers than vehicle manufacturers. Of c ourse, due to constant changes in the industry a
part manufacturer may become part of the same group as the vehicle manufacturer and vice versa.
Mergers and acquisitions are an every day phenome non in most industries. However, it is also
important to underline that a vehicle manufacturer often acts as the supplier of a given part or
"assembly" to another vehicle manufacturer. Even comp etitors in the same market may co-operate in
the context of certain vehicle models. All of this depends on the strategy of the manufacturers. The
Chinese measures seriously compromise the ability of the foreign industry to choose the most
efficient business strategies in the Chinese market.
Response of the United States (WT/DS340)

27. Automobile manufacturers commonly assemble within their own operations and facilities at
least a few of the listed assembly operations. For example, most automobile manufacturers assemble
the body, whether from stampings provided by a s upplier, stampings they make themselves, or a
combination of both. Engine assembly is also a common operation for automobile manufacturers.
The same holds true for chassis assembly, assuming that chassis means what is also referred to as the
"frame". It is extremely common, if not univer sal, that automobile manufacturers perform one or
more of the listed assembly operations, although they may not all perform the same ones or
combinations thereof.
28. With respect to the listed assembly operations , a clear distinction cannot be made between
automobile and parts manufacturers.
Response of Canada (WT/DS342)

29. Manufacturers sometimes prepare the "assem blies" listed in Decree 125, as do parts
manufacturers. This is relatively common both in ge neral and in China, to the extent that commonly
understood commercial practices are not affected by the measures. That not ed, even where vehicle
manufacturers do produce particular assemblies, many of the key parts in such assemblies used in
China come from so-called "Tier 1" suppliers. Ther e is a commercial distinction between automobile
manufacturers (which usually control not only th e manufacturing and final assembly of a whole
vehicle, but also its design, marketing and branding) and parts manufacturers (whether Tier 1, 2 or 3).
Tier 1 parts manufacturers may engage in value- added activities related to the parts that they
manufacture (such as research and development), wh ich activities used to be carried out solely by
vehicle manufacturers. Commercial practice may evolve in respect of which company produces parts
and which company processes or assembles them. However, automobile manufactures and parts
manufacturers remain distinguished by the "b rand". Auto manufacturers produce vehicles under
different brands with which consumers are familiar; parts manufacturers produce parts, components or
modules used in the vehicles and do not have their own vehicle brands.
4. ( China) Could China please explain the "Public Bulletin" referred to in Article 7 of
Decree 125, including what purpose it serves, wh ether all automobile manufacturers in China
have to apply for it and what is the reason fo r having "Characterized as Complete Vehicle"
marked on the Bulletin for auto parts falling under this scope.

Response of China

30. Being listed in the Public Bulletin is requi red for auto manufacturers to produce and sell
motor vehicles and for consumers to register and us e motor vehicles in China. A vehicle model can
be listed in the Public Bulletin only if it satisfies a ll requirements in respect of various regulations that
apply to motor vehicles. Listing a vehicle model' s registration status under Decree 125 is simply one

of the regulatory characteristics of the model that is disclosed in the Public Bulletin. This disclosure
aids customs officials and others in the automotive industry by designating the customs status of that
vehicle model, including the customs status of parts and components that are imported for its
assembly.
5. ( China) Please clarify, by referring to the relevant provisions of the measures at issue,
when the decision of whether certain imported au to parts should be characterized as complete
vehicles is made.

Response of China

31. This determination is made by reference to specific vehicle models, prior to the importation of
the parts that the manufacturer will import to assemb le that vehicle model. The overall purpose of
this process is to determine whether, to assemble that vehicle model, the auto manufacturer imports
multiple shipments of parts and components that have the essential character of a motor vehicle.
32. The process begins with the manufacturer's self-evaluation under Article 7 of Decree 125. If
the manufacturer determines as a result of the self-evaluation that a particular vehicle model meets
one or more of the thresholds for characterizing parts as having the essential character of a motor
vehicle, as specified in Article 21 of Decree 125, it must register that vehicle model with the CGA
prior to the importation of parts for that vehicle model (Art. 7). It must also file a registration
statement with the CGA for that vehicle model (Art. 9). The manufacturer's determination, whatever
the result, is subject to review and verification under Chapter IV of Decree 125 (Art. 17-18).
33. Once the manufacturer has registered a particular vehicle model in accordance with Article 9,
it must provide an import duty bond to the CGA ba sed on its projection of monthly average imports
for that vehicle model (Art. 12). Thereafter, th e manufacturer must import parts for that vehicle
model separately from other auto parts, and must decl are the imported parts as parts of a registered
vehicle model (Art. 14-15). These parts enter China in bond and remain under customs control
(Art. 16, Art. 27). Parts that are imported for the assembly of other vehicle models are declared as
parts (Art. 35).
34. The manufacturer must pay the duty when th e imported auto parts are assembled into
complete vehicles (Art. 28). The automobile manufact urer is required to declare duty payment on the
tenth working day of each month based on the number of registered vehicle models that it assembled
in the prior month (Art. 31).
35. If the assembled vehicle is one that has been verified as meeting one or more of the thresholds
of Article 21, the CGA classifies the imported auto pa rts in that vehicle model as a motor vehicle, just
as it would have had the imported auto parts entered China in a single shipment (Art. 28). If the
assembled vehicle is one that has been verified as not meeting one or more of the thresholds of
Article 21, the CGA classifies the imported auto part s in that vehicle model as parts (Art. 28) – again,
just as it would have had the imported auto parts entered China in a single shipment.
2

2 The only exceptions to these cla ssifications are if: (1) the classifi cation of a previously registered
vehicle model changes between the entry of the parts into China and their assembly into a complete vehicle, in
which event the manufacturer may declare those imported parts for which it has not yet paid duty under the
relevant tariff provisions for parts (Art . 32); or (2) the imported parts are not assembled into a complete vehicle
within a period of one year after entry, in which event the imported parts are assessed at the duty rate for parts
(Art. 29). As China explained during the first substan tive meeting, the first exception provides an element of

36. The effect of this system is that the determin ation of whether imported auto parts should be
classified as a motor vehicle is made prior to the importation of the parts, based on the self-evaluation
and verification process described above. It is this self-evaluation and verification process that gives
rise to the declaration that is made at the time of importation and the obligation to provide an import
bond for these entries.
6. ( China) What is the purpose of requiring both self-evaluation by automobile
manufacturers and verification by the Verification Center?

Response of China

37. The purpose of the self-evaluation is for auto mobile manufacturers to review each vehicle
model in relation to the requirements of Decree 125 a nd to produce a report that details the status of
each vehicle model in relation to those requirements. This self-evaluation report is then verified to
confirm that the information provided by the auto manufacturer is genuine, complete, and accurate.
7. ( China) In respect of tariff classification practice by China's customs office:

(a) Is there a system in China under which an importer can appeal the customs office's
decision on the tariff classification of imported auto parts or other imported products. If so,
please explain;

Response of China

38. Article 64 of the Regulation on Import/Export Tariff provides that:
A duty payer or a security provider shall pa y the duties and may apply for a review to
the customs office at an immediate upper level according to relevant laws if [it]
disagrees with the customs on designation as a duty payer, determination of dutiable
prices, merchandise classification, origin, applicable tariff rate or exchange rate, duty
reduction or duty exemption, supplement of unpaid duty, duty refund, late charges,
method of duty calculation, and place of duty collection. In case [the duty payer or
the security provider] disputes the review conclusion, [it] may file a case to the court
according to relevant laws.
 Pursuant to this provision, an importer can a ppeal the tariff classification of imported auto
parts in Chinese courts. The courts can find that the CGA determination is not in accordance with
Chinese law and can direct a remand to the agency for reconsideration.

(b) Please indicate whether there is any existing or pending court and/or administrative
decisions in respect of the application of any of the provisions of the measures. If so, please
explain in detail; and

flexibility to the manufacturer in acknowledging that th e sourcing of parts and assemblies for a particular
vehicle model could change, while the second exception serves to bring finality to the customs process.

Response of China

39. There are no such administrative reviews or court appeals pending in relation to the
application of the challenged measures.
(c) In this connection, also clarify whether the NDRC is authorized to provide its own
interpretations of the provisions of Decree 125 and Announcement 4 in light of Article 78 of
Policy Order 8. If so, has NDRC issued any int erpretations of the provisions of the challenged
measures?

Response of China

40. The NDRC is not authorized to provide its ow n interpretations or explanations of the
provisions of Decree 125 and Announcement 4 under Article 78 of Policy Order 8, and the NDRC has
not done so.
8. (Complainants) Please explain whether, and if so, to what extent, the procedural
requirements under the measures affect the aver age period necessary for the assembly of a
vehicle.

Response of the European Communities (WT/DS339)

41. It is important to put this question into its prope r context. The considerable complexity of the
measures in itself affects the launching of a new model in the Chinese mark et. The bottom line for
most manufacturers is that they must avoid the 25 % duty since otherwise it will simply not be
commercially worthwhile to even begin the ad ministrative procedure under the measures. The
conception and launching of a new model can thus be delayed by 2-3 years, as vehicle manufacturers
will have to look for domestic supp liers able to provide the require d proportion of domestic parts or
assemblies, and test their reliability. Establishing th e self-verification report required by Article 7 of
Decree 125 may take an additional six months for a team of 10-15 highly sk illed experts. After a
manufacturer decides to begin the procedures fo r introducing a new model, which it believes and
hopes to be subject only to the 10 % duty as regards imported parts, it can in reality take up to one
year before all the procedures are finalised. The m easures thus also results in having to launch in a
context of legal uncertainty that may persist for months and sometimes even for years.
42. At the stage of the assembly operations, the measures impose a considerable administrative
burden and, as a consequence, additional costs. It should be emphasised that 30% to 35% of parts are
common to different models. For a vehicle manufacturer, the most efficient way is to ship parts
together and use them depending on the production needs which may easily vary from the initial plan.
There may be a need to increase the production of a specific model as a result of sales higher than
anticipated; there may be a need to replace urgently deficient parts. Because China's measures impose
to declare for which model the parts will be imported (Article 15 of Decree 125), vehicle
manufacturers have to unnecessarily define in deta il for which model each part is imported. The
flexibility required for an economically sound management of parts supply is taken away.
Response of the United States (WT/DS340)

43. As the United States explained in paragraphs 46-66 and 99-104 of its first submission, China's
measure impose burdensome procedural requireme nts on manufacturers who use imported parts,
while any manufacturers who use only domestic parts are excused from these burdensome
requirements. This difference accords less favorable treatment to imported parts as compared to like

domestic parts, and results in a prima facie violation of Article III:4. China has not even attempted to
rebut this prima facie case.
44. Information on the average period of delay resulting from China's measures was not an
element of the United States' prima facie case on this issue, and the United States does not have such
information readily available.
Response of Canada (WT/DS342)

45. It is not possible to describe, as a general ru le, the effect that the measures have on the
average period necessary to assemble a vehicle. The overall effect will vary based upon, e.g., the web
of suppliers and the particular sourcing (both dome stic and imported) of parts. The most significant
delay results from a combination of the proce dural and substantive requirements: vehicle
manufacturers need to ensure that the domestic content in their vehicles is well over the 40%
minimum requirements in order to avoid charg es under the measures, keeping in mind possible
differences in valuation of imported content. For so me models, this can result in significant delays in
beginning production (in the order of many months). This is so as to find domestic suppliers to
guarantee sufficient domestic content, thereby gi ving the vehicle manufacturer comfort that the
number of Deemed Imported Assemblies will remain below the required threshold in the event of
differences in the valuation of certain parts.
9. ( All parties ) Assuming that a country can have an anti-circumvention policy in the
context of ordinary customs duties, how much fl exibility should a country have in introducing
measures to enforce such a policy?

Response of China

46. The issue of circumvention in this case is one of ensuring the proper tariff classification of
imports and thereby preventing the evasion of higher duty rates that apply to motor vehicles. China
considers that the challenged measures implement and enforce an interpretation of its tariff provisions
for "motor vehicles" that is consistent with th e interpretative rules of the Harmonized System. A
Member's ability to adopt measures to interpret its tariff schedule in accordance with the rules of
Harmonized System is co-extensive with those ru les; any such measure must comport with the
requirements of the Harmonized System.
47. To illustrate the point, it may be helpful to use an example that is not relevant to the present
dispute. General Interpretative Rule 3 addresse s the circumstance in which goods are prime facie
classifiable under two or more headings, and provides a set of rules to resolve this conflict. Under
GIR 3(a), "the heading which provides the most spec ific description shall be preferred to headings
providing a more general description." Suppose that a Member adopted a measure to advise importers
as to which headings it considered to be "prima facie classifiable under two or more headings," and, in
those cases, to advise importers as to which headings it considered to be "the most specific".
48. This measure would affect how the Member classifies certain articles. It could result in tariff
classifications and determinations of duty liabil ity with which importers disagree on the facts of
specific cases. But from the st andpoint of evaluating the consistency of the measure with the
Member's WTO obligations, including Article II of the GATT 1994, the relevant inquiry would be
whether the measure results in classifications consistent with the HS terms employed in that Member's
tariff schedule. Any assessment of such classification determinations would need to consider whether
the results are consistent with the requirements of GIR 3(a), including, as may be pertinent, any
interpretations of GIR 3(a) adopted by the WCO. Thus, the measure could not result in tariff

classifications, and determinations of duty liability, that were manifestly inconsistent with GIR 3(a)
(e.g., by identifying articles that ar e not "prima facie classifiable under two or more headings," or by
applying the "more general description" over "the most specific"). This is, in relevant respect, the
degree of flexibility that a Member has in adoptin g measures to interpret its Schedule of Concessions
in accordance with the rules of the Harmonized System.
Response of the European Communities (WT/DS339)

49. Since a county's tariff schedule has to be interp reted in the light of the Harmonized System,
any "flexibility" must be in accordance with HS nomen clature and its rules. To the extent the question
refers to Article XX(d) of the GATT, the "flexib ility" must comply with the requirements of that
provision and in particular be necessary to secure compliance with laws or regulations which are not
inconsistent with the GATT and fulfil the criteria laid down in the chapeau of Article XX.
Response of the United States (WT/DS340)

50. The United States cannot accept the assumption – ad vocated by China in this dispute – that it
amounts to "circumvention" when automobile manuf acturers use normal channels of trade to source
bulk shipments of parts for assembly purposes. As the United States has explained, China's attempt to
analogize all auto manufacturing operations as the assembly of separately organized and shipped
"knock down kits" is baseless, and ignores the reality of modern manufacturing operations.
51. Moreover, the United States does not otherwise know what China means by "circumvention"
with respect to the application of customs laws. The United States follows the long-standing principle
that goods should be classified based on its condition as entered, regardless of what occurs to the
goods after entry.
52. The United States, however, notes that the WT O Agreement certainly does not prevent the
enforcement of a Member's customs laws. Many provisions of the WTO Agreement refer to the
existence of, and the enforcement of, custom s laws. For example, Article X of the General
Agreement on Tariffs and Trade 1994 ("GATT 1994") imposes certain disciplines, including that
customs laws be administered "in a uniform, impartial and reasonable manner." Additional
disciplines are set out in other WTO Agreements, such as the Agreement on Implementation of Article
VII of the General Agreement on Tariffs and Trade 1994 ("Customs Valuation Agreement") and the
Agreement on Import Licensing Procedures.
Response of Canada (WT/DS342)

53. Canada considers that a tariff-related "anti-ci rcumvention" policy could not operate in a
manner consistent with the expr ess legal obligations set out in the non-discrimination articles of
GATT 1994. Any measures that impose internal charges only on imported products, on the theory
that such a charge is necessary to prevent wh at China calls "circumvention" of tariffs, is prima facie a
violation of GATT Article III, and must be defended under Article XX(d). While Canada believes that
the measures cannot be justified under Article XX (see Canada's first oral submission at
paragraphs 27-36), Canada does not co nsider it appropriate in the abstract to consider what internal
charges might be justified under Article XX(d).
Comments by the United States on China's response to question 9
54. As the United States has explained, China's so-c alled concern with "circumvention" is that
importers might make use of the lower tariff on auto parts negotiated at the time of China's accession.

55. However, the United States does agree with Chin a's general proposition that mechanisms to
enforce customs laws must be consistent with a Member's internati onal obligations, including
obligations under the WTO Agreement and under the Ha rmonized System Convention. To this end,
China responded that the "ability to adopt measures to interpret its tariff schedule in accordance with
rules of Harmonized System is co-extensive with those rules; any such measure must comport with
the requirements of the Harmonized System." Howe ver, the substance of China's response to this
question is intended to demonstrat e a certain "degree of flexibility … in adopting measures to
interpret its schedule of Concessions in accordance with the rule of the Harmonized System."
56. China's example of a national measure interpre ting a General Interpretative Rule (GIR) fails
to demonstrate this alleged "flexibility". The example involves GIR 3(a), which governs goods that
are prima facie classifiable under two or more tariff headings. The rule provides that "the heading
which provides the most specific description shall be preferred to headings providing a more general
description." China's example as sumes that a contracting party adopts a measure that advises
importers as to which goods it considers prima f acie classifiable under more than one heading and
advises as to which heading is more specific.
3 Such a measure would be in compliance with the
contracting party's obligations under GIR 3(a) only if the products identified were specifically
described by both headings.
57. More relevant to the case at hand, there is no degree of flexibility under the Harmonized
System that would legitimize the "anti-circumvent ion" measures that China has implemented for the
classification of imported auto parts. It is China's position that "the relevant inquiry would be whether
the measure results in classification consistent w ith the HS [Harmonized Sy stem] terms employed in
that member's tariff schedule." To this end, China states that the results must be consistent with the
requirements of the GIRs. However, China is impl ementing measures that are not in compliance with
GIR 2(a). GIR 2(a) permits the classification of unfinished or unassembled goods as finished goods
based upon their condition "as presented". The co ndition of goods presented for customs clearance is
their condition at the time of importation. China' s measure that mandates classification of imported
auto parts under a tariff schedule h eading for a completed automobile is based on the future use of
those goods in the production of a completed autom obile. Classification on this basis is a flagrant
violation of GRI 2(a) because classification based on use after importation is not consistent with the
requirement that goods be classified in their condition upon importation.
10. ( Complainants) China submits in paragraph 15 of its first written submission that the
details of the specific tariff headings and tariff rates are not relevant to the disposition of the
claims before the Panel. Do the complainants agree with China? If so, is your view the same
regardless of whether the charge concerned should be considered as tariff duty or internal
charge?

Response of the European Communities (WT/DS339)

58. The European Communities profoundly disagrees with the statement of China in
paragraph 15 of its first written subm ission. Rule 1 of the General Ru les for the interpretation of the
Harmonized System states that

3 In its response to the Panel question, China stat es, "Suppose that a Member adopted a measure to
advise importers as to which headings it considered to be "prima facie classifiable under two or more
headings…." This statement is illogical because a heading is not classifiable under other headings. The United
States, for the purposes of its rebuttal to China's re sponse, presumes that China intended to refer to a
hypothetical measure that identifies "goods" (rather than headings) that are prima facie classifiable under two or
more headings.

"The titles of Sections, Chapters and sub-Ch apters are provided for ease of reference
only; for legal purposes, classification shall be determined according to the terms of
the headings and any relative Section or Ch apter Notes and, provided such headings
or Notes do not otherwise require, according to the following provisions." (Emphasis
added)
As explained by explanatory note V to Rule 1, "…the terms of the headings and any
relative Section or Chapter notes are paramount, i.e. they are the first consideration in
determining classification".
59. The position of China is in direct contradiction with Rule 1.
60. The Appellate Body has also clearly recognised the importance of the terms of the specific
tariff headings in the context of an analysis under Ar ticle II of the GATT. In this respect reference is
made to Appellate Body Reports in EC – Computer Equipment and EC – Chicken Cuts.
61. If the measures are considered to be imposi ng an internal charge as the European
Communities considers, the details of the tariff headi ngs would not be relevant. The rates are relevant
as the internal charge is the difference between the full vehicle rate and the part rate.
Response of the United States (WT/DS340)

62. The United States disagrees with China. In th e US view, the tariff headings and rates in
China's Schedule are relevant to the disposition of this dispute. The way specific tariff headings tie
into the matters at issue depends on the specific claim under consideration.
63. GATT 1994 Articles III:4 and III:5 and TRIMs Agreement
: For these claims, the key aspect
of China's Schedule is the 15 per cent differential between the whole vehicle tariff (25%) and the parts
tariff (10%). China's measure's impose a WTO-inc onsistent local content requirement for vehicle
manufacturers, which results in the imposition of the 15 per cent additional charge unless the local
content requirements are met. Note that this local-content requirement is WTO-inconsistent,
regardless of whether the additional charge is considered an internal charge or part of China's ordinary
customs duties or other duties or charges.
64. GATT 1994 Article III:2 : If, as the United States contends, China's measures are internal
charges, then again the key aspect is the 15 per cent differential between the whole vehicle tariff
(25%) and the parts tariff (10%). This additional charge is imposed only on imported parts, and never
on domestic parts.
65. GATT 1994 Article II : If, as China contends, China's additional charge is a customs duty,
then such a duty breaches China's tariff bindings on parts. In th is instance, the difference between the
whole vehicle tariff and the duty on each imported part is the amount by which China has breached its
tariff bindings.
Response of Canada (WT/DS342)

66. Tariff headings would be irrelevant for pur poses of assessing the nature of goods were the
measures properly considered to result in internal charges on auto parts. In that case, no recourse to
Article II is necessary. To the extent the Pa nel finds it necessary to assess the measures under
Article II, it is only China's broad tariff rate commitments that are relevant to resolving this dispute.

67. China's tariff headings, under an Article II anal ysis, demonstrate the arbitrary nature of the
measures, particularly given that China attempts to blur the distinction between parts and motor
vehicles. That is inconsistent with the proper approach to tariff interpretation expressed in, e.g.,
Rules 1 and 2(a) of the General Rules for the Interpretation of the Harmonized System.
68. Canada notes that there is agreement among the parties that at least some charges under the
measures are internal. China has conceded (implicitl y in footnote 20 of its first written submission,
and then explicitly in response to oral questions) th at charges imposed on auto parts imported by parts
manufacturers located in China, and then sold to ve hicle manufacturers located in China, are internal
charges subject to Article III.
11. ( China) Please clarify whether there are any other legal instrument similar to the Policy
on the Development of the Auto Industry in relation to other industry sectors in China.

Response of China

69. Yes, China has adopted broad policy instruments of this nature in other industry sectors.
12. ( China) In respect of the alleged problems re lating to circumvention of ordinary
customs duties for motor vehicles in China:

(a) Could China explain, based on evidence, th e circumstances leading up to its decision to
introduce the measures at issue to address this "a lleged" problem in 2005. In particular, in
light of China's statement in paragraph 22 of its first submission that "[t]he need to define a
clear boundary between motor vehi cles and parts of motor vehicl es, coupled with evidence of
tariff circumvention, prompted China to being consideration of measures..., consistent with
China's Schedule of Concessions and intern ationally accepted principles of tariff
interpretation," could China please explain in detail why the need to define such a clear
boundary arose and provide copies of evidence of tariff circumvention referred to in this
paragrah;

Response of China

70. For the reasons that China has explained in response to question 13 below, China does not
consider that it required specific evidence of "circu mvention" in order to resolve an issue of tariff
classification in its Schedule of Concessions. Cust oms authorities routinely resolve issues of tariff
classification in response to requests from importers, or as a general matter of customs administration.
An example of the latter is the EC regulation provid ed in CHI-14, which seeks to ensure a "uniform
application" of the EC tariff schedule in respect of incomplete or unassembled pick-up trucks. These
types of measures provide greater certainty to importers and ensure consistent application of the tariff
schedule by national customs authorities.
71. In point of fact, however, China had evidence that there was a significant issue concerning the
evasion of higher duty rates that apply to motor vehicles, including parts and components that have
the essential character of a motor vehicle. As Chin a explained in its first written submission, China
was aware that the value of imported parts and components had increased dramatically between 2001
and 2004, greatly outstripping the rate of total motor vehicle production in China.
4 The sharp increase
in the importation of auto parts and components oc curred at a time when auto manufacturers were
introducing a large number of new vehicle models into the Chinese market. These figures strongly

4 See China first written submission at para. 21.

suggested that there were issues of tariff classifi cation concerning motor vehicles and parts of motor
vehicles that warranted examination. Customs authorities routinely address specific issues in customs
administration, including the issuance of tariff cl assification guidance, in response to these types of
import trends. The legitimate nature of China's c oncern, and its decision to address this classification
issue, is demonstrated by the fact that approxima tely 20 per cent of vehicl e models that have gone
through the evaluation process are assembled from imported parts and components that have the
essential character of a motor vehicle. This point is discussed in response to question 160 below.
(b) How has China dealt with the alleged prob lem before the introduction of the measures
at issue?; and

Response of China

72. With respect, the specific problem of tariff classification at issue in this dispute is not
"alleged." As China has sought to demonstrate by reference to the practices of other WTO Members,
it is a problem of tariff classification that arises wh enever there is a significant difference in duty rates
between complete articles and parts of those article.
73. Prior to the adoption of the measures at issue, China did not have a procedure for determining
whether multiple shipments of parts and components were related to each other through their common
assembly into a specific vehicle model.
Comments by the United States on China's response to question 12(b)
74. The United States disagrees with China's claim that the supposed "circumvention" of ordinary
customs duties for motor vehicles in China is simply an example of "a problem of tariff classification
that arises whenever there is a significant differen ce in duty rates between complete articles and parts
of those articles." There is not a problem of classification when parts are imported separately and
later assembled into a completed article. Under the Harmonized System, it is a longstanding principle
that goods are classified, pursuant to General Interp retative Rule 1, under the tariff heading that most
specifically describes those goods in their condition as imported.
5 The Harmonized System is made
up of 96 chapters grouped into 21 sections consistin g of approximately 5,000 article descriptions in
the headings and subheadings. The Harmonized Sy stem is divided into categories or product
headings beginning with crude and natural products and continuing in further degrees of complexity
through advanced manufactured goods . As reflected in the United States' response to the Panel's
question 47, there are tariff headings that specifical ly describe automobile parts, and, accordingly,
when those parts are imported separately, they ar e classifiable under those provisions. It is not
"circumvention" of the tariff schedule for an auto manufacturer to import parts separately and later
assemble them into a completed article in the domestic market.
(c) Could China also identify other products in its Schedule for which different tariff rates
are applied for an article and parts and components of such an article.

5General Interpretative Rule 1 states that "for legal purposes, classification shall be determined
according to the terms of the heading and any relative Section or Chapter No tes and, provide such heading or
Notes do not otherwise require, according to the following provisions." (Ex. CHI-15).

Response of China

75. Without having undertaken a systematic review of its Schedule of Concessions, China notes
two other instances in which its Schedule of Conc essions creates a significant tariff rate difference
between the complete article and parts of that article:
• 8414.5110 (fans) 21.7% (at date of accession)
• 8414.9020 (parts for 8414.5110 etc.) 12.0%
• 8415.1000 (air conditioner) 21.0% (at date of accession)
• 8415.9010 (parts for 8415.1000 etc.) 11.7% (at date of accession)

13. ( All parties) Regarding the notion of "circumvention":

(a) Please explain what "circumvention" means; and

(b) Please explain whether, and if so, how, under the WTO law, a Member is allowed to
take an anti-circumvention measure. If po ssible, please support your response with relevant
GATT/WTO jurisprudence.

Response of China

76. China's defense of the challenged measures does not depend upon a freestanding concept of
"circumvention," or upon the concept of a specific type of "anti-circumvention measure" within the
framework of GATT and WTO jurisprudence. What China refers to as "circumvention," as pertinent
to the facts of this case, is a tariff classification issue. That tariff classification issue is whether a tariff
provision for a complete article (such as motor vehicles) includes the importation and assembly of
parts that, in their entirety, have the essential character of that article. This tariff classification issue is
governed by General Interpretative Rule 2(a).
77. As China explained in its first written submi ssion, auto manufacturers can evade the higher
duty rate that applies to motor vehicles by structuring their imports of parts and components so that no
single shipment has the essential character of a mo tor vehicle, even if those parts and components
would have been classified as a motor vehicl e had they entered China in a single shipment.
6 This is
what China means by the "circumvention" of ordina ry customs duties under the circumstances of this
case. By structuring the importation of auto parts and components in this manner, auto manufacturers
deprive China of the revenue and market access bene fits that it negotiated when it obtained a higher
bound duty rate for motor vehicles as compared to parts and assemblies of motor vehicles.
78. China does not consider that its right to in terpret its Schedule of Concessions in accordance
with the rules of the Harmonized System is de pendent upon specific evidence of an intent to
circumvent the higher duty rates on motor vehicles. The importation and assembly of auto parts and
components through multiple shipments undermines the value of the tariff concessions that China
negotiated, whether the auto manufacturer has an intention to evade the higher duty rates on motor
vehicles or not. Moreover, customs authorities ro utinely classify imported articles contrary to the
proposed classification of the importer, without regard to whether the importer's proposed
classification was motivated by an intention to evad e a higher duty rate. Customs authorities interpret

6 China first written submission at para. 18.

and enforce their tariff schedules in accordance with the rules of the Harmonized System, not the
intention of the importer to evade applicable duty rates.
7
79. Nor does China consider that it requires a sp ecific authorization within the GATT 1994, or
any other WTO agreement, to adopt a measure th at interprets its Schedule of Concessions in
accordance with the rules of the Harmonized System. As explained in response to question 68, the
Appellate Body has repeatedly affirmed the im portance of the Harmonized System, including the
General Interpretative Rules, in the interpretati on of a Member's Schedule of Concessions. China
does not need a specific basis in WTO law to have recourse to General Interpretative Rule 2(a), as
interpreted by the WCO, any more than a Member would need a specific basis in WTO law to have
recourse, for example, to General Interpretative Rule 4 ("Goods which cannot be classified in
accordance with the above Ru les shall be classified under the h eading appropriate to the goods to
which they are most akin."), or to relevant classi fication decisions of the HS Committee. These rules
are part of the Harmonized System, which is the basis upon which WTO Members have negotiated
their reciprocal and mutually advantageous tariff concessions.
80. For these reasons, China considers that the cha llenged measures fall within the scope of
measures that national customs authorities routinely a dopt to ensure the proper interpretation of their
tariff schedules and to ensure the proper classification of imports. These measures are subject to the
disciplines of Article II. However, to the extent th at the Panel considers that China needed a separate
basis under WTO law to enforce its tariff rate provisi ons for motor vehicles, that authority is provided
by Article XX(d) of the GATT 1994. As China expl ained in its first written submission, Decree 125
secures compliance with China's customs laws by preventing the importation and assembly of auto
parts as a means of circumventing China's tariff provisions for motor vehicles.
8 As discussed in
response to question 160, there is ample eviden ce that, in the absence of these measures, auto
manufacturers would evade the higher duty rates that apply to motor vehicles by importing parts and
components that have the essential character of a motor vehicle, in multiple shipments.
Response of the European Communities (WT/DS339)

(a) Please explain what "circumvention" means;

81. The ordinary meaning of 'circumvention' accordi ng to the Shorter Oxford English Dictionary
is "deceitful or fraudulent conduct perpetrated against a facile person" while 'circumvent' is defined as
"deceive, outwit, overreach, find a way round, evade (a difficulty)". The ordinary meaning of the
term appears to contemplate both situations where there is criminal or fraudulent intent behind the
action and situations where such criminal or fra udulent intent is not necessarily present and where
circumvention would not per se be illegal.
82. In the context of Anti-Dumping EC law define s circumvention as follows (Article 13(1) of
regulation 384/96 as amended by regulation 461/2004): "Circumvention shall be defined as a change
in the pattern of trade between third countries and the Community or between individual companies in

7 To return to the example of GI R 3(a) provided in response to question 9, a Member might adopt a
measure to advise importers as to which headings it considered to be "prima facie classifiable under two or more
headings," and to advise importers, in those cases, as to which heading it considered to be "the most specific."
The Member might adopt such a meas ure in response to evidence that importers were taking advantage of
possible ambiguities as to which of two tariff headings might apply in order to obtain lower duty rates. But the
Member would not need evidence of this intention before it could take steps to interpret and enforce its tariff
schedule.
8 China first written submission at paras. 203-214.

the country subject to measures and the Community, which stems from a practice, process or work for
which there is insufficient due cause or economic ju stification other than the imposition of the duty,
and where there is evidence of injury or that the remedial effects of the dut y are being undermined in
terms of the prices and/or quantities of the like product, and where there is evidence of dumping in
relation to the normal values previously establishe d for the like product, if necessary in accordance
with the provisions of Article 2." To understand th is provision in its context reference is made to
replies to questions 132 and 141.
(b) Please explain whether, and if so, how, under the WTO law, a Member is allowed to
take an anti-circumvention measure. If po ssible, please support your response with relevant
GATT/WTO jurisprudence.

83. Anti-circumvention measures are explicitly contemplated under WTO law under Article 10 of
the Agreement on Agriculture and in the context of Anti-Dumping. The Ministerial Decision on Anti-
Circumvention adopted by the Trade Negotiati ons Committee on 15 December 1993 noted that the
problem of circumvention of anti-dumping duty m easures formed part of the negotiations which
preceded the Agreement on Implementation of Artic le VI of GATT 1994 but the negotiators were
unable to agree on specific text. The European Co mmunities is of the view that anti-circumvention
measures are permissible for the purposes of enforc ing Anti Dumping duties within the framework of
Article VI of the GATT 1994 and the Agreement implementing Article VI of the GATT. In respect of
Anti-Dumping the EC is not aware of other GATT or WTO jurisprudence except for the GATT panel
report EEC – Parts and Components.
84. To the extent the question refers to Article XX (d) of the GATT, reference is made to the
reply given to question 9.
Response of the United States (WT/DS340)

85. The United States respectfully refers the Pane l to the US Response to Question 9. To
summarize, the United States does not know wh at China means by its use of the term
"circumvention," other than that China believes that it is "circumvention" for automobile
manufacturers to request the tariff treatment that Chin a promised to provide to automotive parts. As
also noted, the WTO Agreements contemplate that Members may enforce their Customs laws, so long
as Members comply with relevant WTO obligations, such as Article X of the GATT 1994.
Response of Canada (WT/DS342)

(a) Please explain what "circumvention" means;

86. There is no recognized concept of "circumvention" in the tariff context. In the context of anti-
dumping charges imposed in accordance with GATT Artic le VI, there are clear references to "anti-
circumvention" in, for example, EEC – Parts and Components,
9 as well as the Ministerial Decision on
Anti-Circumvention10 adopted by the Trade Negotiations Committee on 15 December 1993.
87. However, China's use of the term "circumventi on" is to justify internal charges that it
considers necessary to prevent what it characterizes as "evasion" of tariffs. In the context of Article II,
charges must be internal in order for this concept of "circumvention" to apply. Otherwise, the charge
is properly characterized simply as either an "ordinar y customs duty" or an "other duty or charge", in

9 EEC –Parts and Components, Report of the GATT Panel, BISD 37S/132, adopted May 16, 1990.
10 LT/UR/D-3/1, April 15, 1994.

which case the charge must be set out in the Me mber's Schedule and must be applied based on the
state of the imported product on presentation at the border.
(b) Please explain whether, and if so, how, under the WTO law, a Member is allowed to
take an anti-circumvention measure. If po ssible, please support your response with relevant
GATT/WTO jurisprudence.

88. In Canada's view, any internal charge that is applied to the detriment of like imported
products violates Article III:2. This violation may be justified under Article XX(d), or possibly in
reference to other provisions of the WTO Agreement (for example, charges related to anti-dumping
measures may be justifiable on the basis of Article V I). This analysis is supported by the panel in
EEC – Parts and Components , which, at paragraphs 5.12 to 5.18, analyzed the internal charges in the
light of Article XX(d).
Comments by the United States on China's response to question 13(b)
89. In describing its notion of "circumvention" in the context of this dispute, China argues that its
concerns reflect a tariff classification issue. China explains: "That tariff classification issue is
whether a tariff provision for a complete article (such as motor vehicles) includes the importation and
assembly of parts that, in their entirety, have th e essential character of that article. This tariff
classification issue is governed by General Interpre tative Rule 2(a)." China then acknowledges that
auto manufacturers "structur[e] th eir imports of parts and components so that no single shipment has
the essential character of a motor vehicle," but it describes this activity as circumvention because
these auto manufacturers pay the lower tariff rates app licable to parts instead of the higher tariff rates
applicable to motor vehicles. In China's word s, this activity is circumvention because "auto
manufacturers deprive China of the revenue and mark et access benefits that it negotiated when it
obtained a higher bound duty rate for motor vehicles as compared to parts and assemblies of motor
vehicles."
90. China, however, has no basis for arguing that it is being deprived of the "revenue benefits"
that it negotiated in the form of higher duty rates for motor vehicles. The United States and other
WTO Members negotiated lower duty rates on parts, and it is they who are being deprived (by the
application of China's measures) of their negotiated benefits.
91. China also glosses over the true coverage of the measures at issue by describing them as
being aimed at importing parts "in multiple shipme nts." China's measures cover the importation of
parts (1) in multiple shipments, (2) from multiple suppliers, (3) from multiple countries,
11 (4) pursuant
to multiple purchase orders, (5) placed as much as one year apart. Moreover, the number of
shipments potentially grouped toge ther by China's measures is astoundi ng. Even the simplest motor
vehicle contains about 1,500 parts, as is shown in China's discussion in response to question 69. More
commonly, motor vehicles have thousands of parts.
92. According to China, the tariff classification issu e is "whether a tariff provision for a complete
article (such as motor vehicles) includes the importati on and assembly of parts that, in their entirety,
have the essential character of that article." Chin a specifies that "[t]his tariff classification issue is
governed by General Interpretative Rule 2(a)." Th e United States notes that the concept of parts "in
their entirety" is not included in the GIR 2(a). GIR 2(a) provides for the classification of goods "as
presented," which is their condition at the time of importation. Consistent with GIR 1, when an

11 China's measures even cover parts that auto manuf acturers purchase from suppliers in China if those
suppliers had themselves imported those parts.

imported auto part is specifically described by a heading of the tariff schedule, it is classifiable under
that heading notwithstanding that, post importation, th e auto part may be used in the assembly of a
complete automobile. Even a measure that compel s an auto manufacturer to provide proof of the
post-importation assembly of many different imported parts, in their entirety, into a complete
automobile does not retroactively confer to tho se parts at the time of importation the "essential
character" of an automobile.
14. In paragraph 21 its first written submission, China indicates that between 2001 and
2004, the value of imported parts and components increased by 300%.

(a) ( Complainants) Please comment on this statement, including whether, and if so, how,
these types of data are relevant to the measures at issue; and

Response of the European Communities (WT/DS339)

93. The European Communities does not consider that such statistics are relevant to the measures
at issue. The European Communities is of the view that the Schedule of concessions of China or the
Harmonised System under chapters 84 and 87 do no t provide for the anti-circumvention measures
argued by China. Hence, there is no need to consider trade statistics.
94. However, in general the European Communities is of the view that such statistics could at
most demonstrate that after WTO accession, trade has in creased in imported parts and components.
This is a direct consequence of China's commitment to reduce the tariff rate for parts and components
to a bound level of 10 % or less. If the expected effect of a commitment could serve as a justification
for not respecting this commitment any longer, this would entirely undermine the legal value of WTO
commitments. Any possible changes in trade pattern s should also be examined in the light of all
relevant data including the changes in imports of complete vehicles, production of complete vehicles
in China, production of auto parts in China (which may require imports of parts further processed in
China) and the number of vehicles in circulation in China (which affects the demand for imports of
parts for repair and maintenance).
Response of the United States (WT/DS340)

95. The United States fails to see how the trade data presented by China is relevant to any matters
at issue in this dispute. The United States has prima facie established breaches of various provisions
of the WTO Agreement, including Article III of the GATT 1994 and the TRIMs Agreement. China's
trade data is not relevant to these claims. The United States does note, however, that data on trade
flows could be relevant for dete rmining the level of nullification and impairment under Article 22 of
the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU").
96. The United States understands that China relies on these data in support of its theory that
automobile manufacturers began to split their CKD kits into separate shipments in order to avoid the
whole vehicle rate that China claims it is allowed to apply to such kits. As an initial matter, the
United States does not agree with China's views on the classification of separate shipments as a single
CKD. But even leaving this aside, China's data on total imports of parts and components do not
support China's factual assertions. China has presente d no data showing that imports of CKD kits fell
over the same period. And, more importantly, Ch ina has presented no evidence that these imported
parts and components were destined for facilities th at assembled "kits", as oppo sed to being destined
for either (a) replacement parts or (b) manufactur ing plants that imported bulk parts and components
in the normal course of operations.

Response of Canada (WT/DS342)

97. Canada is not in a position to confirm the speci fic facts put forward by China, but does not
disagree that parts imports grew in response to increased demand within China.
98. However, Canada strongly disagrees with China' s interpretation of this statistic. China in
effect asks the Panel to conclude that increased importation of auto parts is evidence that vehicle
manufacturers are improperly importing parts on which they should be paying whole-vehicle duties.
Canada notes simply that China has presented no evidence on which such a conclusion could be
based.
99. From an economic point of view, fluctuations in imports and exports may result from any
number of factors, such as domestic demand, fo reign supply, trade regulations, currency rates,
investment flows and tax policies. It is impossible to quantify which factors give rise to a 300% rise
in imports, on the basis of a mere assertion that th e size of the growth must be significant. The only
evidence available demonstrates that the surge in im ports of auto parts into China is related to the
increased supply of vehicles in China, both for dom estic consumption and ex port. More important,
China's WTO commitments are independent of growth in a particular set of imports. China has not
established, in respect of those commitments, wh ether or how that import growth may be a
justification for the measures.
(b) ( China) Could China please also indicate the percentage change, if any, in imports of
complete vehicles during this same period.

Response of China

100. The figures are as indicated in the following table:
 2001 2002 2003 2004
Unit 71,398 128,195 171,710 175,654
Increase Rate (%) - 80% 34% 2.3%
Value (1,000USD) 1,712,394 3,209,378 5,275,917 5,416,170
Complete
Vehicles
Increase Rate (%) - 87% 64% 2.7%
Auto Parts 2,155,639 2,312,355 7,384,300 8,679,599
Engine Parts 443,765 639,715 1,400,043 1,712,467
Total (1,000USD) 2,599,404 2,952,070 8,784,343 10,392,066
Auto
Parts
Increase Rate (%) - 13.6% 197.6% 18.3%

101. The table indicates that the rates of increase for complete vehicles sharply declined in 2003
and 2004. This is abnormal in light of the fact that China's quota on complete vehicles was
substantially loosened over these years. In compar ison, the rates of increase for auto parts were as
high as 197.6% in 2003. The importation of complete vehicles accounted for 52.09% of total imports
of auto products in 2002. This percentage decreased to 37.52% in 2003 and 34.26% in 2004,
indicating a shift toward importing vehicle parts.
Comments by the United States on China's response to question 14(b)
102. In its response to question 14(b), China again makes the point that it found a pattern of
"circumvention" during the period from 2001 to 2004 because imports of auto parts increased overall
at a quicker rate than did imports of motor vehicles. China also points to a slowing rate of increase

for imported motor vehicles in 2003 and 2004 and ar gues that this trend was "abnormal" because
China's import quotas on motor vehicles were being "substantially loosened" during this time period.
103. China's response is not convincing. China was doing everything in its power to limit imports
of motor vehicles during the years 2001, 2002 and 2003. Only in 2004 did China begin to lift the
barriers that it had put in place to limit vehicle imports, and these barriers were only lifted in full by
the end of 2004 (with the exception of the high tariff rates that are still applicable to motor vehicles).
104. As explained above (see qu estion 2), during the period from 2001 to 2004, China was
pursuing tariff practices that encouraged the impor tation of parts and even CKDs and SKDs for
assembly in China, while it was discouraging the importation of vehicles through an import quota
regime. Under the import quota regime, China set an annual import quota for motor vehicles (and two
key parts) at a value of $6 billion, with annual in creases of 15 per cent. At the same time, however,
China actively impeded foreign auto companies' attempts to fill this quota, which kept their imports of
vehicles even further artificially low.
105. The United States described this situation in the 2002 USTR Report to Congress on China's
WTO Compliance, which was issued on 11 December 2002. That report explained:
"From the outset, China's quota system was beset with problems. The State Council
did not issue necessary regulations until mid-December 2001. Not only were these
regulations late, but they also appeared to be inconsistent with China's WTO
commitments in certain respects. Furt her delay ensued as the administering
authorities charged with implementing this sy stem – [the Ministry of Foreign Trade
and Economic Cooperation, known as MOFTEC] for some products and the State
Economic and Trade Commission (SETC) fo r other products – struggled with
implementation. More problems arose when MOFTEC and SETC finally began
allocating quotas. In the case of auto s, for example, while MOFTEC issued
necessary implementing rules shortly after the issuance of the State Council's
regulations, it did not open up the quota application process until February [2002],
and it did not begin to allocate quotas until late April [2002]. Because of a lack of
transparency, it was difficult to assess wh ether the quotas were allocated in
accordance with the agreed ru les. It became apparent, however, that MOFTEC was
creating false fill rates by filling the quota fo r autos with auto parts (other than the
key auto parts allowed by China's accession agreement). By mid-year, MOFTEC had
also not yet fully allocated the auto quotas, although part of this delay was due to
MOFTEC's crackdown on the illegal secondary market for auto import licenses."
12
106. The report goes on to recount the efforts of the United States to obtain improvements in the
operations of China's quota system, based on deta iled commitments that China had made in its
Protocol of Accession regarding applicable rul es and procedures. The United States raised its
concerns bilaterally with China and during mee tings of the Committee on Market Access and the
Committee on Import Licensing, as did other WTO Members. The report concluded that "[w]hile it is
possible that some of the problems that arose dur ing 2002, such as the missed deadlines, may have
been attributable to first-time difficulties in implementing a new system, other problems seemed to
reflect protectionist policies, particularly, for example, MOFTEC's filling of the quota for autos with
auto parts." Id., pages 12-13.

12 2002 USTR Report to Congress on China's WTO Compliance, page 12.

107. One year later, on 11 December 2003, the United States reported little improvement in
China's import quota system for vehicles. The 2003 USTR Report to Congress on China's WTO
Compliance explained:
In 2003, the problems encountered with the auto quota system in 2002 continued, and
MOFTEC was again late in issuing quota a llocations, which resulted in uncertainty
and significant disruption of wholesale and retail operations for imported autos.
Given the persistence of these problems, it appears that China's poor implementation
of its auto quota commitments is not due simply to difficulties in implementing a new
quota system.
13
108. Following sustained pressure from the United States, at the end of 2003, China began to
loosen its restrictions on the importation of some motor vehicles. At that time, "China announced that
certain US auto companies would be authorized to import sizeable quantities of US-produced autos in
2004 without having to use Chinese enterprises holding quotas. This development effectively ends
the auto quota system for these companies as of the end of 2003, one year ahead of schedule."14
109. Thus, the import data that China proffers in response to question 14(b) does not reflect
China's notion of circumvention. It does not demo nstrate that auto manufacturers decided to change
their business practices to avoid the higher duty rat es on motor vehicles. Rather, the data reflects the
Chinese government's own concerted efforts to disc ourage imports of motor vehicles by manipulating
an already restrictive quota regime while promoting imports of CKDs and SKDs and parts through the
tariff practices described above under question 2.
15. ( China) Out of the total CKD and SKD kits imported since the entry into force of the
measures at issue, what proportion of such imports was made under the second paragraph of
Article 2 of Decree 125?

Response of China

110. Since the adoption of the challe nged measures, all imports of CKD and SKD kits have been
made under Article 2.2 of Decree 125.
16. ( China) Article 30 of Decree 125 states that rules under this measure "apply to the
situations in which vehicles manufactured und er 'trade-for-processing' programmes are sold
into the domestic market".

(a) Please clarify whether this sentence also applies to manufacturers "located in a bonded
zone, in an export processing zone, or in other special zones supervised by the customs";

Response of China

111. The provision cited by the question is not applicable to the situation of bonded zones.
Domestic sales of complete vehicle assembled under trade-for-processing programmes are dealt with
by Article 30.2 of Decree 125, while domestic sa les of complete vehicles assembled in bonded zones
and other special zones are dealt with by Article 30.3.

13 Id., page 23.
14 Id., page 24.

112. Like other inward processing regimes maintained by other WTO Members, the key feature of
the trade-for-processing programme is deferral of duties on imports of materials that are used to
produce products for export. Eligible processors import materials for processing into final products
that they will export from China. Eligible processo rs do not need to be located in a bonded zone or
another type of special zone supervised by the customs. Eligible processors are required to post bonds
rather than pay duties when they import materials fo r this purpose. Article 30.2 simply concerns the
circumstance in which parts imported under the trad e-for-processing programme are, in fact, used to
assemble motor vehicles that are sold into the domestic market.
(b) Please explain automobile manufacturers located (i) "in a bonded zone", (ii) "in an
export processing zone", and (iii) "in other special zones supervised by the customs";

Response of China

113. Auto manufacturers located in these special cust oms zones are part of the "processing trade."
Because these special customs zones are geographica lly isolated with fence requirements, they are
easier for customs authorities to supervise, and offe r certain benefits to importers. Unlike out-of-zone
processors, for example, in-zone processors are not required to post a cash deposit on imports of
materials for use in the production of goods for export.
(c) Please explain the difference between automo bile manufacturers referred to in Article 2
of Decree 125 and those operating under the "tra de-for-processing" program and located in a
"bonded zone", in an "export processing zone" or "other special zones supervised by the
customs under Article 30 of Decree 125; and

Response of China

114. According to Article 7.1 of Decree 125, au tomobile manufacturers operating under the
processing trade, including those located in speci al customs zones, are outside the scope of
Decree 125 unless they sell automobile products into the domestic Chinese market, a circumstance
dealt with by Article 30. This is natural because processors are not required to pay customs duties on
imported parts, as long as they process and export these imports in accordance with the conditions of
the programme.
(d) Please clarify the relationship between Article 49 of Order 8 and Article 30 of
Decree 125.

Response of China

115. There is no relationship between the two articles cited. Article 49 of Order No. 8 concerns
the application of investment policies to vehicle manufacturers in export-processing zones.
17. ( Complainants) China submits in footnote 14 in its first written submission that "the
complainants appear to have mistaken the rule s applicable to bonded areas as applicable to
bonded entries" and that "pursuant to Art. 12 of Decree 125 importers provide comprehensive
import bonds commensurate with their stated plans for importing and assembling auto parts
that have the essential character of a motor vehicle". Please comment on China's statement.

Response of the European Communities (WT/DS339)

116. The European Communities does not believe it has misunderstood the Chinese rules. It seems
that the suspending regime allegedly applied by China concerning bonded goods at issue is a hybrid
one, which confuses international customs practice regarding bonded areas with the "bond" imposed
on vehicle manufacturers in the amount of the relevant duty on automotive parts on importation.
China refers to the word "bonded" in relation to both situations (guarantee – transit procedure) and
this has a misleading effect. The "bond" (i.e. the guarantee or security deposit) is made on the basis of
the duty rate for parts (generally 10 %), i.e. on the basis of the characteristics of the goods as
presented to customs. The European Communities also refers to the more detailed answer given by
Canada.
Response of the United States (WT/DS340)

117. China – both in the above cited footnote 14 and in its answers at the fi rst substantive meeting
– has presented a clarification of its bonding requirements on imported auto parts. This clarification
further supports the position of the United States that the additional charges imposed by China's
measures are internal charges, not Customs duties.
118. In particular, China has clarified (1) that a ll automotive parts covered by China's measures
enter under a bond based on the 10% rate for auto part s, and (2) that the bond is simply a financial
guarantee, and does not involve any control by Ch inese Customs on the importers disposition of the
part. That is, if the importer sells the part as a spar e part, or if for any reason the part is not used in
the manufacture of a vehicle within one year, then the 10% parts rate applies. Only if
 the part is used
in the manufacture of a vehicle not meeting local content requirements will China proceed to impose
the 25 per cent "whole vehicle" rate on the part.
Response of Canada (WT/DS342)

119. China has not explained what it means by the concept of "bonded entries", which is not a
concept that exists in Canadian law. In contr ast, there is a recognized concept in international
customs practice of bonded areas (e.g., bonded warehouse) or export-processing zones (e.g., free trade
zone), which are areas of special customs supervisi on, control and administration. In using the term
"bonded entries", China appears to be referring to the bond imposed on vehicle manufacturers in the
amount of 10% of the value of parts that they import directly. This bond is simply akin to a "security
deposit" to ensure payment of the duty liability based on the state of the good as presented at the
border. China has not disagreed with what the comp lainants believe is the relevant fact related to
bonding – that parts imported into China are not ke pt physically segregated. Imported parts are not
kept in bonded areas or export-processing zones, they are not required to be kept separately in sealed
containers, and they are not otherwise restricted from entering the internal market.
18. ( China) Please explain in detail about " comprehensive duty bonds" that automobile
manufacturers importing auto parts charact erized as complete vehicles must pay under
Article 12 of Decree 125.

Response of China

120. The pertinent part of Article 66 of the Cu stoms Law of China provides that "in case the
consigner or the consignee applies for release of th e goods before the determination in respect of
classification and valuation is made or valid cust oms declaration form and accompanied documents
and/or certificates are provided, customs shall allow release [of the goods] where [the consigner or the

consignee] provides bonds, commensurate with th e legal obligation it shall assume pursuant to
relevant laws and regulations." Parties may provide comprehensive customs bonds, upon the
approval of customs, for customs matters of the same nature that will reoccur multiple times within a
given time period. Article 12 of Decree 125 is an application of these general customs bond rules in
the particular circumstance of auto parts that are imported for registered vehicle models. These
comprehensive duty bonds are required to ensure th at the auto manufacturer abides by all relevant
customs rules and can satisfy the customs liability.
121. The amount of the comprehensive customs bonds is based on the projected amount of duties
that the importer will pay each month. In pract ice, customs calculates the bonds based on the
applicable rates for auto parts, which minimizes the burden on auto manufacturers. Customs offices
are required to recalculate the bonds every three months and may require the auto manufacturer to
adjust the amount of the bond.
19. ( China) Please explain what procedural requirements "the administration of bonded
goods" under Article 16 of Decree 125 entail, including what the phrase " remain under customs
control" in paragraph 31 of your first submission means.

Response of China

122. The "administration of bonded goods" may vary fro m one type of customs matter to another.
The following is an outline of the procedure in a typical scenario, the importation of goods for use
under the trade-in-processing programme:
• An eligible processor registers itself with the relevant customs office;
• The eligible processor obtains from the re levant customs office a Processing Trade
Manual;
• Each transaction, by which raw materials ar e obtained from foreign sources, is recorded
in the Processing Trade Manual and other applicable customs records;
• The consumption of raw materials is recorded in the Processing Trade Manual and other
applicable customs records; and
• Once the finished products are exported, the processor applies for the appropriate
adjustment of the import entry in its Processing Trade Manual and other applicable
customs records.

123. Article 100 of the Customs Law of China defines "goods remaining under customs control" as
goods that are:
• covered by Article 23 of the Customs Law of China;
• in the status of pass-through, transit, or continuous transportation;
• under special duty exemption and reduction;
• under a temporary import/export arrangement;
• in bonded status; or
• not fulfilling all necessary customs requirements.

20. ( China) Article 27 of Decree 125 refers to "the rules for bonded goods".

(a) Please clarify whether the rules ref erred to in this provision are "Procedures on Customs
Control over Bonded Areas ", as provided by the complainants in Exhibit JE-31. If not, please
explain how the rules referred to in Articl e 27 of Decree 125 are different from the rules

provided in Procedures on Customs Co ntrol over Bonded Areas and provide a translated copy of
such rules for bonded goods; and
Response of China

124. Article 27 of Decree 125 does not refer to the Customs Control measures over Bonded Zones,
which is only one of many types of "rules for bonded goods." As is the case in the customs practices
of other WTO Members, China's "rules for bonded goods" vary from one customs procedure to
another, depending on the nature of the procedure and the degree of customs control that is required.
125. The bonding requirements under the measures at issue include the following elements:
• the registration of vehicle models for whic h the imported auto parts have the essential
character of a motor vehicle;
• a requirement that the auto manufacturer keep accurate records of the parts and
components that it imports in bond, and account for their assembly into registered
vehicle models;
• the establishment of the Q-account, which connect s the auto manufacturer to the relevant
customs office via the Internet;
• recording each entry of bonded auto parts fo r the registered vehicle models in the Q-
account; and
• making adjustments to the Q-account as parts and components that entered in bond are
assembled into registered vehicle models and the applicable duties are paid.

(b) Could China explain how "the rules for bonded goods" are applied to the auto parts
imported by auto part suppliers and then subsequently sold to automobile manufacturers? In
China's view, are these imported auto parts not in free circulation.

Response of China

126. The rules for bonded goods do not apply to auto parts imported by a third party and
subsequently sold to the auto manufacturer. As described in response to question 83, these goods are
in free circulation in China.
21. ( China) Please explain the respective roles playe d by various Chinese authorities, such
as the General Administration of Customs, the NDRC, the Ministry of Commerce, and the
Ministry of Finance, with respect to the administra tion of the rules relating to the imposition of
the charge and the procedural requirements under the measures at issue.

Response of China

127. The role of the GENERAL ADMINISTRATION OF CUSTOMS relating to the measures at
issue includes:
• being a member of the Leading Panel (Article 6.2 of Decree 125);
• receiving auto manufacturers' self-evalua tion conclusion and registration request
(Articles 7.1 and 19.2 of Decree 125);
• receiving auto manufacturers' review application (Articles 7.2 and 19.2 of Decree 125);
• entrusting the State Verification Centre for Complete Vehicle Character ("Verification
Centre") to conduct reviews (Article 7.2 of Decree 125);
•
issuing review opinions (Article 7.3 of Decree 125);

• receiving auto manufacturers' registration materials and forwarding them to relevant
authorities (Articles 10, 19.2, 30.2, and 30.3 of Decree 125);
• receiving auto manufacturers' verification requests and entrusting the Verification Centre
to conduct verifications (Articles 17, 19.1, 19.2, and 20.2 of Decree 125);
• formulating detailed verification rules (Article 17 of Decree 125);
• designating the Verification Centre to conduc t verification when the auto manufacturer
does not apply for registration or verification (Article 26 of Decree 125);
• administering imported auto parts for regist ered vehicle models in accordance with the
rules for bonded goods (Article 27 of Decree 125); and
• making classification determinations a nd assessing applicable customs duties in
accordance with China's customs laws (Articles 28, 31 of Decree 125)

128. The role of the NATIONAL DEVELOPMENT AND REFORM COMMISSION relating to
the measures at issue includes:
• being a member of the Leading Panel (Article 6.2 of Decree 125);
• marking "Complete Vehicle Character" on the Public Bulletin for On-Road Vehicle
Manufacturers and Their Products (Article 7.4 of Decree 125); and
• suspending the relevant vehicle model listing in the Public Bulletin in the event that an
auto manufacturer violates relevant rules (Article 37 of Decree 125).

129. The role of the MINISTRY OF COMMERCE relating to the measures at issue includes:
• being a member of the Leading Panel (Article 6.2 of Decree 125); and
• marking "complete vehicle character" on the Automatic Import License (Article 7.4 of
Decree 125).

130. The role of the MINISTRY OF FINANCE relati ng to the measures at issue includes being a
member of the Leading Panel (Article 6.2 of Decree 125).
22. ( China) Article 10 of Decree 125 states, inter alia , "Having received the relevant
documents, the NDRC, the Ministry of Comme rce, and the district customs office ... shall
administer the registration in accordance with their respective responsibilities." Article 11 of
Decree 125 then sets out the responsi bilities for the district customs office. In light of the terms
of Article 11, what are the respective respon sibilities of the NDRC and the Ministry of
Commerce in this regard as referred to in Article 10?

Response of China

131. These responsibilities are detailed in response to question 21.
23. ( China) Please elaborate, by referring to Articles 2, 3 and 4 of Announcement 4, on the
respective functions of the "Leading Panel Office" and the "Verification Center" in respect of
the verification of imported auto parts characterized as complete vehicles.

Response of China

132. The Leading Panel Office is an executive o ffice of the Leading Panel. The office is
responsible for daily work in the administration of Decree 125, such as coordination of the
verification efforts.

133. The function of the Verification Centre in relation to the measures at issue includes:
• being entrusted by the customs office to conduc t simple or on-site reviews (Article 7.2 of
Decree 125 and Article 4 of Announcement No.4);
• being entrusted by the customs office to conduct verifications on registered vehicle
models and to issue the Verification Report (A rticles 17, 18, 19.l, 19.2, 20.1, 20.2, 30.2
and 30.3 of Decree 125 and Article 4 of Announcement No.4); and
• being instructed by the customs office to conduct verifications in case an auto
manufacturer does not apply for registration or verification (Article 26 of Decree 125 and
Article 4(3) of Announcement No.4).

134. The Verification Centre is to be an indepe ndent professional firm, which is now organized
under the auspices of the China Automotive Technology & Research Centre.
24. ( China) In respect of Article 29 of Decree 125, as provided by China in Exhibit CHI-3:

(a) Please elaborate on the companies that can be considered as "the affiliated companies of
the automobile manufacturer" within the meaning of Article 29;

Response of China

135. This is a translation error. The provision should read as follows:
Article 29 If the customs characterizes the imported automobile parts as
complete vehicles for the purpose of classification and duty collection, the
importation duty and the importation VAT, which have been paid by suppliers of
these imported parts upon importation, sha ll be deducted, provided that the
automobile manufacturer provides relevant proof of duty payment.
(b) If this term applies only to the companies that have a certain relationship with
automobile manufacturers, then how is the impo rtation of auto parts by supplier companies
with no affiliation with automobile manufacturers treated under the measures?; and

Response of China

136. There is no difference.
(c) Article 29 also refers to "in accordance wi th relevant regulations." Please clarify the
"relevant regulations" indicated in Article 29 and provide a translated copy of the relevant
regulations.

Response of China

137. No specific regulation is referred to by this phr ase. It directs the auto manufacturer to the
normal customs declaration procedures.
25. ( China) While Article 18 of Announcement 4 refers to a "change of tariff classification"
as the basic criterion for "substantial processi ng", the complainants submit that the two
additional criteria specified therein involve aggregate value-based considerations (i.e. " ad
valorem percentage" and "manufacturing and processing procedures"). Please clarify whether

this is a correct understanding of Article 18 a nd explain how substantial processing is applied
within the meaning of Article 19 of Announcement 4.

Response of China

138. Article 18 of Announcement No. 4 sets forth thr ee criteria for "substantial processing," which
are valid criteria for "substantial transformation" widely adopted as part of many countries' rules of
origin, including China's Regulation on Rules of Origin for Import or Export Goods.
139. The primary criterion is a "change of tariff head ing". The other two criteria apply only if a
"change of tariff heading" does not, on its own, result in a finding of substantial transformation. The
first supplementary criterion is the ad valorem valu e added by the processing. This criterion is used
by many customs authorities in making substantial transformation determinations, and is explicitly
recognized by Article 2(a)(ii) of the Agreemen t on Rules of Origin. The second supplementary
criterion involves an examination of the nature of the process and whether it vests the essential
character to the processed goods. Again, this is a factor that many customs authorities consider in
making substantial transformation determinations.
26. ( China) In respect of Article 22(2) of Decree 125, it is understood that the new class A/B
distinction will enter into force as of 1 July 2008. If so, please explain why this should not be
considered as an indication of arbitrariness of China's measures for determining when
imported auto parts should be considered as a complete vehicle.

Response of China

140. China has deferred the implementation of Article 22(2) primarily because of the
administrative complexity of implementing this particular provision. There is nothing arbitrary about
the A/B distinction, or its deferral. The parts designated under Class A reflect China's consideration
of which parts, by themselves, impart the essential ch aracter of the particular assembly at issue. The
parts designated under Class B reflect China's considera tion of the other parts of that assembly which,
in the aggregate, also impart th e essential character of the assem bly at issue. Until the class A/B
distinction takes effect, China is classifying assemblies on the basis of the aggregate threshold number
of parts for that assembly. With or without th e class A/B distinction, China considers that the
designated parts at the designated thresholds impart the essential character of that assembly.
27. ( China) If China was concerned with tariff circu mvention on automobile parts at the
time of its accession to the WTO, why didn't Chin a indicate specific terms and conditions to this
effect in its Schedule?

Response of China

141. As explained in response to question 54, China was not required to inscribe specific terms and
conditions in its Schedule of C oncessions to preserve its ability to interpret its Schedule of
Concessions in accordance with the rules of the Harmonized System, as interpreted by the WCO. The
Harmonized System, which includes the General In terpretative Rules, is the basis upon which WTO
Members negotiate and schedule their tariff commitm ents; it is not a "term or condition" that
Members must include in their Schedules of Concessions in order to preserve. When Members
negotiate Schedules of Concessions on the basis of the Harmonized System, it must be presumed that
they are aware of the rules of classification that apply to the Harmonized System.
142. For the reasons set forth in response to question 133, China considers that it is more relevant
to pose this question in the reverse: If the compla inants thought that China should not be allowed to
apply GIR 2(a) to its tariff provisions for "motor vehicles," and that China should not be allowed to
avail itself of the longstanding interpretation of GIR 2(a) that the WCO reaffirmed in 1995, then why
didn't they negotiate a specific commitment to this e ffect? Moreover, if the complainants thought that
China should not be allowed to resolve the relations hip between complete articles and parts of articles
in the same manner as the complainants had done in respect of duties that were of concern to them,
then why didn't they obtain such a commitment? These were, after all, the relevant circumstances that
prevailed at the time of China's accession to the WT O. In light of these circumstances, the burden
rested on the complainants to obtain a commitment that China would not adhere to these rules and
practices.
28. ( China) Please clarify the order in which the application to the NDRC to be listed on
Public Bulletin and the application to the Mini stry of Commerce for an automatic importation
licence take place under the measures at issue.

Response of China

143. Being listed in the Public Bulletin is requi red for auto manufacturers to produce and sell
motor vehicles in China. If an auto manufacturer is planning to produce and sell a particular vehicle
model, the manufacturer shall apply to the NDRC to be listed in the Public Bulletin. As explained in
response to question 4, one of the regulatory character istics that is listed in the Public Bulletin with
respect to a specific vehicle is its customs status under Decree 125.
144. With regard to automatic import licences fo r motor vehicle products, the purpose of
establishing the automatic import licence system is to monitor the importation of motor vehicle
products. If an auto manufacturer is planning to im port auto parts which are subject to an automatic
import licence requirement, it must apply to MOFCOM for this purpose. This process is unrelated to
the listing in the Public Bulletin.
29. ( China) Please explain why registration with Customs is unnecessary under Article 7 of
Decree 125 for imported auto parts that are de termined not to be considered as complete
vehicles after self-evaluation and review by the Verification Center.

Response of China

145. The purpose of registration is to keep track of how auto manufacturers import and assemble
auto parts that, in their entirety, have the essential character of a motor vehicle. This determination is
made on a model-by-model basis. The registration of a vehicle model confirms that imports of auto

parts for that vehicle model will be subject to the duty provisions for motor vehicles, and subject to
the customs procedures that Decree 125 establishes to collect these duties.
146. According to Decree 125, if the auto manufact urer conducts a self-evaluation and determines
that the imported auto parts should not be characteri zed as a complete vehicle, and this is confirmed
by the Verification Center, registration of that vehicle model is unnecessary because imports of parts
for that vehicle model will not be subject to the customs procedures that Decree 125 establishes.
30. ( China) Please explain in detail, citing specific provisions and providing a translated
version thereof, if necessary, the customs violat ions and criminal liabilities referred to in the
first and second sentences of Article 36 of Decree 125.

Response of China

147. There are three types of acts encompassed by the laws referred to in Article 36 of
Decree 125: (1) criminal smuggling violations; (2) non-criminal smuggling violations; and (3) other
customs violations. Article 153 of the Criminal Law of the People's Republic of China defines
smuggling as a criminal offence by reference to the amount of the import taxes that are evaded. The
amount of any criminal penalties and the durati on of any imprisonment depend upon the amount of
the import taxes that are evaded. Article 82 of the Customs Law and Articles 7 and 9 of the
Regulation of the People's Republic of China on the Implementation of Customs Administrative
Punishment define non-criminal smuggling as acts of smuggling that do not rise to the thresholds of a
criminal offence. Penalties for these violations include confiscation of the smuggled goods, the
imposition of fines, and the destruction or confisca tion of equipment used in the act of smuggling.
Finally, Articles 12, 14, 15, 18, and 23 of the Regulation of the People's Republic of China on the
Implementation of Customs Administrative Punishment define other types of non-smuggling customs
violations, such as the submission of untruthful declarations (Article 15) or actions that violate
customs control of goods (Article 18). The financial penalties for these violations vary.
148. CHI-34 contains translations of the relevant portions of these laws and regulations.
31. ( China) An auto part manufacturer
 located in China imports "100 vehicle bodies" and
"100 engines" in a single shipment with the purpose of assembling these assemblies in China
and subsequently selling the 100 assembled assemblies to a vehicle manufacturer located in
China who subsequently uses:

(a) 50 assemblies to assemble whole vehicles for sale in China;
(b) 30 assemblies to assemble whole vehicl es to be exported from China; and
(c) 20 assemblies as replacement parts of vehicles for sale in China.
(d) Please explain, citing the applicable provisions, how these "100 vehicle bodies" and "100
engines" would be respectively treated under the measures at the border and after they
will have been used by the automobile manufacturer as indicated above.

Response of China

149. Vehicle bodies and engines are, in most cases, uniqu e to specific vehicle models. It is highly
unlikely that an auto part manufacturer would import both the bodies and engines of a specific vehicle
model, and then sell those assemblies in an arm's-leng th transaction to an auto manufacturer in China.
These assemblies are generally not interchangeable with other vehicles, and certainly are not
interchangeable with vehicle models produced by different automobile manufacturers. Bodies,
engines, and other assemblies are made to the specifications of each automobile manufacturer,

ordinarily for a specific vehicle model (or a number of closely related vehicle models). Thus, if an
auto part manufacturer were to import these assemblies, it would have to be by prior arrangement with
the automobile manufacturer.
150. This highlights the problem of customs administ ration that China has in respect of enforcing
Decree 125. Because of the close commercial rela tionships between auto part manufacturers and
automobile manufacturers, and the heavy commercial dependence of th e former upon the latter, it is
possible for auto manufacturers to arrange with their au to parts suppliers to be the importers of record
for the auto parts and components that they use to assemble specific vehicle models. This is the
loophole that Article 29 of Decree 125 seeks to close by applying the motor vehicle duty rates to
imported auto parts and components that have the essential character of a motor vehicle, without
regard to whether the auto manufacturer or a third-party supplier was the importer of record.
151. Under the particular facts of this question, howe ver, China considers that the body and engine
of a vehicle model have the essential character of a motor vehicle. This is evidenced in Article 21 of
Decree 125. Thus, China would classify the imports described in this question as a motor vehicle
without regard to who the importer was (i.e., a part s manufacturer, an auto manufacturer, or any other
importer).
32. ( Complainants) In paragraphs 62-67 of its first written submission, China cites
examples of customs practices from certain WTO Members, including from the complainants,
to demonstrate the existence of the "widespread" and "consistent practice of WTO Members in
imposing customs duties after the 'time and poin t of importation'". Please comment on the
accuracy of these examples and their relevance to the characterization of the measures.

Response of the European Communities (WT/DS339)

152. China misinterprets the customs legislation it cites by trying to mix up ordinary tariff
classification with the customs procedures related to the post clearance recovery of the customs debt.
When goods are imported into the EC in order to be released for free circulation, a customs
declaration is lodged with the customs administration. It contains the precise physical description of
the goods that is sometimes also supported by pi ctures or laboratory analysis. The importer will
propose a tariff code (CN code in the EC) where to classify such goods. The customs administration
will then "take a snapshot" of the customs declaration related to the goods at issue
 and classify them
according to the HS rules in force at the time of importation. These are transposed into the EC's
Combined Nomenclature (or, we understand, the US' HTSUS). Only rarely are goods physically
inspected at the border. If it turns out that the ta riff classification at the time of importation has been
done by relying upon incorrect documentation subm itted by the importer (for instance misleading
laboratory analysis, different characteristics of the goods imported that do not correspond to those
indicated in the import declaration), the customs administration is allowed to check the goods and
re-classify them accordingly because the goods that have been imported are different from those
declared in the customs import declaration lodged by the importer at the time of importation. As it is
apparent from the above, China's examples are ba sed on the rules in force concerning the post
clearance recovery of the customs debt that have nothing to do with the ordinary tariff classification
done at the border at the time of importation. In other words, the imposition and collection of
customs duties is always made on the basis of the status of goods at the time of importation or in other
words as presented at the border.
153. The EC understands that the same applies for the customs systems of the US and Canada.
Even if there was, in the legal system of an individual WTO member, a practice of classifying goods

based on events after importation, such practice wo uld not be "widespread a nd consistent" and would
certainly not fulfil the test of Article 31(3)(b) of the Vienna Convention.
Response of the United States (WT/DS340)

154. Paragraph 62 refers to "the consistent practice of WTO Members in imposing customs duties
after "the time or point of importation" in order to demonstrate that, as stated in paragraph 63,
Article II of the GATT "is not limited to charges that ar e collected 'on or at the point of importation.'"
Contrary to China's characterization of US practic e in paragraph 63, the imposition of customs duties
occurs at the time of importation of goods that ar e entered into the United States. Specifically,
19 C.F.R. § 141.1(a) provides that duties and liability for their payment accrue upon imported
merchandise on arrival of the importing vessel or other means of transport within the United States.
Additional duty liability does not accrue based upon th e usage of the goods after entering the United
States.
155. The classification of the goods is based on th e condition of the goods when imported and
entered for consumption in the United States. The classification and corresponding amount of duties
owed must be identified and deposited at the time of importation, when the importer files an Entry
Summary. This is the point at which customs du ties are imposed. China implies that the United
States "imposes" customs duties beyond the point of importation into the United States by alleging
"customs authorities are not required to make a final classification determination and assessment of
duty liability until one year after the merchandise has entered the customs territory of the United
States." 19 C.F.R. § 159.11.
156. The United States mandates a one-year time frame for liquidation, to which China refers in
paragraph 62, for the purpose of providing an adequate amount of time to verify the accuracy of the
information provided by the importer concerning the nature of the imported goods, including the
correctness of their classification based upon their condition at the time of importation. Liquidation
means the final computation of the duties that accrued on an entry of imported merchandise,
19 C.F.R. § 159.1, which are based solely on the condition of the merchandise at the time of
importation, 19 C.F.R. § 141.1(a). The one-year tim e frame for liquidation is necessary due to the
sheer volume of goods arriving at the ports, for which the United States is not in a position to
instantaneously review entry documents and determine their accuracy at the time of importation.
157. China also notes in paragraph 64 that the Unite d States only requires the deposit of estimated
duties at the time of importation, pending the finalization of those duties within one year from the date
that the goods are entered for consumption into the United States. This practice does not undermine
the legal requirement that the imposition of customs duties occurs at the time of importation.
Estimated duties are deposited in lieu of the fi nal imposition of duties, per 19 C.F.R. § 141.101,
because (as explained above) the United States is una ble to verify the accuracy of the classification
and amount of duties alleged by the importer based on the condition of the goods at the time of their
importation. The one-year time frame within which the United States will verify the accuracy of the
amount of the estimated duties is not a time frame within which the United States may impose
additional customs duties, unless such duties are base d upon the condition of the goods at the time of
their importation.
158. Paragraph 65 alleges that "man y countries specify more specialized circumstances in which
duties can be assessed after the time or point of impor tation." The first example cited by China is the
allegation that Canada "retains the authority to reconsider the origin, classification, and value of
imported goods for a period of up to four years af ter liquidation." The other examples also involve
like provisions under the laws of the EC, New Zeala nd, Australia, and India, all of which permit a

final determination of duty liability after the goods ha ve been imported. Retaining the right to verify
the accuracy of origin, classification, valuation, and other facts that may affect the dutiability of goods
is fundamentally different from China's measure, wh ich changes the level of a charge based on the
local content thresholds of an internal manufact uring operation. In contrast, the imposition of
customs duties must be based upon the condition of the goods at the time of importation. If an
importer misrepresents that condition (by misstating the origin, classification, value, etc. of the
goods), then proper enforcement of the trade laws requires the imposition of the additional duties that
were properly owed based on the condition of the merchandise at the time of importation.
159. In paragraph 67, China identifies an allege d nexus between "widesp read and consistent
practices of WTO Members" (as described in the preceding paragraphs) that impose "charges after
'the time or point of importation'" when "the charge bears an objective relationship to the
administration and enforcement of a valid custom s liability." These "widespread" and "consistent"
practices of WTO Members, as described by Chin a in paragraphs 62-67, are relevant to China's
position concerning the permissibility of its classifica tion of auto parts only to the extent there is a
valid customs liability. In regard to the classifica tion of goods, this determin ation is a valid customs
liability when it is based on the condition of the goods at the time of importation. The examples cited
by China merely demonstrate that other WTO Member s enforce this particular valid customs liability
by verifying that the classification of the goods is correctly based upon their condition at the time of
importation.
Response of Canada (WT/DS342)

160. Canada disagrees. It is common and consistent customs practice to classify a good based on
an objective assessment of the essential character istics of the good as presented at the border.
Although the duty may be calculated and paid later, liability for customs duties is based on this
assessment.
161. With specific reference to Canadian law cited by China, Canada's Customs Act establishes
how a good is assessed at the point of importation.
15 In particular, Sections 32 and 33 describe the
conditions under which goods may be released from customs control before duty payment has been
made. However, the calculation of the duty remains based upon the essential character of the goods on
presentation prior to release from customs. Sections 57 to 66 of the Customs Act elaborate on the
process for making determinations, re-determinati ons or further re-determinations of tariff
classification, which may occur after the good has been imported, but remain based on the condition
of the goods at the time of importation.
162. In terms of the practice of other customs authorities cited by China, 16 China has attempted to
relate its measures to the customs regimes of a number of WTO Members by drawing selectively, and
out of context, from those regimes. In fact, all of the cited customs authorities follow the practice of
examining goods based upon their status at presentation at the border:
• Australia's legislation assesses duty based upon the status of goods as they arrive at the
border. Section 162A of Australia's Customs Act 1901 deals with the special case of
items temporarily brought into Australia and then removed, 17 such as commercial

15 Customs Act, R.S.C. 1985 (2nd Supp.), c. 1 (Customs Act), excerpted sections (Exhibit CDA-1).
16 China's first written submission, at paras. 62-67.
17 Ibid., at fn. 43 (Exhibit CHI-12).

samples, shipping containe rs, and scientific equipment.
18 Section 165 simply allows
Australian customs to seek payment after im portation where there was an underpayment
or erroneous refund of duties.19

• New Zealand's case law establishes clearly that " goods are to be identified in their
condition at time of their importation" and th at "identification must be objective, having
regard to the characteristics which th e goods present on informed inspection". 20 The
provisions cited by China merely relate to common practices of customs authorities in
relation to that snapshot: allowing payment to occur after importation (Section 86 of New
Zealand's Customs and Excise Act of 1996 ) and allowing corrections for inaccurate
assessments (Section 89 of the Act).21

• India's customs law also assesses duty based u pon the snapshot at the border. The
provision in India's Provisional Duty Assessm ent Regulations cited by China regarding
provisional duty assessment 22 refers to the ability of customs to provisionally determine
duty in instances where further examina tion of the snapshot is needed ( e.g., scientific
testing, professional examination, current market pricing research).23

• European Communities' law can best be addressed by Canada's co-complainant
directly, but Canada notes that the provisions cited by China simply reflect the same
general practices discussed above, namely pro cedures relating to examining the snapshot
of a good taken at the border.
24

33. ( Complainants) In your view, should imported CKD or SKD kits be classified
differently than the auto parts included in such ki ts if such auto parts were to be imported
separately?

Response of the European Communities (WT/DS339)

163. To the extent that a CKD or SKD kit would be s ubject to a separate tariff line or be classified
in casu as the complete vehicle because all the parts of a complete vehicle are presented to customs at
the same time, there could be a difference between the classification of separately imported parts and
a CKD or SKD kit. However, depending on the particular case it can also be that both the kits and the
parts imported separately would be classified as parts. It is therefore not possible to treat such kits in a
generalised manner as imports of complete vehicles as is the case with the contested measures.

18 See on this topic Australian Customs Service, Temporary Importations; online at:
http://www.customs.gov.au/site/page.cfm?u=4355 (Exhibit CDA-2).
19 Cited by China in its first written submission, at fn. 44 (Exhibit CHI-12).
20 Campervan correctly classified [2005] NZCAA 2 (1 February 2005), at para. 15 (Exhibit CDA-3).
21 China's first written submission, at fns. 41 and 42 (Exhibit CHI-11).
22 Ibid., at fn. 45 (Exhibit CHI-13).
23 See Batra v. Commissioner of Customs (Indian Customs, Excise and Service Tax Appellate
Tribunal, Appeal No. C/615/03, decision dated March 20, 2006) for a discussion of the procedure for
investigating the proper price of the good on presentation at the border following a preliminary assessement – in
that case the reassessment was set aside based on a lack of evidence (Exhibit CDA-4).
24 China's first written submission, at fns. 38, 39 and 40 (Exhibit CHI-10).

Response of the United States (WT/DS340)

164. Yes, the classification should be different. Under the Harmonized System, a good should be
classified in its condition as imported. Assuming that an imported CKD or SKD kits is a complete
vehicle unassembled, it would be classified differently than the auto parts included in such kits if such
auto parts were to be imported separately.
Response of Canada (WT/DS342)

165. Canada notes as a preliminary matter that the Harmonized System does not use the terms
CKD or SKD, nor are they in common use in custom s practice. In the auto industry, the terms CKD
and SKD are used without a fixed definition. The terms refer to a large collection of parts imported
together for the purpose of assembling a vehicle in the internal market. While CKDs usually are
completely unassembled, SKDs contain parts that are partially assembled.
166. For tariff classification, what is relevant is the application of Rule 2(a), which requires a
determination of whether imported parts have the essential character of a whole product.
167. The terms CKD or SKD become relevant in th is dispute only because they are used both in
the Working Party Report on China's accession, and in the measures. In this context, certain
collections of parts may only properly be described as CKDs or SKDs where all or nearly all of the
parts necessary to construct a whole vehicle are presented to customs together in one shipment.
Chinese customs officials have the discretion either to classify CKDs or SKDs as parts, or to classify
them at the six-digit level as a whole vehicle (in wh ich case there should be a further classification at
the seven- or eight-digit level to show that it is a whole vehicle in unassembled form, and therefore
subject to a 10% duty).
168. Separate shipments of parts must be classified separately, based upon the parts in a given
shipment. Canada does not accept China's implicit cl aim that separate shipments of parts may be
related, nor that separate shipments of parts can be considered to have the essential character of a
whole vehicle. In practice, parts shipments include a variety of parts for a variety of vehicles, from
multiple suppliers and possibly to multiple destinations in the internal market.
34. ( China) In light of the example given in paragraph 97 and your statement in
paragraph 98 of your first written submission, is China of the view that CKD or SKD kits under
Article 21(1) of Decree 125 are of the same value or quantity as the combinations of auto parts
set out in Article 21(2) and (3). Please explain in detail.

Response of China

169. Not necessarily. The example provided in paragraph 97 of China's first written submission
was meant to illustrate the basic principle underl ying Decree 125 by using a relatively "easy" case – a
motor vehicle that the auto ma nufacturer assembles entirely from imported parts and components.
The point of this example is that the tariff classification of imported auto parts and components should
not change based solely on the manner in which the auto manufacturer structures its imports.
170. The same principle applies, however, to im ported parts and components that have the
essential character of a motor vehicle within the mean ing of GIR 2(a), even if the imported parts and
components represent less than 100 per cent of the parts and components necessary to assemble the
complete vehicle. Whether the auto manufact urer imports these parts and components in one
shipment or in multiple shipments, the tariff cla ssification should be the same. The purpose of the

combinations of auto parts set out in Article 21(2) and 21(3) is to define th e thresholds of imported
parts and components that China considers to have the essential character of a motor vehicle. These
combinations of auto parts may or may not be equiva lent in quantity or value to the quantity or value
of auto parts that constitute a CKD or SKD kit. Th e relevant inquiry under GIR 2(a) is whether they
have the essential character of a motor vehicle.
35. ( China) In respect of the criteria of Article 21(2) of Decree 125, the European
Communities argues that "China applies the full ve hicle duty to all imported parts if the vehicle
contains certain imported assemblies that constitu te only 17-29% of the value of the complete
vehicle" (paragraph 67 of the European Communities' oral statement).

(a) Please comment on the specific values iden tified by the European Communities with
respect to the imported assemblies under Article 21(2) of Decree 125; and

(b) Please clarify the value for each combinatio n of imported auto parts under Article 21(1)
and (2) of Decree 125.

Response of China

171. China has addressed this particular contention of the EC in response to questions 64 and 147.
In sum, the EC is challenging where China has drawn the line for purposes of the essential character
test. This is a separate question from the validity of the challenged measures per se.
36. ( China) Please provide a copy of the customs form that importers in China are required
to fill out. If there are any additional forms to be filled out specifically by auto parts importers
in China, please indicate them and provide copies of such forms.

Response of China

172. CHI-35 contains a copy of this customs form.
37. ( All parties) Please explain the relationship between the obligations respectively under
Article II and Article III of the GATT 1994 in light of the Appellate Body's statement in Japan -
Alcoholic Beverages II that "the broad purpose of Article III of avoiding protectionism must be
remembered when considering the relationship between Article III and other provisions of the
WTO Agreement." Further, how do you relate this statement to the instant case?

Response of China

173. The Appellate Body's statement in Japan – Alcoholic Beverages II highlights the importance
of the threshold issue in this dispute. The Appe llate Body stated that "the broad and fundamental
purpose of Article III is to avoid protectionism in the application of internal tax and regulatory
measures."
25 Quoting the GATT panel report in Italy – Agricultural Machinery , the Appellate Body
observed that "the intention of the drafters of the Agreement was clearly to treat the imported products
in the same way as the like domestic products once they had been cleared through customs."26

25 Appellate Body Report, Japan – Alcoholic Beverages II at p. 16 (emphasis added).
26 Appellate Body Report, Japan – Alcoholic Beverages II at p. 16, quoting Italian Discrimination
Against Imported Agricultural Machinery, BISD 7S/60, para. 11 (emphasis added).

174. These statements follow from the plain language of Article III, which, by its terms, applies to
"imported" products.
27 This limitation on the scope of Artic le III is critical to understanding its
relationship to Article II. Article II countenances a particular type of discrimination against imported
products – the application of ordinary customs du ties to which domestic products are not subject.
Members may apply such duties to products from other Members "on their importation" into the
customs territory, and in accordance with the li mits bound in their Schedules of Concessions. Once
the products are "imported," however, they beco me subject to the basic principles of non-
discrimination set forth in Article III.
175. Whether one examines the matter from the standpoint of Article II ("on their importation"), or
from the standpoint of Article III ("imported"), it is evident that the delineation between Article II and
Article III requires some understanding of what it means for products to have completed the process
of importation. It is the completion of this pro cess that marks the turning point between permissible
discrimination under Article II and impermissible discrimination under Article III. The Appellate
Body in Japan – Alcoholic Beverages II acknowledged this distinction, and highlighted a possible
answer to the interpretive issue, by refe rring to the statement of the GATT panel in Italy –
Agricultural Machinery that Article III applies to "imported products … once they ha[ve] been
cleared through customs."
176. In China's consideration, imports have been "cleared through customs" once all customs
formalities are complete and the goods are in free circulation within the customs territory. In
particular, China considers that imports have been "cleared through customs" once the national
customs authorities have completed the administrativ e processes that are n ecessary for the imposition
and assessment of the specific border charges that the Member is allowed to impose in respect of the
imports at issue, and the imports are no longer subject to customs control. A Member may not impose
any charge in connection with the customs clearance process and thereby evade the non-
discrimination disciplines of Article III. Rather, it must be a charge of a type that the Member is
allowed to impose under its Schedule of Concessions or in accordance with other WTO provisions.
177. This brings China to the tariff classification issue at the heart of the present dispute. As China
has explained, the challenged measures interpret the tariff provisions for "motor vehicles" in China's
Schedule of Concessions to include the importation and assembly of auto parts and components that
have the essential character of a motor vehicle, w ithout regard to whether the parts and components
enter China in one shipment or in multiple shipme nts. The critical issue in relation to China's
obligations under Article II and its Schedule of Concessions is whether China is allowed to interpret
the term "motor vehicles" in this way, and to est ablish a customs process to give effect to this
interpretation. As China has explained, the appli cation of General Interpretive Rule 2(a) to multiple
shipments of auto parts and components is cons istent with the decision of the World Customs
Organization, and is consistent with the practi ce of other WTO Members in like circumstances.
China's interpretation of the term "motor vehicles," a nd its adoption of measures to give effect to this
interpretation, are therefore consistent with its WTO obligations.
178. A basic feature of the customs process that Ch ina has adopted to give effect to this
interpretation of the term "motor vehicles" is to defer the completion of customs formalities in respect
of parts that are declared as parts of register ed vehicle models until the auto manufacturer has
imported and assembled all of the imported parts a nd components that it will use to assemble that
vehicle model. Until this process is complete, the imported parts and components are subject to a
customs bond and remain under customs control in acco rdance with the customs laws of China.

27 See, e.g., Art. III:2 ("imported into the territory of any other contracting party"); Art. III:4 ("imported
into the territory of any other contracting party").

When the Customs General Administration of Ch ina assesses customs duties on these imported parts
and components in accordance with the declaration that the manufacturer made at the time of
importation, these parts and components are not yet "imported." The parts and components are not in
free circulation, and the Customs General Admini stration has not yet completed the administrative
process for the clearance of these parts and components into the customs territory of China.
179. What these considerations demonstrate is that it is not "protectionism" for a Member to
interpret and enforce its Schedule of Concessions in accordance with the rules of the Harmonized
System, and to establish customs processes for this purpose. The concerns of Article II and the
concerns of Article III are of equal dignity and importance within the GATT system. Just as Article II
does not allow Members to take actions that wo uld be inconsistent with its obligations under
Article III, Article III does not prohibit Members from ta king actions that are consistent with its rights
under Article II.
Response of the European Communities (WT/DS339)

180. The statement of the Appellate Body in Japan – Alcoholic Beverages II demonstrates that the
purpose of Article III is broader than guaranteei ng that internal measures of WTO members do not
undermine their commitments under Article II. This demonstrates that the measures and in particular
the cumbersome procedural requirements that go ma nifestly beyond any general customs procedures
would violate the national treatment obligation under Article III even if China had no bound tariffs on
the products at issue. This statement would al so seem to lend support to a position that the same
measures could breach both Article II and Artic le III of the GATT 1994 depending on the emphasis
and angle of the analysis. The European Communities would also like to refer to EC – Export
Subsidies on Sugar where the Appellate Body considered that Article II:1(b) does not permit members
to qualify their obligations under other provisions of the GATT (paragraphs 217 to 219).
Response of the United States (WT/DS340)

181. As explained in Japan-Alcohol, Article III "obliges Members of the WTO to provide equality
of competitive conditions for imported produc ts in relation to domestic products."
28 Article II has a
different purpose and imposes different obligations – under Article II, Members bind their tariff rates
on specific goods, and are obliged to charge no higher Customs duties than the level set out in their
respective schedules. Since Article II is an additional obligation, nothi ng in Article II is intended to,
or indeed could, undermine the national treatment obligations set out in Article III.
182. The following paragraph from Japan – Alcoholic Beverages II is directly relevant to the
disposition of this dispute.
The broad purpose of Article III of avoidi ng protectionism must be remembered
when considering the relationship between Article III and other provisions of the
WTO Agreement. Although the protection of negotiated tariff concessions is
certainly one purpose of Article III, the st atement in Paragraph 6.13 of the Panel
Report that "one of the main purposes of Article III is to guarantee that WTO
Members will not undermine through inte rnal measures their commitments under
Article II" should not be overemphasized. Th e sheltering scope of Article III is not
limited to products that are the subject of tariff concessions under Article II. The
Article III national treatment obligation is a general prohibition on the use of internal
taxes and other internal regulatory measures so as to afford protection to domestic

28 Japan – Alcoholic Beverages II, at 17.

production. This obligation clearly ex tends also to products not bound under
Article II. This is confirmed by the negotiating history of Article III.29
183. In particular, the reasoning in this paragraph highlights that China's measures – which favor
the use of domestic parts over imported parts by im posing higher charges on other imported parts, as
well as through the imposition of extra administrative burdens, if local content thresholds are not met
– are independent breaches of Article III:4, regardless of any question under Article II with regard to
whether China has breached its tariff concessions on au to parts. The independent scope of Article III,
and in particular the fact that Article III applies regardless of any question of tariff bindings, is the
basis for the US position during the first substantive meeting that the Panel should begin its analysis
with China's breaches of Article III:4.
Response of Canada (WT/DS342)

184. The statement from the Appellate Body in Japan – Alcoholic Beverages II reflects the breadth
of a Member's obligations respecting internal m easures when compared with the narrower scope of
obligations respecting border charges. The Appellate Body considered in that same paragraph the
statement of the panel that "one of the main purposes of Article III is to guarantee that WTO Members
will not undermine through internal measu res their commitments under Article II". 30 Importantly,
however, it reasoned that this logic applies not only to scheduled products, but also to those that are
not specifically bound under Article II. In a similar vein, in EC – Export Subsidies on Sugar , the
Appellate Body reasoned that there is no authority to allow a Member to qualify its obligations under
the GATT by means of its Schedule.31
185. A border charge must be limited to those "ord inary customs duties" or "other duties and
charges" listed in a Member's Schedule and must apply to a good as presented at the border. GATT
Article II:2 and the Ad Note to Article III also confirm that an internal charge can be applied to a
product presented at the border to the extent that it is consistent with an internal charge levied on a
like product. The obligation set out in Article III to eschew protectionism not only constrains the
scope of charges under Article II to the limits set out in a Member's Schedule; necessarily, it also
prohibits a creative application of those charges so as to affect internal competition, whether or not
such application occurs after the good passes the borde r. The very principle of negotiating clear tariff
rates is to facilitate trade free of protectionism.
186. Applied to the instant case, the Appellate Body's statement demonstrates the inconsistency of
China's measures with the specific requirements of Article III. It also demonstrates that, since the
avoidance of protectionism is implicit in th e relationship between Article III and other GATT
provisions, the tariff bindings on auto parts are only one element of the broader obligation to avoid
trade protectionism.
38. (China) Please comment on the systemic concern s expressed by the complainants and
certain third parties that if the processing and manufacturing of the products after importation
into the territory of a Member could be generally accepted as an intermediate step before tariff

29 Japan – Alcoholic Beverages II, at 17 (emphasis added).
30 Appellate Body Report, Japan – Alcoholic Beverages II , WT/DS8/AB/R, WT/DS10/AB/R,
WT/DS11/AB/R, adopted 1 November 1996, at pp. 16-17.
31 EC – Export Subsidies on Sugar , Report of the Appellate Body, WT/DS265/AB/R,
WT/DS266/AB/R, WT/DS283/AB/R, adopted 19 May 2005, at paras. 217-220, quoting from the US – Sugar
GATT Panel Report.

classification, the system of tariff classifi cation would circumvent GATT 1994's core national
treatment obligations under Article III.

Response of China

187. China considers that these concerns misconstrue the nature of the interpretive issue before the
Panel. It is not China's position that Members may base tariff classification determinations on the
"processing and manufacturing of the products after im portation." Rather, it is China's position that
Members may interpret their Schedules of Concessions in a manner that is consistent with the rules of
the Harmonized System, and consistent with the practices of other WTO Members in like
circumstances.
188. The present dispute involves a narrow and technical issue of customs classification: The
relationship between complete articles and parts of t hose articles. As China has explained at length,
this specific issue of customs classification is addr essed by General Interpretative Rule 2(a) of the
Harmonized System. GIR 2(a) states that a tariff provision for a complete article includes
unassembled parts and components of the complete artic le that have the essential character of that
article. As explained in response to question 111, the World Customs Organization has interpreted
GIR 2(a) to permit members of the Harmonized System to apply this principle of tariff interpretation
to complete articles that are assembled from multi ple shipments of parts and components. This
application of GIR 2(a) is, as explained in res ponse to question 112, constrained by the rules of
GIR 2(a) itself: The parts and components must ha ve the essential character of the complete article,
and they must be capable of assembly by means of the types of assembly op erations specified in
Explanatory Note VII to GIR 2(a).
189. The need for customs authorities to apply GIR 2(a) in this manner arises only in
circumstances in which there is a significant differe nce in duty rates between the complete article and
the parts of that article. This could arise in th e case of ordinary customs duties (as in the case of
motor vehicles in China, or furniture in Canada ) or in the case of other types of duties (such as
complete articles that are subject to anti-dumping or countervailing duties). When this need arises,
customs authorities must implement a process to determine whether specific importers are importing
parts and components in multiple shipments that, in their entirety, have the essential character of the
complete article that is subject to the higher ra te of duty. Such a process necessarily entails an
examination of the importer's practice with respect to the importation and assembly of parts and
components in multiple shipments, and whether those imported parts and components, in their
entirety, have the essential character of the complete article. This is not a tariff classification based on
"the processing and manufacturing of the products afte r importation." Rather, it is a determination as
to whether a particular series of import transactions are related to each other through their common
assembly into a complete article. This determina tion ascertains the commercial reality of whether the
importer is importing parts and components in multip le shipments that have the essential character of
the complete article.
190. It should be evident from the foregoing that Chin a is not advocating a general principle that
"the processing and manufacturing of products after importation" can be "generally accepted as an
intermediate step before tariff classification." China is not saying, for example, that customs
authorities could classify a bolt of cloth as a "shirt" because of how it might be (or is actually)
processed and manufactured after importation. Nor is China saying that customs authorities can defer
tariff classification to see how imported articles are processed and manufactured, and then base the
tariff classification on the resulting product. Inst ead, China's position is that customs authorities are
permitted under Article II of the GATT 1994 to deal with the complex relationship between complete
articles and parts of those articles in a manner that is consistent with the Harmonized System, and in a

manner that allows customs authorities to give effect to the substance of a series of import
transactions over their form.
191. Contrary to the complainants' hyperbole, this is not an assault on the core national treatment
disciplines of Article III of the GATT. China is not even remotely suggesting that Members can
impose discriminatory measures on imported products merely by characterizing the measures as
border measures under Article II. Nor is China suggesting that Members can use tariff classification
determinations to impose measures that are incons istent with the non-discrimination principles of
Article III. China's position is simply that Member s may interpret their Schedules of Concessions in
accordance with the rules of the Harmonized System, and in a manner that is consistent with the
object and purpose of securing the benefit of reciprocal and mutually advantageous tariff concessions.
192. It suits the complainants' purposes to turn a t echnical issue of tariff classification into an
alleged assault on Article III of the GATT. By misch aracterizing the nature and scope of China's
argument, the complainants' have sought to portray China's position as creating a massive loophole in
Article III. It does no such thing. The position that China is advocating is limited to the specific
circumstance in which there is a significant duty diffe rential between a complete article and the parts
of that article. China considers that this is not a common situation, and certainly not one whose
resolution would pose a systemic risk to the GATT. In China's view, the only loophole that needs
closing is the complainants' position that importers can evade higher duties that apply to complete
articles merely through the manner in which they st ructure their imports. This arbitrary, form-over-
substance position is the only argument in this pro ceeding that poses a systemic risk to the GATT –
that is, to the security and predictability of tariff concessions under Article II.
39. ( Complainants) Please comment on the tariff classi fication decisions of the complainant
governments referred to by China in relation to Explanatory Note VII to Rule 2(a) of the
General Interpretative Rules in paragraphs 102- 103 and footnote 74 of China's first written
submission.

Response of the European Communities (WT/DS339)

193. The description provided by China of judgment of the Court of Justice of the European
Communities in case 165/78 Michaelis under paragraphs 102 and 103 of its first written submission is
misleading and taken out of context.
194. First, the Schedule of concessions of the then EEC in 1978 contained a special tariff heading
"for the parts of an unassembled or disassembled article" (see question 1 referred to the Court of
Justice by the national court).
195. Second, all the parts were presented to the customs at the same time
. China entirely ignores
this fundamentally important element.
196. Third, the Court explicitly came to the conclu sion that the parts as presented to the customs
would allow the assembly of a complete article i.e. all the parts necessary to make the complete article
were presented to the customs. Hence, the unfinished article had the essential character of the
complete or finished article.
Response of the United States (WT/DS340)

197. The United States does not understand China's reliance on the US ruling (HQ 960242), as the
classification decision did not address whether th e imported goods should be considered parts or

incomplete, unassembled goods. The facts in the US ruling indicate that all of the slipper components
(vamps and soles) were entered together and that there were no excess components.

Response of Canada (WT/DS342)

198. The Explanatory Note is mean t to cover situations where all parts arrive at the border in one
shipment. In such situations, all parts that are nece ssary to form the article are classified together if
they have the "essential character" of that complete or finished article as presented. Any excess parts
not required to form that article contained in the same shipment can be classified as parts.
199. The IMCO – J. Michaelis GmbH & Co. v. Oberfinanzdirektion de Berlin case cited by China
is correct in its interpretation of Explanatory Note VII, but taken out of context and misapplied by
China to its measures. The European Court of Ju stice was considering a single shipment, containing
all the parts necessary to manufacture pens, and a cer tain number of excess parts. That is, multiple
shipments were not in issue, a fact that China conveniently neglects to mention.
40. ( China) Please clarify whether various combinations of auto parts listed in Article 21(2)
of Decree 125, for example, a body and an engine as provided in Article 21(2)(a), refer only to
the situation where those specific auto parts are imported together at the same time, either
assembled or without being fitted together, as the European Communities submits in
paragraphs 261 and 265 of its first written submission.

Response of China

200. China does not believe that this was the EC 's characterization of Article 21(2)(a) of
Decree 125. As stated in paragraph 261 of the EC's first written submission, Article 21(2)(a)
"foresees a situation where the vehicle body and the engine are imported together or separately but
without being fitted together." (Emphasis added.) This is essentially correct . Consistent with the
overall purpose of Decree 125, the structure of the im port transactions is not relevant; what matters is
whether the imported part and components in a partic ular vehicle model, in their entirety, have the
essential character of a motor vehicle.
41. ( China) In respect of Article 24 of Decree 125 (and Article 16 of Announcement 4),
Could China please confirm:

(a) Whether "assemblies and sub-assemblies" are not excluded from "imported unfinished
automobile parts"; and

Response of China

201. Assemblies and sub-assemblies are excluded from "imported unfinished automobile parts."
Assemblies and sub-assemblies of parts are not susceptib le to substantial transformation; they already
constitute a finished portion of the motor vehicle and will not undergo further transformation prior to
their assembly into the vehicle. An example of an "imported unfinished automobile part" would be a
semi-manufactured steel bar or disc that is not rec ognizable as a finished part, and that must undergo
further processing (e.g., into a spring or washer ) before it is assembled with other parts and
components.
(b) If not excluded, whether it is possible to consider "imported unfinished assemblies" that
have been "substantially processed" in China as "domestic automobile parts".

Response of China

202. As explained above, assemblies and sub-assemblies are not subject to further transformation.
42. ( China) Could China please confirm whether Regulation on Rules of Origin for Imported
and Exported Goods of the People's Republic of China is applicable to "substantial processing"
as indicated in Article 17 of Announcement 4.

Response of China

203. The Regulation on Rules of Origin for Imported and Exported Goods of the People's Republic
of China does not directly apply to "substantial processing" as indicated in Article 17 of
Announcement 4. This is because neither D ecree 125 nor Announcement No. 4 relates to the
application of Rules of Origin. However, the substantial transformation criteria for "substantial
processing" in Article 17 are specified by reference to the Regulation.
43. ( China) When automobile manufacturers or auto part manufacturers in China import
key component or sub-assemblies, as indicated in Annexes 1 and 2 to Decree 125, to incorporate
into one of the assemblies referred to in Article 4 of Decree 125, what is the tariff rate applicable
to those parts?

Response of China

204. If the key components or sub-assemblies are parts of a registered vehicle model, the tariff rate
applicable to those parts is the relevant tariff rate for motor vehicles.
44. ( China) Please clarify what "inter-customs-transhipment" (or "Customs-to-Customs
transfer" according to the translation provided by the complainants) provided in Article 13 of
Decree 125 means.

Response of China

205. According to the Customs Supervision Rules of the People's Republic of China on Inter-
customs-transshipment of Goods , the reference to "inter-customs -transshipment" refers to the
movement of goods under the supervision of the cu stoms from the port of entry to another designated
port that will be responsible for the handling of cu stoms clearance procedures. Under Article 13 of
Decree 125, the auto manufacturer declares imports of parts for registered vehicle models and pays
the applicable duties through the customs office where th e auto manufacturer is located. It is for this
purpose of centralized administration that an inter-customs movement would occur.
45. ( China) Please elaborate on the registration requirements indicated in Articles 7, 26 and
37 respectively of Decree 125.

Response of China

206. All three articles refer to the same registration process, under different circumstances.
Article 7 states the general obligation to register a vehicle model that meets one or more the
thresholds of Decree 125 prior to the importation of pa rts for that vehicle model. Article 26 concerns
the ability of the CGA to direct a verification of a vehicle model in the event that the auto
manufacturer has failed to register or apply for verifi cation of that vehicle model. Article 37 concerns

the situation in which an auto manufacturer, in viol ation of Decree 125, imports auto parts that have
the essential character of a motor vehicle in multiple shipments without having registered that vehicle
model.
46. ( China) Could China clarify the exact point in time and place that automobile
manufacturers must pay tariff duties for imported auto parts in relation to the terms of
Articles 13 and 28 of Decree 125.

Response of China

207. While Articles 13 and 28 are relevant to this question, the most relevant provision is
Article 31 of Decree 125. Article 13 establishes wher e the automobile manufacturer is to declare the
importation of parts and pay duties for registered vehicle models – to the district customs office where
the manufacturer is located. Article 28 establish es when the auto manufacturer is to declare duty
payments – when the imported auto parts are asse mbled into registered vehicle models. But the
"exact point in time and place" at which the automo bile manufacturer pays the duty is governed by
Article 31. As described in response to question 5, Article 31 requires the automobile manufacturer to
declare duty payments on the tenth working day of each month based on the number of registered
vehicle models that it assembled in the prior month.
47. (Complainants) Please explain how CKD and SKD kit imports are classified in your
country.

Response of the European Communities (WT/DS339)

208. The European Communities does not have a tari ff line for CKD and SKD kits. There is no
established legal definition for such kits but as indicated under paragraph 267 of its first written
submission, the European Communities understands these concepts under the measures as referring to
kits that consist of all
 parts necessary to make a complete automotive product, in most cases a
complete vehicle. In view of the Chapter not e to Chapter 87 of the Harmonized System, which
provides for a specific application of Rule 2 (a) of the Harmonized System in this context, the
classification of CKD and SKD kits in an individu al case is a difficult question as the Chapter note
uses concepts such as "fitting" and "equipping" pu tting therefore emphasis on the state of assembly
and manufacture of the relevant product. An SKD kit that by definition denotes 'semi-knocked down'
kits would from a general point of view appear more likely to fulfil the conditions to be classifiable as
a complete vehicle (or other relevant product) as th e parts would be presented to the customs with a
certain degree of "fitting and equipping". A CKD kit that denotes a 'completely knocked down' kit is
in principle further away from the examples provi ded for by the Chapter note to chapter 87 as the
parts presented to the customs are in a completely unassembled state. However, a CKD kit that
consists of all the parts necessary to assemble a complete vehicle may in some circumstances be
classified as the complete vehicle provided that no working operation beyond assembly for
completion into a complete vehicle is necessary in ac cordance with explanatory note VII to rule 2 (a).
In this respect it should be emphasised that differe nt kits intended to become complete vehicles may
need different further working operations depending e. g. of the level of high technology electronics in
the final vehicle. Therefore, the classification of a kit must always be made on a case by case basis
and not generally as China does unless the member's schedules provide for tariff lines for different
kind of kits.

Response of the United States (WT/DS340)

209. The terms "CKD" and "SKD" are not terms that are defined or used in the Harmonized
System, nor are they defined or used by the United States in its administration of the Harmonized
Tariff Schedule of the United States. To the exte nt that the United States understands these terms as
defined by China in Decree 125, Annex I of Exhi bit 3-CHI, we classify merchandise in its condition
as imported. For example, a single component entered is classified under the terms of a heading that
describes that component. If a group of components ar e entered together that may form an assembly,
we would classify it under the heading that descr ibes that assembly. If a group of components do not
form an assembly, they are individually classified (e.g., a crankshaft and side panel would not
constitute an assembly and would be individually classified). Given the limited description in
Annex 1, the following chart explains how the United States would classify these assemblies and
sub-assemblies:
Assembly
Name
Description Sub-
assembly
Letter
U.S. Classification
Vehicle Bodies Class M1 A If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class M1 B If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class M1 2 A's &
1 B
If entered together, then we would classify under heading 87.07, as
bodies by application of GIR 2(a)
 Class M2 A If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class M2 B If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class M2 A&B Given the descriptions of the sub- assemblies, we do not see how 2 A
sub-assemblies can be combined as Sub-assembly A covers roof box.
 Class M3 A If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class M3 B If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class M3 A&B Given the descriptions of the sub- assemblies, we do not see how 2 A
sub-assemblies can be combined as Sub-assembly A covers roof box.
 Class N A If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class N B If sub-assembly is entered separa tely, we would classify under
subheading 8708.29 (if for the vehicles of headings 87.01 to 87.05) or
under subheading 8709.90 (if for the vehicles of heading 87.09)
 Class N A&B Given the descriptions of the sub- assemblies, we do not see how 2 A
sub-assemblies can be combined as Sub-assembly A covers roof box.
Engine
Assemblies
Diesel
Engine
A If sub-assembly entered separately, we would cl assify under subheading
8409.99
 Diesel
Engine
B If sub-assembly entered separately, we would cl assify under subheading
8409.99
 Diesel
Engine
A&B If sub-assemblies A and B are entered together, then we would classify
under subheading 8408.20, by application of GIR 2(a)

Assembly
Name
Description Sub-
assembly
Letter
U.S. Classification
 Gasoline
Engine
A If sub-assembly entered separately, we would cl assify under subheading
8409.91
 Gasoline
Engine
B If sub-assembly entered separately, we would cl assify under subheading
8409.91
 Gasoline
Engine
A&B If sub-assemblies A and B are entered together, then we would classify
under subheading 8407.31 to 8407.34 (depending upon cylinder
capacity), by application of GIR 2(a).
Transmission
Assemblies
MT A If sub-assembly entered separately, we would cl assify under subheading
8708.93 (if for the vehicles of headings 87.01-87.05) or subheading
8709.90 (if for the vehicles of heading 87.09)
 AT A If sub-assembly entered separately, we would cl assify under subheading
8708.93 (if for the vehicles of headings 87.01-87.05) or subheading
8709.90 (if for the vehicles of heading 87.09)
 AT B If sub-assembly entered separately, we would cl assify under subheading
8708.40 (if for the vehicles of headings 87.01-87.05) or subheading
8709.90 (if for the vehicles of heading 87.09)
 AT A&B If sub-assemblies A and B are entered together, then we would classify
under subheading 8708.40 by application of GIR 2(a)
Vehicle axle of
Class M1, M2,
M3 and N
vehicles
Driving
axle
 We would classify under subheading 8708.50 (if for the vehicles of
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of
heading 87.09)
 Driven axle We would classify under subheading 8708.50 (if for the vehicles of
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of
heading 87.09)
Frames We would classify under subheading 8708.99 (if for the vehicles of
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of
heading 87.09)
Braking
Systems
 Assuming that all components are ente red together as an assembly, we
would classify under subheading 8708.30. If components entered
separately, then classifi cation may be under provis ions of chapters 84,
85, 87, or 90.
Steering
Systems
Power
steering
 We would classify under subheading 8708.94 (if for the vehicles of
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of
heading 87.09)
 Non-power
steering
 We would classify under subheading 8708.94 (if for the vehicles of
headings 87.01-87.05) or subheading 8709.90 (if for the vehicles of
heading 87.09)

Response of Canada (WT/DS342)

210. As discussed in more detail in response to Question 33, Canada does not use these terms in
customs classification. Rather, classification on importation is determined on the basis of the essential
character of the good.
48. ( China) Please clarify whether there is a legal hierarchy among Policy Order 8,
Decree 125 and Announcement 4. If so, please ex plain, and if not, which legal instrument
should prevail in case of conflict between these measures?

Response of China

211. There is no "legal hierarchy" between Po licy Order No. 8 and Decree 125 in the sense
suggested by the question. As explained in res ponse to questions 49 and 50, Order No. 8 is a broad
policy instrument that sets forth general goals across a wide array of issues relating to motor vehicles
and the automobile industry. Chapter XI of Order No. 8 addresses the administration and
enforcement of China's tariff rates for motor vehicl es and motor vehicle parts. Article 60 of Order
No. 8 directed the CGA, together with other relevant agencies, to promulgate the specific
administrative rules to give effect to the general principles set forth in Chapter XI. The CGA did so
through the promulgation of Decree 125. Afterwar ds, in order to detail the procedures for the
verification of evaluations by automobile manufacturers, the CGA formulated Announcement No. 4
to provide further details concerning the verification process.
212. The legal obligation of auto manufacturers to pa y the applicable customs duties on imports of
auto parts that have the essential character of a mo tor vehicle, and the customs procedures that the
CGA has adopted to ensure the proper classification of these imports and the collection of the relevant
duties, are set forth in Decree 125.
49. ( China) Should Decree 125 and Announcement 4 be read in light of the preamble of
Policy Order 8?

Response of China

213. As China has explained, Order No. 8 encompasses a vast array of topics relating to the
development and use of motor vehicles in China, including, inter alia, emissions standards,
environmental control technologies, the developm ent of hybrid vehicles, consumer protection,
consumer financing for motor vehicle purchases, automotive insurance, vehicle safety, auto
trademarks and brands, foreign direct invest ment, domestic and intern ational cooperation in
automotive research and development, the establishm ent of auto dealerships, road planning and
construction, and vehicle registration and inspection, among many other topics.
214. The preamble to Order No. 8 encompasses all of these topics in broad and sweeping terms.
China does not consider that the language in the preamb le to Order No. 8 is meaningful or relevant to
an evaluation of the one chapter of Order No. 8 that is relevant to the present dispute – the chapter
concerning the administration and enforcement of China's tariff provisions for motor vehicles and
motor vehicle parts. It is that chapter, and that chapter only, that gave rise to the customs enforcement
procedures embodied in Decree 125 and Announcement No. 4 that are the subject matter of this
dispute.
50. ( China) Does China agree with the interpretation advanced by the complainants
regarding the objectives of Policy Order 8, for example the statements in paragraphs 28-29 of
Canada's first written submission? If not, could China please indicate what are the main
objectives of Policy Order 8?
Response of China

215. China does not agree with this interpretation. As explained in response to question 49,
Order No. 8 encompasses a vast array of topics related to motor vehicles and the motor vehicle
industry in China. To the extent that there is a "main objective," or even "main objectives," of
Order No. 8, they are broadly reflected in the titl es of the different chapter headings. As noted,

Chapter XI of Order No. 8 concerns the administra tion and enforcement of China's tariff provisions
for motor vehicles.
216. China considers that the complainants' effort to mix and match different aspects of the
policies set forth in Order No. 8 is an attempt to shif t attention away from a critical fact in this dispute
– the fact that China negotiated a Schedule of Concessions that allows it to maintain higher duty rates
on motor vehicles than the duty rates that apply to parts and components of motor vehicles. This
difference in tariff rates has an impact on market access and a concomitant impact on the
development of domestic producers . This is in the very nature of customs duties. As China explains
in response to question 133 below, the issue presented in this dispute is whether China is allowed to
enforce these market access arrangements, or whet her, as the complainants contend, those market
access arrangements are essentially unenforceable.
51. (Complainants) Do the complainants agree with the translations provided by China of
the challenged measures in Exhibits CHI-2, CH I-3, CHI-4? If not, please indicate specific
provisions of the measures to which the complainants do not agree.

Response of the European Communities (WT/DS339)

217. During the consultations the co-complainants re quested several times the translation of the
measures from China. China committed to provide us with a translation during the consultations. This
commitment was not kept. Therefore we have been obliged to do the translations ourselves. There
has been a considerable investment of time and effort to make the translation as accurate as possible.
With this background the European Communities c onsiders that it is not in accordance with the
principle of due process to require the complainants to now rely on translations that China provided
only in its first written submission i.e. 5 weeks after submitting our own first written submission. It
would therefore be for China to argue why the transl ations submitted by the complainants may not be
accurate.
218. In the alternative and to reply to the specific question of the Panel, we have listed the points
on which we disagree with the translations provided by China in a separate doc ument attached to the
replies to the questions (Exhibit JE – 38).
Response of the United States (WT/DS340)

219. In furtherance of the Complainants' decision to submit an initial set of joint exhibits,
including translations of China's measures in Exhibits CHI-2, CHI-3, CHI-4, the United States
respectfully refers the Panel to the EC's response to this question.
Response of Canada (WT/DS342)

220. The complainants worked carefully with translators in an attempt to provide translations of
the measures that are complete, clear and grammatically correct in English. Those translations were
provided by the complainants as JE-18, JE-27 a nd JE-28, and are the translations on which the
complainants rely.
221. CHI-2, CHI-3 and CHI-4 generally conform in s ubstance with the translations provided by
the complainants. However, as set out in the answers to questions provided by the European
Communities, China's translations differ from the transl ations of the complainants in various material
ways. Canada associates itself with the EC respon se to this question in respect of the detail and
significance of those differences.

52. ( China) Does China agree with the complainants' translation of China's 1994
Automotive Policy Order as provided in Exhibit JE-24? If not, please indicate specific
provisions of the measures to which China does not agree.

Response of China

222. China has submitted as CHI-36 a redlined versio n of the complainants' translation, noting
specific corrections to the translation.
53. ( China) China has submitted a translated version of Policy Order 8 for Articles 52
through 62 in Exhibit CHI-2. Does China agree with the translations provided by the
complainants in Exhibit JE-18 for the remaining parts of Policy Order. 8? If not, please
indicate the specific provisions translated by th e complainants with which China does not agree
and provide explanations for such position and translations by China of such provisions.

Response of China

223. China has submitted as CHI-37 a redlined versio n of the complainants' translation, noting
specific corrections to the translation.
54. ( China) China submits that the criteria in Article 21 of Decree 125 allows for a an ex-
ante verification of whether the importer intends to import auto parts and components which, in
their entirety, constitute the essential character of a complete vehicle, and that this is a condition
declared at the time of importation . Could China explain why it did not include such "condition"
in its Schedule of Concessions?

Response of China

224. The term "condition" in Article II:1(b) of the GATT 1994 refers to conditions that the
Member intends to have "some qualifying or limiting e ffect on the substantive content or scope of the
concession or commitment."
32 The paradigmatic "condition" on a ta riff rate concession is a tariff rate
quota, such as the one at issue in Canada – Dairy. That is not the type of "condition" at issue in this
dispute. China has not restricted, in any way, th e substantive content or scope of its tariff rate
concessions on motor vehicles. Importers are free to import as many motor vehicles as they wish,
without qualification or restriction. The measures challenged in this dispute simply ensure that
imported parts and components that have the essentia l character of a motor vehicle receive the same
tariff classification whether they enter China in one shipment or in multiple shipments. The
declaration to which China has referred, and that the importer makes at the time of importation, is part
of the customs process that China has adopted to ensure this result.
225. As the parties discussed at length during the first substantive meeting, the GATT panel in
EEC – Parts and Components considered that a measure is within the scope of Article II if it imposes
charges " conditional upon the importation of a product or at the time or point of importation."
33
China has demonstrated that WTO Members routinel y assess border charges after the time or point of
importation, and no party appears to question this proposition. In ev aluating whether the charges that
Members assess after the time or point of importation are border charges within the scope of Article
II, the relevant inquiry is, in China's view, whethe r the importer's obligation to pay the charge arose
by reason of the importation of the product, i.e., as a "condition" of the importation of the product.

32 Canada – Dairy at para. 134.
33 EEC – Parts and Components at para. 5.5 (emphasis added).

The importer's obligation to pay the applicable cu stoms duty is a condition of the importation of the
product – that is, it is the importation of the product that triggers the obligation to satisfy the liability.
As China has explained, Members may assess and confirm these charges after the time or point of
importation, provided that they relate back to a charge that the Member was allowed to impose by
reason of the importation of the product.
226. In this light, the "condition declared at the time of importation" is that a particular shipment of
auto parts is one of a series of shipments of auto parts that, in their entirety, have the essential
character of a motor vehicle. This "condition" is a characteristic of the import, not a limitation or
restriction on the importer's ability to import motor vehicles at the bound duty rate. Having made this
declaration, the auto manufacturer imports these parts and components subject to the obligation to pay
the applicable duty rate for motor vehicles when, as declared, it assembles these parts and components
into a motor vehicle that it has previously register ed as meeting one or more of the thresholds in
Article 21 of Decree 125. The imposition of this duty is a valid border charge under Article II
because it objectively relates to an ordinary custom s duty that China is allowed to impose, and that
arose by reason of the importation of the product.
227. As China has explained in response to several other questions, the customs process that China
has adopted to apply GIR 2(a) to multiple shipments of auto parts and components is consistent with
the rules of the Harmonized System, as interpreted by the WCO, and consistent with the practice of
other WTO Members in addressing the relationship between complete articles and parts of articles.
The Harmonized System is not a "term, condition or qualification" that China was required to inscribe
in its Schedule of Concessions before it could take steps to interpret its Schedule of Concessions in
accordance with the rules of the Harmonized System.
55. ( All parties) Please explain in detail what customs "clearance" means.

Response of China

228. The definition of "customs clearance," as well as other related terms, is addressed by the
Revised Kyoto Convention on the Simplificatio n and Harmonization of Customs Procedures (the
"Kyoto Convention").
34 As the notion of "clearance" is built upon several other international customs
concepts, China will approach this topic in a cumulative fashion.
229. The Kyoto Convention defines "clearance" as "the accomplishment of the Customs formalities
necessary to allow goods to enter home use, to be exported or to be placed under another Customs
procedure." There are two key concepts embedded in this definition: "Customs formalities" and
"Customs procedures." The Kyoto Convention defines "Customs formalities" as "all the operations
which must be carried out by the persons concerned and by the Customs in order to comply with the
Customs law." While the Kyoto Convention does not directly define the term "Customs procedure,"
the WCO has elsewhere defined the term "customs procedure" as a "treatment applied by the Customs
to goods which are subject to Customs control." 35 This is reflected in the Kyoto Convention itself,
which defines the term "Customs control" as "measu res applied by the Customs to ensure compliance
with Customs law." Thus, a "Customs procedure" is a measure applied by customs to ensure
compliance with customs law.

34 The Kyoto Convention entered into force on 3 February 2006. All three complainants, as well as
China, have ratified the convention. Relevant portions of the Kyoto Convention appear at CHI-38.
35 World Customs Organization, Glossary of International Customs Terms (CHI-39)

230. As reflected in the definition of "clearance," one such "Customs procedure" is "clearance for
home use." The Kyoto Convention defines this as "the Customs procedur e which provides that
imported goods enter into free circulation in the Customs territory upon the payment of any import
duties and taxes chargeable and the accomplishmen t of all the necessary Customs formalities." The
term "goods in free circulation," in turn, is de fined as "goods which may be disposed of without
Customs restriction."
231. These layered definitions support China's contenti on that goods have been "cleared through
customs" once all of the customs formalities requi red in connection with the importation of those
goods are complete, and the goods are no longer subject to customs control. It is important to note
that, under the Kyoto Convention, the release of the goods does no t necessarily mean that the goods
have "cleared" customs. Under the Kyoto Convention, the term "release of goods" means "the action
by the Customs to permit goods undergoing clearance to be placed at the disposal of the persons
concerned." Thus, goods can be "released" to the im porter (i.e., placed at its disposal), even though
the goods have not been "cleared" (for example, because the goods remain under customs control).
232. These considerations further support China's c ontention that the time or place at which a
charge is imposed is not determinative of whether th e charge is within the scope of Article II of the
GATT. The entire structure of the Kyoto Convention supports the conclusion that customs formalities
are routinely concluded after the goods have been released into the customs territory. The relevant
consideration is whether the customs procedure to which the goods are subject after they have been
released is one that pertains to the satisfaction of a liability that arose by reason of the importation of
the goods (i.e., whether it is a "Customs formality" th at is carried out "in order to comply with the
Customs law.").
Response of the European Communities (WT/DS339)

233. The concept relates to the fact that goods, on ce the customs clearance has taken place, are in
free circulation within the customs territory of the importing country. In order to be released for free
circulation all the import
 formalities will have to be complete d: goods will have to be classified
according to HS rules and the corresponding customs duty (customs debt) will ha ve to be paid by the
importer or at least be secured by a guarantee.
Response of the United States (WT/DS340)

234. In the United States, "clearance" is a legal te rm that may apply to passengers, vessels, and
goods entering (and, in some cases, exiting) the cust oms territory of the Unite d States. With respect
to the importation of goods, "clearance" is not form ally defined under the customs laws of the United
States. The United States defines "entry" into the United States not merely as the arrival of goods at a
port, but as the process of presenting documentati on for clearing goods through Customs. Imported
goods are considered cleared for entry into the United States when the proper entry documentation has
been filed and the goods are released from custom s custody (into the custody of the importer) on the
basis of that documentation.
Response of Canada (WT/DS342)

235. The term "clearance" in the Canadian context is limited to persons, conveyances, and certain
products that are imported by private persons (i.e., non-commercial importations).

236. In the case of commercial importations, products must be reported at the nearest customs
office
36 and accounted for and duty paid at the time of importation. 37 When products arrive at the
border, the importer, carrier or broker reports their arrival at the first customs office upon entry into
Canada. If it is convenient for the importer to account for the products and pay any duties or taxes at
that time, the importer may submit any documents and payment required, after which the products
leave the control of customs officials and enter in ternal Canadian commerce. Should the importer opt
to have the goods accounted for and duty-paid at an inland customs office, the products travel "in
bond" to the inland office under customs control. Upon arrival at the inland customs office, either the
importer or broker submits the required documents an d payment to customs officials, after which the
products leave customs control and enter internal Canadian commerce.
Comments by the United States on China's response to question 55
237. According to China, "[t]he relevant considera tion is whether the customs procedure to which
the goods are subject after they have been released is one that pertains to the satisfaction of a liability
that arose by reason of the importation of the goods." For tariff classification purposes, the liability
that arises in connection with the importation of the goods is the collection of "Customs duties,"
which are defined by the revised (1999) Kyoto Co nvention on the Simplification and Harmonization
of Customs Procedures as "the duties laid down in the Customs tariff to which goods are liable on
entering or leaving the Customs territory." Theref ore, the relevant consideration in this case is
whether China's measures enforce the collection of a Customs duty under China's tariff schedule for
which an auto part was liable when it entered th e customs territory of China by virtue of its
importation. While the time or place of the assessment of the charge may vary, that charge cannot be
based upon a change in the condition of the auto part that occurred after its entry into the Customs
territory of China.
56. ( China) Let us assume for a moment that an automobile manufacturer in China is
planning to import certain automo bile parts for one of their vehicle models for sale on the
Chinese market. Could China please explain in chronological order, referring to relevant
provisions of the measures concerned and taking into your response to previous question, "all"
the procedural requirements that such an automobile manufacturers must follow to import auto
parts:

Response of China

238. In response to question 5, China has detailed, in chronological order, the relevant provisions
of the measures as they pertain to the importation of auto parts and components that, in their entirety,
have the essential character of a motor vehicle. Th is is the customs procedure that applies to the
importation of auto parts and components in multip le shipments, where those parts and components
have been verified as having the essential character of a motor vehicle.
239. In response to the previous question, China has detailed the relevant provisions of the Kyoto
Convention as they pertain to the customs clearance pr ocess, the completion of customs formalities,
and the maintenance of imported goods under customs control subject to a customs procedure. The
chronological steps detailed in response to questi on 5 define a process whereby imported auto parts
and components remain subject to customs control in order to ensure compliance with China's tariff
provisions for motor vehicles. This process ensures the correct application of GIR 2(a) to multiple
shipments of parts and components that are relate d to each through their common assembly into a

36 Customs Act, sections 12-16 (Exhibit CDA-1).
37 Ibid., sections 32-35.

specific vehicle model, consistent with the rules of the Harmonized System and consistent with the
practices of other WTO Members under like circumstances.
(a) Would any aspect of the procedures China just explained be different if the same
manufacturer were to purchase all or some imported auto parts from domestic suppliers? If so,
how?;

240. The only procedural difference in respect of imported auto parts purchased from suppliers
within China arises under Article 29 of Decree 125. Under that provision, the auto manufacturer is
entitled to deduct from the applicable duty any amount of duty that has already been paid in respect of
those imported parts.
(b) What procedures would the same automobile manufacturer have to satisfy if it were to
use only imported auto parts " not characterized as complete vehicles" for its vehicle model?;
and

241. The auto manufacturer must conduct the evaluation process of that vehicle model and have
the evaluation verified by the CGA. If the verifi cation confirms that the imported auto parts and
components in that vehicle model do not have the essential character of a motor vehicle, auto parts
that the auto manufacturer imports for this vehicle model are not subject to the customs procedure
established by Decree 125. As detailed in response to question 5, Article 35 of Decree 125 provides
that auto parts imported for the assembly of these vehi cle models are to be declared as parts. These
parts do not enter in bond, are not subject to customs control, and are subject to the ordinary customs
procedures for the payment of customs duties.
(c) Are there any procedural requirements that automobile manufacturers using only
domestic auto parts must satisfy for the manufac turing and sale of automobiles in the Chinese
market?

242. Under Article 7 of Decree 125, an automobile manufacturer is only required to undergo the
evaluation and verification process if it assembles vehi cle models with imported parts for sale in the
Chinese market. If the automobile manufacturer uses only domestic auto parts, then it is not subject
to Decree 125.
57. ( China) Does China have laws or regulations similar to Decree 125 and
Announcement 4 that would apply more generally to all products having separate tariff rates
for parts and components and complete products , in particular under China's general customs
law? If not, please explain why.

Response of China

243. As detailed in response to question 12(c), there are only limited circumstances in China's
tariff schedule in which there is a significant tariff rate difference between a complete article and parts
of that article. China does not have a law or regula tion that deals with each such circumstance. It is
important to recall, in this context, that China's Schedule of Concessions establishes the upper limit of
the duties that it may apply to imported products. The fact that China has established a customs
process to resolve the tariff classification relations hip between parts and wholes in one context does
not mean that it needs to establish a similar custom s process in other such contexts. Like customs
authorities all over the world, China allocates its customs administration resources based on a variety
of considerations, including the commercial signifi cance of the products at issue, the volume of
imports, and the potential revenue loss from misclassification of the imports.

58. ( China) Please elaborate on how Article 2 of Decree 125 applies to CKD and SKD kits,
including specific importation procedures applic able to automobile manufacturers under the
second paragraph of Article 2.

Response of China

244. Importers import CKD/SKD kits into China in accordance with the ordinary provisions of the
Customs Law of the People's Republic of China . First, the importer must apply to the Ministry of
Commerce for an automatic import license. Wh en the importer imports the CKD/SKD kits, it
declares the imports to the Customs and provides the relevant import documentation, including the
declaration form, the automatic import license, and th e certificate of origin. The Customs then makes
a tariff classification of the CKD/SKD kits in acco rdance with GIR 2(a), and would classify them as
motor vehicles. The importer would then pay th e applicable motor vehicle duty rate for the
CKD/SKD kits in accordance with the regular procedures for the payment of customs duties.
59. ( China) Why is the application of Article 21(3) of Decree 125 postponed until July 2008?
Please explain in relation to the rationale behind the criteria set out in Article 21 of Decree 125.

Response of China

245. China has deferred the application of Article 21(3) of Decree 125 primarily because of the
administrative complexity of implementing this par ticular criterion. China believes that once auto
manufacturers and customs officials have gained mo re experience with the implementation of Decree
125, and have laid a solid foundation of record-k eeping and reporting for the administration of the
measure, it will be easier for manufacturers and customs authorities to determine and account for the
value of imported parts and components.
246. As China explains in response to question 117, the value of imported parts and components in
relation to the value of the complete article is one criterion that customs authorities consider in the
application of the essential character test. The other criteria specified under Article 21 are also
relevant criteria in the application of the essential character test.
60. (Complainants) China submits in footnote 65 of its first written submission that the
complainants' customs authorities routinely classify CKD kits as "complete vehicles". Please
comment on this statement

Response of the European Communities (WT/DS339)

247. The European Communities is not aware of any such "routine" by its customs officials. China
does not present any evidence in respect of the practice of the EC. Reference is also made to the reply
given to question 47.
Response of the United States (WT/DS340)

248. The United States does not agree with the charact erization in footnote 65 that US customs
authorities routinely classify CKD kits as "complete articles". The US issues over 10,000
classification rulings each year, but China cites only to a single ruling, and that ruling involves an
unassembled pistol, not an automotive vehicle. As explained in the United States answer to
Question 47, the terms "CKD" and "SKD" are not defined or used by the United States in its
administration of the Harmonized Tariff Schedule of the United States. As further explained in the
answer to Question 47, any classification decision by US Customs would depend on the specific

details concerning the items (wheth er the importer labels them as a "CKD" or "SKD" or something
else) as actually entered.
Response of Canada (WT/DS342)

249. As set out above in response to Questions 33 and 47, Canadian customs practice does not use
the term "CKD", but on a case-by-case basis offici als may determine that a collection of all or
virtually all of the parts necessary to build a ve hicle has the "essential character" of a complete
vehicle.
250. Canada notes that the Canadian memorandum that China cites refers to a very specific
category of "kit car" which, as defined in the memora ndum, refers to specialized automotive kits that
become fully operational replicas of specialty or antique motor cars following their assembly. They
are not CKDs or SKDs of the sort that are at issue in this dispute.
61. ( Complainants) Paragraph 93 of the Working Party Report states that if China were to
have created a separate tariff line for CKD and SKD kits, the duty rate would be 10 per cent.

(a) ( All parties) Has China created separate tariff lines for CKD and SKD kits?; and

Response of China

251. No. China has not created separate tariff lines for CKD and SKD kits.
Response of the European Communities (WT/DS339)

252. No, the European Communities is not aware of any formal tariff line created by China for
CKD and SKD kits. However, as stated in its firs t written submission, the European Communities is
of the view that for all practical purposes China has introduced a disguised tariff line on such kits.
Response of the United States (WT/DS340)

253. The United States is not aware of any tariff lin es in China's tariff schedule for CKD or SKD
kits. However, China's measures – by treati ng CKD and SKD kits as "d eemed whole vehicles"
subject to a 25% whole vehicle rate – have accomplished the same result as a new tariff line that
specifically mentions CKDs and SKDs. Thus, the de facto result of China's measure is as if China
created a new tariff line for CKDs and SKDs.
Response of Canada (WT/DS342)

254. China does not have a formal tariff line for e ither CKDs or SKDs. However, in its customs
tariff for 1995, China did have separate tariff lines differentiating between certain whole vehicles and
CKDs at the eight-digit level, while other descriptions of a particular tariff line included the term
"CKD" in their description. For the most part, where there was a separate tariff line at the eight-digit
level, the duty rates for CKDs were the same. In some cases, the CKD rate was lower.
38
255. Starting in 1996, references to CKDs were removed from China's customs tariff. China's
evidence on how CKDs were treated after this point is contradictory; it asserts without evidence either

38 See Chinese Tariff Schedules Showing CKD Lines, 1991-1995 (Exhibit CHI-30), entries for
8704.1010 and 8704.1020.

that CKDs were prohibited from importation or that they were classified as whole vehicles.
39 The
available evidence is limited, but suggests that China treated CKDs as equivalent to parts. 40 That
evidence is supported by discussions during and after China's accession relating to quotas on imports
of whole vehicles and auto parts. The evidence ar ising out of those discussions suggests a common
understanding of WTO Members that China treated CKDs as parts for classification purposes:
In the July 21, 2000 draft of the Working Party Repor t, the text indicated that China was not treating
CKD kits as whole vehicles: "In response to quest ions from some Members [China] confirmed that
the quota for autos and certain parts did not include CKD kits".41
Following accession, China confirmed in the Committee on Import Licensing that it was classifying
CKDs as parts for purposes of "customs statistics":
[I]n Japan's statistics, auto knock-down kits, or CKD and SKD, which were imported
for assembly in China, were not included, because in the past two years in the initial
period of production of new car models by Chinese domestic manufacturers, they had
to import a considerable amount of knock-down kits for assembly production; for the
import of these parts they had to be granted certain quotas; however, as regarded
customs statistics, because these parts a rrived at the customs in the form of
component parts, they had not been incor porated in the statistics for complete
automobiles.42 (emphasis added)
256. Canada does not understand China, following its accession, to have created a separate tariff
line at the seven- or eight-digit level for CKDs or SKDs. However, Canada understands that, prior to
the enactment of the measures, CKDs were often classified as parts. The effect of the measures was to
move the classification of CKDs from parts (unde r heading 87.08) to whole vehicles (under heading
87.03 or 87.04), and thus in effect create a new tari ff line for CKDs at the eight-digit level, just as
China had in 1995. Canada submits that paragraph 93 of the Working Party Report applies, and the
new tariff line that China has effectively created must have a rate of 10%. Any other result would
render paragraph 93 meaningless.
(b) ( Complainants) If a separate tariff line for CKD a nd SKD kits has not been created,
what is the relevance of paragraph 93 of the Working Party Report to this dispute?

Response of the European Communities (WT/DS339)

257. The European Communities considers that without prejudice to a potential direct violation of
the commitment made by China under paragraph 93 of the Working Party Report, or nullification or
impairment of benefits in the meaning of Ar ticle XXIII:1 (b) of the GATT 1994, this commitment
provides crucial context for interpreting China' s Schedule of commitments upon accession to the
WTO. The commitment to apply 10 % duty if it were to create a tariff line on such kits lends strong
support to an argument that China has considered such kits as akin to automotive parts upon accession
to the WTO.

39 See China's first written submission, at paras. 40 and 184.
40 See complainants' joint Background section, Canada's first written submission, at fn. 36.
41Draft Report of the Working Party on the Accession of China to the WTO,
WT/ACC/SPEC/CHN/1/Rev.2, July 21, 2000, at p. 34 (paragraph numbered "xx").
42 Report to the Council for Trade in Good s on China's Transitional Review, G/LIC/11,
29 October 2003, at para. 3.31.

Response of the United States (WT/DS340)

258. The United States submits that the final sentence of paragraph 93, in the context of the rest of
the paragraph, imposes an obligation on China to pr ovide a tariff treatment of no greater than 10 per
cent on CKDs and SKDs. The paragraph starts out by
noting that certain me mbers of the Working
Party expressed particular concerns about the "tariff treatment" of kits. In fact, the paragraph twice
uses the term "tariff treatment." The use of the term "tariff treatment" highlights that the working
party's concern was the rate of duty applied by Ch ina (that is, 25 per cent for whole vehicles versus
10 per cent for parts), and that the concern was not the classification of CKDs or SKDs. In this
context, the only reasonable interpretation of the clau se "If China created such tariff lines" is that the
clause simply reflects an understanding on the part of the negotiators that CKDs and SKDs were at
that time being entered as parts (not whole vehicl es), and that the working party was concerned that
China would change the tariff treatment by creati ng a new CKD/SKD line with a whole-vehicle rate.
Conversely, it would not be reasonable to read th e sentence as allowing China to provide any tariff
treatment it wished, so long as China creates no ne w tariff heading for CKDs and SKDs. Such a
reading would amount to no commitment at all – as illustrated by the current measures of China –
since China could change tariff treatment by classi fying the CKDs/SKDs as whole vehicles, and thus
this reading would not meet the negotiators stated intention of addressing concerns with the tariff
treatment (as opposed to classification) of CKDs and SKDs.
Response of Canada (WT/DS342)

259. A tariff commitment can be created when a Member, which committed itself to provide
certain tariff treatment if it cr eates a tariff line for a specific good, in effect does so by enacting a
measure that pronounces how that good is to be treated , or otherwise institutes a practice in respect of
that good's classification. Article 21(1) of Decree 125 in effect does this by treating CKDs and SKDs
as "deemed whole vehicles" charged at a tariff rate of 25%. This would be inconsistent with China's
commitment to apply treatment of 10%, whether or not CKDs are classified as "motor vehicles" or
"parts". The principle of effective treaty interpretation, ut res magis valeat quam pereat , requires an
interpreter to give effect to all the terms of a provision and not render them meaningless (unless it is
clear the parties intended to do so).
43 China's commitment would be meaningless if the phrase "if a
separate tariff line is created" was not read in the context of the whole of paragraph 93, and in the
light of the common intentions of the parties when paragraph 93 was negotiated.
260. Read in the context of the whole provision, the ordinary meaning of "if a separate tariff line is
created" illustrates that preferential tariff treat ment is specifically to address WTO Members'
"particular concerns about tariff treatment in the auto sect or" (emphasis added). That is, CKDs
would continue to receive the 10% tariff treatment received pre-accession.
261. Consistent with Article 32 of the Vienna Convention, this textual interp retation is supported
by "the circumstances surrounding the conclusion" of the Accession Protocol . In particular, the
following facts are significant in considering the context in which that language was concluded:
(a) all other parts and intermediate products (bodies and chassis with engines) were
bound at a 10% rate;
(b) China previously had separate tariff lines for some CKDs at a lower tariff rate;

43 Sir Robert Jenning & Sir Arthur Watts, eds., Oppenheim's International Law, 9th ed., Volume I,
Peace, Parts 2 to 4 (Harlow, Essex: Longman Group UK, 1992), at pp. 1280-1281 (Exhibit CDA-5).

(c) Members understood that China was at th e time of accession classifying CKDs as
parts, and charging them the parts rate (though without discounts for meeting
domestic content thresholds); and
(d) most Members who have separate tariff lines for CKDs charge lower rates than for
fully assembled vehicles.
62. ( China) With respect to CKD and SKD kits, is there any difference between
"manufacturing" and "assembling". If so, what is the difference and how is such difference
relevant to understanding Rule 2(a) of the General Interpretative Rules?

Response of China

262. The scope of GIR 2(a), second sentence, is defi ned by reference to the types of assembly
operations specified in Explanatory Note VII to GIR 2(a). The Explan atory Note states, in relevant
part:
 For the purposes of this Rule, "articles presented unassembled or
disassembled" means articles the components of which are to be assembled either by
means of fixing devices (screws, nuts, bolts , etc.) or by riveting or welding, for
example, provided only assembly operations are involved.
 No account is to be taken in that regard of the complexity of the assembly
method. However, the components shall not be subjected to any further working
operation for completion into the finished state.

263. Neither GIR 2(a) nor the Explanatory Note contains any reference to "manufacturing". The
relevant consideration, in respect of the scope of GIR 2(a), is whether the unassembled parts and
components can be assembled into the complete article by means of the specified assembly
operations, without regard to the complexity of th e assembly method. No party has disputed that
CKD and SKD kits can be assembled into a comp lete motor vehicle by means of the assembly
methods detailed in Explanatory Note VII. Among other considerations, this conclusion follows from
the fact that national customs authorities routinel y classify CKD and SKD kits for motor vehicles as
"motor vehicles" in accordance with GIR 2(a).
264. The notion of "manufacturing" is only relevant, if at all, in what is implied by the statement
that "the components shall not be subjected to an y further working operation for completion into the
finished state." By "working operation," the drafte rs of GIR 2(a) presumably meant to use the word
"working" in the sense of "making, manufacture, construction; the manner or style in which
something is made."
44 Thus, if the components must be subjected to an additional "working
operation" (i.e., a manufacturing operation) before th ey can be assembled into the complete article,
then the components cannot be classified as the comple te article in accordance with GIR 2(a). In the
context, it is reasonable to interpret the term "w orking operation" to mean some process beyond the
types of assembly operations detailed in the Explanatory Note.
265. In sum, the notion of "manufacturing" is not re levant to the application of GIR 2(a) to CKD
and SKD kits, as it is beyond dispute that CKD and SKD kits are assembled into finished vehicles by
means of the assembly operations specified in the Explanatory Note.

44 The New Shorter Oxford English Dictionary at 3720 (CHI-40).

Comments by the United States on China's response to question 62
266. In its response to this question, China stated: "In sum, the notion of 'manufacturing' is not
relevant to the application of GIR 2(a) to CKD and SKD kits, as it is beyond dispute that CKD and
SKD kits are assembled into finished vehicles by m eans of the assembly operations specified in the
Explanatory Note." The factual question as to whether CKD and SKD kits can be assembled into
finished vehicles is indeed disputed by the United States, as spelled out in our response to the Panel's
question 47. Further, "manufactur ing" operations are not covered by GIR 2(a). See Explanatory
Note VII to GIR 2(a), which states in relevant part "[h]owever the components shall not be subjected
to any further working operation for completion into the finished state."
45
63. ( China) What is the relationship between "CKD and SKD kits" and the "assemblies"
referred to in Article 21(2) of Decree 125?

Response of China

267. There is no particular relationship, other than th at they all consist of auto parts in various
states of assembly. A complete motor vehicle is, of course, an assemblage of various parts. It is a
convention in the automobile industry to group these parts into "assemblies," such as all of the
constituent parts that make up the "transmission as sembly." In its most literal sense, a CKD kit
consists of the parts necessary to assemble a particular motor vehicle, completely unassembled. In
practice, there is a continuum between a CKD kit a nd a kit in which at least some of the parts and
components are in a more advanced stage of assembly – that is, an SKD kit.
64. ( China) Could China please comment on paragraphs 67-68 of the European
Communities' oral statement.

Response of China

268. In China's view, the point that the EC is trying to make in paragraphs 67 and 68 of its oral
statement is not entirely clear. The EC's argum ent appears to be that the data presented in
paragraph 19 of China's first writte n submission demonstrate that certain combinations of assemblies
specified under Article 21 of Decree 125 do not, in the EC's view, have the essential character of a
motor vehicle under GIR 2(a).
269. The first response to this contention is that th e fact that certain assemblies only constitute a
certain portion of the value of the assembled mo tor vehicle does not necessarily mean that those
assemblies do not, in their entirety, have the essential character of a motor vehicle. The ratio of a
particular assembly to the value of the assembled motor vehicle will change from one vehicle model
to another. While a ratio of imported parts beyond a certain value level may indicate that those parts
have the essential character of the complete article, the fact that the ratio of imported parts is below a
certain value is not necessarily determinative unde r the essential character test. As discussed in
response to question 117, the value of parts and components in relation to the value of the finished
article is one factor that customs authorities rely upon in applying the essential character test under
GIR 2(a).
270. The second response to the EC's contention is that if it wants to challenge the application of
Decree 125 to the facts of specific cases, and argue that certain combinations under Article 21 of
Decree 125 do not have the essential character of a moto r vehicle, then it should being that case either

45 Exhibit CHI-15.

to a WTO dispute settlement panel or to the Ha rmonized System Committee of the World Customs
Organization. But the claim that it has brought before this Panel is that there is no set of facts to
which China could apply the challenged measures and obtain a correct classification result. China
rebuts this contention in response to question 147 below.
65. ( China) Please clarify whether the final duty liability always lies with automobile
manufacturers regardless of the recorded importer.

Response of China

271. The auto manufacturer is, in most cases, the importer of record for most of the imported parts
and components that it assembles into a registered motor vehicle model. In those cases, the duty
liability lies with the auto manufacturer as the importer of record.
272. Article 29 of Decree 125 concerns the circumstance in which the auto manufacturer purchases
imported auto parts and components from a third-part y supplier in China. In that case, the auto
manufacturer is liable for the difference between any duty that has already been paid on the imported
parts and components, and the duty that is applicable by reason of their incorporation into a registered
vehicle model for the manufacturer has declared that the imported parts have the essential character of
a motor vehicle.
66. ( China) Please explain how tariff duties are impo sed on imported auto parts when auto
part manufacturers import auto parts.

Response of China

273. China assumes that this question pertains to impor ts of auto parts by auto part manufacturers
that are not also manufacturers of complete motor ve hicles. In that event, the importer would declare
the imported auto parts under the applicable tariff rate provisions for auto parts, and would pay the
applicable duty rates for these parts in accordan ce with the ordinary customs procedures for the
payment of duties.
67. ( Complainants) If China was imposing an anti-dumping duty on complete vehicles,
would China in your view have the right to impose such duty upon imports of CKD and SKD
kits?

Response of the European Communities (WT/DS339)

274. Such measures should be applied in accordance with the relevant WTO rules most notably
Article VI of the GATT 1994 and the Agreement on Implementation of Article VI of the GATT 1994.
In any event, any such duties should not affect the normal application of the provisions in force
concerning ordinary customs duties.
Response of the United States (WT/DS340)

275. A Member's ability to impose antidumping duti es is governed by Article VI of GATT 1994
and the AD Agreement. The investigating Member has the right to impose anti-dumping duties on
imports of those products for which it has made a determination that there was dumping of the
products under investigation, injury to domestic producers of the like products, and a causal link. The
investigating Member is not required to impose the se duties on the basis of tariff lines and, in fact,
investigating Members rarely do. Typically, the dut ies are applied to the products covered by the

investigating Member's determination, which can be defined in numerous ways. The product
coverage can be defined to apply to some but not a ll products that fall under a particular tariff line or
to products falling under or within a variety of tariff lines. In addition, the product coverage can apply
to finished products or to parts or both. That is what the rules of GATT Article VI and the
Anti-Dumping Agreement allow. The only requirements are the findings of dumping, injury and
causal link.
276. Thus, with regard to the hypothesized anti-dumping order imposing duties on complete
vehicles, it would depend on precisely how the product coverage of the anti-dumping order was
defined as to whether duties could be applied to CKD kits and SKD kits. If the product coverage
expressly included the kits, and the requisite findi ngs of dumping, injury and causal link had been
made, it would be appropriate to impose duties on the kits. If it was unclear whether the product
coverage included the kits and the investigating au thority made an appropriate circumvention finding,
it would again be appropriate to impose duties on the kits. If, however, the product coverage of the
anti-dumping order expressly excluded the kits, it would not be appropriate to impose duties on them.
Response of Canada (WT/DS342)

277. If China was imposing an anti-dumping duty on co mplete vehicles, the ability to impose that
duty on CKDs and SKDs would depend entirely on the constraints imposed by GATT Article VI and
the Agreement on Implementation of Article VI (the "AD Agreement"). As set out in Article 1 of the
AD Agreement , anti-dumping duties can only be applied under the circumstances provided for in
Article VI of the GATT 1994 and pursuant to inves tigations initiated and conducted in accordance
with the provisions of the AD Agreement. Anti-dumping duties can only be imposed on imports
falling within the description of those goods covered by an anti-dumping duty order or finding.
278. Typically, the scope of anti-dumping duty investigations, any resulting order and,
consequently, any anti-dumping duties imposed, will extend to goods in their assembled and
disassembled states whenever su ch goods are commonly presented for entry at the border in a
knocked-down state. GIR 2(a) is not directly app licable in making a determination about the proper
scope of coverage of products to be assessed an anti-dumping duty.
68. ( All parties) Please comment on the view that if WTO Members are allowed to resort to
the notions contained in Rule 2(a) of the General Interpretative Rules, such as "as presented"
and "essential character", in relation to tariff cla ssification, it could have serious implications
on the world trading system in light of tod ay's commercial reality that manufacturers import
parts and components from different sources and assemble them together.

Response of China

279. The Appellate Body has repeatedly affirmed the importance of the Harmonized System in
interpreting a Member's Schedule of Concessi ons. As the Appellate Body observed in EC –
Computer Equipment , it was "undisputed" in that case that "the Uruguay Round tariff negotiations
were held on the basis of the Harmonized System's nomenclature and that requests for, and offers of,
concessions were normally made in terms of this nomenclature."
46 I n EC – Chicken Cuts , the AB
observed that "prior to, during, as well as after the Uruguay Round negotiations, there was broad
consensus among the GATT Contracting Parties to use the Harmonized System as the basis for their

WTO Schedules …"
47 On this basis, the Appellate Body cons idered that "the Harmonized System is
relevant for purposes of interpreting tariff commitments in the WTO Members' Schedules."48
280. The General Rules are, as their name indicates, "rules for the interpretation of the
Harmonized System." 49 As the chapeau to the General Rul es indicates, the purpose of the General
Rules is to provide "principles" according to which "the classification of goods … shall be governed."
Under Article 1(a) of the International Convention on the Harm onized Commodity Description and
Coding System (the "Harmonized System Convention"), the General Rules are a part of the
Harmonized System. 50 In addition, under Article 3.1(a)(ii) of the Harmonized System Convention,
contracting parties are required to apply the General Rules. General Interpretive Rule 2 is one of six
General Interpretive rules. As China has explained to the Panel, the purpose of GIR 2(a) is to deal
with the relationship between complete articles and parts of articles.51
281. In light of this history and cont ext, China does not consider that the relevant issue is whether
WTO Members should be "allowed" to apply GIR 2( a). To the extent that they are also WCO
members, WTO Members are required to apply GIR 2(a). As it pertains to the interpretation of
Members' Schedules of Concessions, GIR 2(a) is just as important in providing context as any other
element of the Harmonized System. Members have negotiated tariff commitments on the basis of the
Harmonized System, including the principles set fort h in GIR 2(a) for distinguishing between tariff
provisions for complete articles and tariff provisions for parts of articles. There is no basis to
conclude that this context is any l ess relevant under Article 31(2)(a) of the Vienna Convention than
any other aspect of the Harmonized System.
52
282. As for the concern that terms such as "essential character" and "as presented" would have on
the world trading system, it is important to stress that GIR 2(a) does not provide a license for national
customs authorities to classify imports however they wish. With respect to GIR 2(a), first sentence,
the article must be "incomplete or unfinished," and while there is some scope for disagreement
concerning the application of the "essential character" test to a specific set of facts, these types of
disagreements tend to fall within a narrow range of relevant characteristics. In the case of any such
disagreements, domestic customs pr ocedures and international pro cedures in the WCO and WTO are
available to challenge the application of the rules to specific products.
283. With respect to GIR 2(a), second sentence, the unassembled or disassembled parts must be
capable of assembly into the complete article w ithin a carefully circumscribed range of assembly
operations. Thus, customs authorities could not invoke GIR 2(a) to classify any collection of parts or
materials as a complete article that those parts or materials could conceivably form. Under GIR 2(a),
customs authorities cannot combine iron and carbon to make steel, or combine flour and yeast to
make bread. By the terms of Explanatory Note VII to GIR 2(a), the second sentence applies only to
"articles the components of which are to be assembled either by means of fixing devices … or by
riveting or welding, for example, provided only assembly operations are involved." In actual practice,
there is a fairly narrow range of products under th e Harmonized System to which this circumstance
applies.

50 JE-35.
51 This is underscored by General Interpretive Rule 2(b), which deals with the closely related issue of
the relationship between a material and a mixture or combination that includes that material.
52 See EC – Chicken Cuts at para. 199 (concluding that, under Article 31(2)(a) of the Vienna
Convention, the Harmonized System is "an agreement relating to the treaty which was made between all the
parties in connection with the conclusion of the treaty.")

284. Thus, the principles of GIR 2(a) do not pose a threat to the international trading system.
Customs authorities have been applying the principl es of GIR 2(a) for many years, even before the
adoption of General Interpretive Rule 2(a) in 19 63. These principles are a standard feature of
international customs practice.
Response of the European Communities (WT/DS339)

285. These notions cannot be taken out of their pr oper context. Rule 2 (a) very clearly
demonstrates that all of its elements must be fu lfilled at the same time. Taking any of these notions
out of their context entirely undermines the whole sy stem of tariff classification and results in tariff
classification at will. Members may of course use Rule 2(a) in its proper context to assist in individual
cases that fulfil all the conditions of the Rule. Howe ver, China ignores the very basic rule that is
Rule 1 of the HS system by jumping directly into rule 2 (a) and then picks and chooses what in that
rule fits to its anti-circumvention theory. This would seriously compromise "the security and
predictability of the reciprocal and mutually adva ntageous arrangements directed to the substantial
reduction of tariffs and other barriers to trade" (Appellate Body e.g. in EC – Chicken cuts , at para.
243).
Response of the United States (WT/DS340)

286. If China's view were adopted, then no producer would ever be able to rely on the tariff
bindings set out in a Member's schedule. In ev ery case, producers would face the possibility that an
importing Member (as China has done) would adopt thresholds that arbitrarily defined some
collection of imported parts as having the charact er of a whole product, and would thus begin
assessing duties on the parts as if they were the whol e product. Moreover, if China's view were
adopted, every Member (regardless of the specific details of their tariff bindings on parts and whole
products) would be entitled (as China has done) to impos e higher charges on imported parts (as long
as the rate of duty was equal or lower to the bindi ng on the finished product) used in domestically
manufactured products if those products failed to meet domestic content thresholds . In other words,
every Member would be entitled to adopt local-cont ent based TRIMs, despite the prohibition on such
measures in the TRIMs Agreement.
Response of Canada (WT/DS342)

287. Canada does not take issue with WTO Members making use of GIR 2(a) in classification of
individual shipments of products on the basis of the "snapshot" of goods as they arrive at the border.
The "essential characteristics" must be assessed based on the objective characteristics of the product
as presented at the border in a single shipment.
288. In marked contrast, accepting China's argume nts that GIR 2(a) could apply to multiple
shipments arriving at different times (whether or not from multiple destinations, and after the product
has been imported based on criteria such as end-u se) would undermine significantly the security and
predictability afforded by tariff concessions. In EC – Chicken Cuts , the Appellate Body considered
the understanding of Members in respect of tariff c oncessions. It noted that the object and purpose of
the GATT 1994 is "the security and predictability of 'the reciprocal and mutually advantageous
arrangements directed to the substantial reduc tion of tariffs and other barriers to trade'". 53 A Member
that could ignore one lower tariff concession for a nother, higher one would thwart the understanding

53 EC –Chicken Cuts , Report of the Appellate Body, WT/DS2 69/AB/R, WT/DS286/AB/R, adopted
27 September 2005, at para. 241, fn. 455, citing the Appellate Body in EC – Computer Equipment.

of Members negotiating the concession and ther eby undermine the object and purpose of the
GATT 1994.
Comments by the United States on China's response to question 68
289. On page 54 of its first submission, China asserts that: "As China has explained to the Panel,
the purpose of GIR 2(a) is to deal with the re lationship between complete articles and parts of
articles." This is a misstatement of General Interp retative Rule 2(a), which deals with the relationship
of articles either incomplete or unfinished as well as articles complete or finished that are presented
unassembled or disassembled. The notion that this is the only relevant rule ignores the application of
General Interpretative Rule 1, which states that: "f or legal purposes, classification shall be determined
according to the terms of the heading and any rela tive Section or Chapter Notes and, provide such
heading or Notes do not otherwise require, according to the following provisions."
290. For example, the gasoline engine assemblies d escribed in Exhibit CHI-3, are precluded from
classification in chapter 87 as "parts" of motor vehi cles by the application of General Interpretative
Rule 1 and Legal Note 2(e) to Section XVII (which includes chapter 87), and directs classification of
this assembly to Heading 84.07 which provides for: "Spark-ignition reciprocating or rotary internal
combustion piston engines." This interpretation is supported by EN VIII to GIR 2(a), which provide
that "Cases covered by this Rule are cited in the General Explanatory Notes to Sections or Chapters
(e.g., Section XVI, and Chapters 44, 86, 87 and 89)." The General EN to Chapter 87 states that this
"Chapter also covers parts and accessories which ar e identifiable as being suitable for use solely or
principally with the vehicles included therein, subject to the provisions of the Notes to Section XVII
(see the General Explanatory Note to the Section)."
291. Further, China's Footnote 20 also misstates GIR 2(b). That footnote argues: "This is
underscored by General Interpretive Rule 2(b), whic h deals with the closely related issue of the
relationship between a material and a mixture or co mbination that includes that material." To the
contrary, GIR 2(b) provides guidance on how to inte rpret headings that reference a "material or
substance." GIR 2(b) simply has no relevance to how customs officials should classify articles and
parts.
292. On page 56, China asserts the following: "T hus, the principles of GIR 2(a) do not pose a
threat to the international trading system. Cust oms authorities have been applying the principles of
GIR 2(a) for many years, even before the adoption of General Interpretive Rule 2(a) in 1963. These
principles are a standard feature of international cu stoms practice." China's selective use of GIR 2(a)
does pose a threat to the international trading system, because it ignores the structure of the
Harmonized System and General Interpretative Rule 1. The Harmonized System is made up of
96 chapters grouped into 21 sections consisting of approximately 5, 000 article descriptions in the
headings and subheadings. The Ha rmonized System is divided into categories or product headings
beginning with crude and natural products and continuing in furt her degrees of complexity through
advanced manufactured goods.
293. General Interpretative Rule 2(a) requires that customs officials make a determination as to
whether components entered together impart the essentia l character of a complete or finished article.
If not, then the components are to be individually classified. This view is supported by the structure
of the Harmonized System itself, which specifically names certain parts in their own headings (e.g.,
spark-ignition reciprocating or rotary intern al combustion piston engines of heading 84.07,
transmission shafts of heading 84.83, chassis fitted with engines of heading 87.06, bodies (including
cabs) of heading 87.07) and contains headings for parts suitable for use solely or principally with
motor vehicles (e.g., heading 87.08 which provides for parts and accessories of the motor vehicles of

headings 87.01 to 87.05). To classify all parts even tually incorporated into complete motor vehicles,
as motor vehicles would empty many headings and subheadings of the goods specified therein.
69. ( All parties ) When you refer to CKD and SKD kits in relation to the assembly of
automobiles, are they always composed of the same combination of auto parts or is there a
range of combinations of auto parts that coul d comprise such CKD and SKD kit? Please also
provide definitions of CKD and SKD kits respectively.

Response of China

294. There is no standard definition in the automo tive industry of what constitutes a CKD or SKD
kit. As China explained in its first written submission, the ordinary understanding of a CKD kit is that
it includes all, or nearly all, of the parts and components necessary to assemble a complete vehicle. In
Indonesia – Autos, the EC informed the panel that CKD kits for export to Indonesia included "almost
all the parts and components necessary for assembling the cars."
54 The United States informed the
panel that the CKD kits for the Ford Escort "would have contained all of the individual parts
necessary to build a complete Esco rt, except for locally procured parts and components, such as oil
and gasoline."
55 However, industry sources sometimes use th e term "CKD kit" to include a certain
proportion of locally-supplied parts and components. BMW, for example, states on its web site that
"[i]n the CKD process, certain parts and components are packaged as kits in precisely defined
assembly steps and exported for assembly in the respective countries. These kits are then
supplemented with locally manufactu red parts in the partner countries ."56 As China has explained
previously, an "SKD kit" differs from a CKD in the extent of its prior assembly; it can be thought of
as a CKD kit that has been partially assembled before it is exported to the destination market.
295. Because there is an inherent amount of ambiguity in these terms, one often needs to examine
the context in which the terms are used to discern the intended meaning. A recent article concerning a
new "CKD logistics centre" opened by the Czech au to manufacturer Skoda Auto provides some sense
of how these terms are used, and also provides c ontext for answering the question below concerning
the CKD assembly process. The article explains:
The new CKD logistics centre has been designed for end-to-end preparation,
packaging and shipping of Skoda vehicles in three different assembly set versions –
SKD (semi-knocked-down), MKD (medium- knocked-down) and CKD (completely-
knocked-down). Complete unassembled vehicles are shipped by the centre to foreign-
based assembly plants in special containers or by train.
An SKD assembly set is made up of a completely geared body, drive unit (engine,
transmission and front axle), rear axle and other chassis parts (such as wheels, fuel
tank, exhaust system, etc.). …
One level down in terms of assembly-readiness, the MKD system comprises a painted
body plus a further 1,300 – 1,700 parts. The vehicle assembly is performed on a
standard assembly line, using a technological process comparable with that applied in
the "parent" assembly plant….

54 Indonesia – Autos, at para. 8.239.
55 Indonesia – Autos, at para. 8.242.
56http://www.bmwgroup.com/e/0_0_www_bmwgroup_com/produktion/produktionsnetzwerk/produkti
onsstandorte/montagewerke.html (visited 4 June 2007).

The lowest level of assembly-readiness is CKD. The manufacturing plant delivers
body parts and other components broken down to a large number of items. The
assembly plant welds and paints the bod y, installs the drive unit and other
components and completes the final vehicle build on a standard assembly line.
57
296. Note that the distinguishing feature among these three different types of kits is the degree of
"assembly-readiness". The SKD has substantially assembled parts and components (such as the entire
drive unit), the MKD kit has an asse mbled body that has already been painted plus "1,300 – 1.700
parts," while the CKD kit is "broken down to a large number of items," including an unassembled
body.
Response of the European Communities (WT/DS339)

297. There are no established legal definitions of CKD and SKD kits. In the language of the
industry CKD or SKD kits may denote a combination of parts that make up a certain more general
part of a vehicle ("assembly" using the language of Decree 125) or a combination of parts that make
up a complete vehicle. Therefore, in the industr y the concepts are used in a variety of ways.
However, the European Communities understands that CKD and SKD kits under the measures
comprise all the parts necessary to make a complete vehicle.
Response of the United States (WT/DS340)

298. This response is based on the understanding of the United States regarding general industry
usage of the terms "CKD" and "SKD". As noted in response to Question 47 above, these terms are
not used by the US Customs Service for the purpose of tariff classification. In addition, the United
States is not aware of any formal, published definition of these terms.
299. CKD stands for "complete knocked-down" and SKD stands for "semi knocked-down".
Completely knocked-down kits" ("CKDs") are part s imported together in unassembled condition that
provide the necessary parts in order to manufacture a whole vehicle. The kit may include not only
parts, but also sub-assemblies and assemblies such as engine, transmission, axle assemblies, chassis
and body assemblies. Semi knocked-down kits" ("SKDs ") refers to partially assembled combinations
of parts that can be used to manufacture a whole vehicle..
Response of Canada (WT/DS342)

300. See Canada's response to Question 33.
70. ( All parties) In light of your response to the previous question, please clarify whether
you agree with the European Communities' explanation on CKD and SKD kits in
paragraph 267 of its first written submission, in cluding its reference to "all the parts necessary
to manufacture not only a vehicle, but also an 'assembly'"?

Response of China

301. For the reasons set forth in response to questio n 69, China does not consider that a CKD or
SKD kit must include all of the parts necessary to assemble a moto r vehicle. As noted above, there is
some ambiguity in how the automotive industry uses these terms. While it is generally agreed that a
CKD kit includes nearly all of the parts and com ponents necessary to assemble a motor vehicle, the

57 "Skoda Auto steps up global production with new distribution facility" (5 May 2006) (CHI-41).

industry sometimes uses the term "CKD kit" in a way that encompasses a certain proportion of
locally-supplied content.
302. With respect to the EC's use of the term "ass embly" in relation to a CKD kit, China believes
that the EC was referring to the possibility that a particular assembly might itself be imported in the
form of a CKD kit. This is contemplated by Article 22(1) of Decree 125, which provides that an
assembly shall be considered imported if it is assemble d from "imports of a complete set of parts …"
Thus, for example, if a transmission assembly is assembled from a complete set of imported parts,
Decree 125 classifies the imported parts as a transmission assembly, not as parts of a transmission
assembly. This is consistent with General Interpretative Rule 2(a).
Response of the European Communities (WT/DS339)

303. The European Communities understands that this question is addressed to the other parties.
Response of the United States (WT/DS340)

304. The United States notes that the EC statement in paragraph 267 is describing the EC view of
how "CKD" and "SKD" are used in Decree 125. The EC notes that China's measure does not
exhaustively define these terms, and the EC "assume d" that such kits "consist of "all the parts
necessary manufacture a vehicle or an 'assembly"." The United States believes these assumptions are
reasonable, given the lack of clarity in China's measures.
Response of Canada (WT/DS342)

305. As set out above, Canada agrees that CKDs or SK Ds contain all or virtually all of the parts
necessary to manufacture a whole vehicle.
Comment by the United States on China's response to question 70
306. In its response to this question, China states th at it does not consider that a CKD or SKD kit
must include all of the parts necessary to assemble a motor vehicle. China explains that "there is
some ambiguity in how the automo tive industry uses these terms," and that "[w]hile it is generally
agreed that a CKD kit includes nearly all of th e parts and components necessary to assemble a motor
vehicle, the industry sometimes uses the term 'CKD kit' in a way that encompasses a certain
proportion of locally-supplied content." The United States agrees that industry uses the term "kit" to
describe a wide range of combinations of parts, many of which do not in clude all of the parts
necessary to assemble a motor vehicle. However, th e Panel's question is addressed to the measures at
issue (not industry usage of the terms). And Chin a's measures, particularly Articles 2 and 21(1) of
Decree 125, appear to define CKD and SKD kits as kits that include all of the parts necessary to
assemble a motor vehicle.
71. ( All parties) Please explain in detail what kind of manufacturing processes are usually
involved to make a complete vehicle using CKD or SKD kits?

Response of China

307. The automobile assembly process (including the assembly of CKD or SKD kits) is commonly
divided into three parts: welding, painting, and the final assembly (or "fitting") of the vehicle. Motor
vehicles are assembled from metal components that ha ve been stamped, or pressed, into the required
shapes. While there is some variation from one vehicle model to another, the basic structural

elements of a passenger motor vehicle are the side panels, the floor panels (including the front wall
and the back wall), the roof, and the opening pane ls (i.e., the doors, bonnet, and rear hatch). These
components must be welded together to form the body of the vehicle (often referred to as the "body in
white"). Once welded together, the assembled body is painted and cured through various processes of
spraying, heating, sanding, and lacquering. Th e painted body then goes through an assembly line
process in which the various interior and exterior components of the vehicle (such as the windscreen,
dashboard, seats, and steering wheel) are fitted to the vehicle by means of screws, fasteners, or
bonding agents. Usually toward the end of this pro cess, the vehicle is attached to the powertrain
assembly (consisting of the engine, transmission, and axles), which has already been assembled on a
different assembly line. The car is fitted with wh eels and bumpers, and the doors are attached to the
vehicle body. At the end of this process, the assembled vehicle undergoes inspection and testing.
308. The nature and extent of the assembly opera tions required for any given CKD or SKD kit
will, of course, depend upon the extent to which the parts and components of the vehicle were
assembled prior to their arrival at the assembly f acility. For example, an SKD kit may consist of a
vehicle body that was welded and painted prior to export. In that event, the vehicle would only need
to undergo the final assembly process in the destinat ion market. Likewise, the various assemblies of
the motor vehicle (such as the engine and transmis sion) may already be assembled in an SKD kit; this
is alluded to in the excepts from the article concerning Skoda Auto quoted above.
309. Whatever its state of prior assembly, however, both CKD and SKD kits are assembled by
means of the types of assembly operations specified in Explanatory Note VII to General Interpretative
Rule 2(a).
Response of the European Communities (WT/DS339)

310. It is not possible to give a general answer as the level of fitting and equipping will by
definition vary. The example of a SKD kit provi ded in Exhibit CHI-5 would not require complex
manufacturing processes provided all the electroni c equipping and calibration is already done and
only the fitting of the tyr es would be necessary. In contrast, the difference between manufacturing a
CKD kit into a complete vehicle may not differ considerably from the manufacturing of a complete
vehicle generally. However, this will depend on th e manufacturing facilities of the manufacturer and
the complexity of the relevant model. Modern vehi cles that typically contain elements of computer
technology require various types of calibration dur ing the manufacturing process. Most body and
chassis components will also need further working oper ations in the form of rust treatment, painting
and polishing.
Response of the United States (WT/DS340)

311. It is not possible to give a general answer as the level of fitting and equipping will vary
depending on the circumstances and the content of the kit. An SKD with a high level of assembly (or,
put another way, very little disassembly) may requ ire relatively simple assembly operations. In
contrast, assembling a complete knock down kit (CKD) will be more complex.
Response of Canada (WT/DS342)

312. It is not until the final stage of assembly that the chassis with engine (tariff heading 87.07)
combines with the body (tariff heading 87.08) to form a complete vehicle. In order to explain how
CKDs or SKDs are assembled, Canada considers it necessary to set out briefly the normal
manufacturing process for a complete vehicle.

Chassis: the frame is placed on the assembly line. The complete front and rear suspensions,
gas tanks, rear axles and drive shafts, gear boxes, steering box components, wheel drums and
braking systems are installed sequentially. The engine with its transmission is then attached.

Body: the floor pan is the largest body component, containing many panels and braces. The
front and rear door pillars, roof and body side panels are first assembled onto the floor pan.
Additional body components, including fully assembled doors, deck lids, hood panel, fenders,
trunk lid and bumper reinforcements, are then in stalled. Next the vehicle body is spray-
painted. After the shell leaves the paint area, it undergoes interior assembly. This include
parts such as instrumentation, dash panels, in terior lights, seats, door and trim panels, audio
system, steering column, and windshield.

Final Assembly: the chassis assembly conveyor and th e body shell conveyor meet at this
stage of production. As the chassis passes th e body conveyor, the body is placed onto the
chassis and bolted to the frame. The automobile proceeds down the line to receive final trim
components, battery, tires, anti-freeze and gasolin e. The vehicle is inspected and is given a
price label and is prepared for delivery to retailers if it passes.

313. If CKDs or SKDs are used, while final assembly may be similar, the assembly operations for
the body and chassis will be much less complicated than assembly solely from parts. However, it is
not possible to provide a more detailed answer in the abstract, given the number of parts and assembly
combinations.
72. ( All parties) Do the complainants agree with the description of SKD kits as illustrated in
Exhibit CHI-5. If not, explain why.

Response of China

314. China notes that this question was directed to all parties, although it appears to ask a question
of the complainants. As China noted in its firs t written submission at para. 36, the auto industry
sometimes uses the term "SKD kit" to refer to a complete vehicle that has been partially disassembled
prior to shipping. (More commonly, the term refe rs to a partially assembled motor vehicle that has
never been fully assembled.) That appears to be the intended meaning of the logistics company in this
particular case. As stated in the text that accompanied the photo at CHI-5, the logistics company
notes that "SKD (semi knocked down kits) have already been dismantled, packed and shipped for
DaimlerChrysler …"
58 The company also notes that the shi pping process for these SKD kits involves
the "partial dismantling" of these vehicles. From th e photograph, it is evident that the "dismantling"
entailed removing the tyres and strapping them to the shipping skid.
Response of the European Communities (WT/DS339)

315. The European Communities agrees that the description in Exhibit CHI-5 illustrates a
particular type of an SKD kit provided all of the parts are presented to the customs at the same time.
Response of the United States (WT/DS340)

316. Exhibit CHI-5 appears to illustrate a complete ve hicle rather than an SKD kit. It appears to
show a fully finished vehicle with its tires strapped to the shipping skid and not yet mounted.

58 See http://www.blg.de/news-content2006/februar06_en.php.

Response of Canada (WT/DS342)

317. Canada agrees that Exhibit CHI-5 could be a par ticular type of SKD, provided that all of the
parts necessary to manufacture the SKD in question are included in a given shipment at a given time.
However, the example would be an unusual SKD, si nce Canada understands that SKDs usually are in
a less advanced state of assembly than shown in the exhibit.
73. ( All parties) Canada submits in footnote 1 of its first written submission that "in this
submission, except where the measures specific ally provide for other categories of goods,
"parts" includes all auto parts and components associated with the production of whole vehicles
or individual assemblies." In light of this statement, please clarify the exact scope of the
products at issue in this case. Please explain in detail by referring to, inter alia, HS headings.

Response of China

318. The motor vehicles at issue fall under headings 87.02 (motor vehicles for the transport of ten
or more persons, including the driver), 87.03 (m otor cars and other motor vehicles principally
designed for the transport of persons), and 87.04 (motor vehicles for the transport of goods).
Different tariff headings under Chapters 84, 85 and 87 set forth China's commitments with respect to
parts and assemblies of motor vehicles. These include, at the four-digit level:
84.07 Spark-ignition reciprocating or rotary internal combustion piston engines
84.08 Compression-ignition internal combusti on piston engines (diesel or semi-diesel
engines)
84.09 Parts suitable for use solely or principally with engines of heading No. 84.07 or 84.08
85.39 Electric filament or discharge lamps, including sealed beam lamp units …
87.06 Chassis fitted with engines, for the moto r vehicles of headings Nos. 8701 to 8705
87.07 Bodies (including cabs), for the motor vehicles of headings Nos. 8701 to 8705
87.08 Parts and accessories of the motor ve hicles of headings Nos. 8701 to 8705

319. Not all subheadings under these headings relate to the motor vehicles of headings 87.02,
87.03, or 87.04.
Response of the European Communities (WT/DS339)

320. At the four digit level the products at issue fall generally into the following HS headings:
(a) complete vehicles (under headings 87.01 to 87.05 of which headings 87.02 to 87.04
are most relevant in view of the scope of the measures)
(b) intermediate products such as the body an d the chassis fitted with engine (under
headings 87.06 and 87.07)
(c) parts and accessories of the motor vehicles of headings 87.01 to 87.05 (under heading
87.08)
(d) parts and accessories of motor vehicles classified elsewhere than chapter 87 (in
particular Chapters 84 and 85; in this respect most relevant are headings 84.07, 84.08,
84.09, 84.83 and 85.11 but also other head ings may be relevant depending on the
vehicle type).

Response of the United States (WT/DS340)

321. This footnote in Canada's first submission sets out a working definition of "parts," and the
United States agrees with this definition. The Un ited States notes, however, that the scope of this
dispute is not established by any disputing party's working definition of "parts" as set out in a
submission. Rather, the scope of this dispute is set out in the terms of referenc e, which in turn refers
to matters (including the measures) set out in the re quest for an establishment of a panel. Thus, the
products at issue in this dispute are the products subject to China's measures (Order No. 8,
Decree 125, and Announcement No. 4). The product coverage of China's measures appears to be very
broad, and to include any piece (part, assembly, or anything else) used in the production of complete
vehicles.
322. The United States understands that at the four dig it level, the products at issue fall generally
into the following HS headings: (1) complete vehicles (under headings 87.01 to 87.05 of which
headings 87.02 to 87.04 are most relevant in view of the scope of the measures); (2) intermediate
products such as the body and the chassis fitted w ith engine (under headings 87.06 and 87.07); (3)
parts and accessories of the motor vehicles of headin gs 87.01 to 87.05 (under heading 87.08); and (4)
parts and accessories of motor vehicles classified elsewh ere than chapter 87 (in particular Chapters 84
and 85; in this respect most relevant are headings 84.07, 84.08, 84.09, 84.83 and 85.11 but also other
headings may be relevant depending on the vehicle type).
323. Nonetheless, the tariff classification (either asser ted by complainants or asserted by China)
does not determine the scope of the products covered w ithin the scope of this dispute. As noted, the
United States is challenging the consistency of th e measures with covered agreements, and the scope
of the products encompassed in this dispute are any products that China subjects to its measures
identified in the request for establishment of a panel.
Response of Canada (WT/DS342)

324. The products at issue in this case are all products which are, or could be, subject to charges or
reporting requirements under the measures.
325. Article 2 of Decree 125 specifies that charges may be imposed on all imported auto parts
"which are needed for production and assembly of vehicles by automobile manufacturers". Article 3
specifies that "automobiles" include vehicles having at least four wheels used for carrying passengers
or freight. Article 20 specifies that optional parts attached to a vehicle are covered by the measures.
As a consequence, Canada believes that the majority of parts at issue in this dispute fall under Chapter
87 (especially headings 87.06, 87.07, and 87.08), w ith other parts falling notably under Chapter 40
(especially headings 40,11, 40.12, and 40.16), 84 (especially headings 84.07, 84.08, and 84.09) and 85
(especially headings 85.01, 85.03, 85.06, 85.07, 85.11 and 85.12).
74. ( Complainants) Please comment on China's statemen t in footnote 129 to its first written
submission, which was made in response to the complainants' reference to Exhibit JE 25
(p. 189).

Response of the European Communities (WT/DS339)

326. This statement would appear to confirm that China considers CKD and SKD kits as
consisting of all
 the parts necessary to manufacture a vehicl e. Furthermore, China appears to admit
that a significant combination of parts necessary to manufacture a vehicle presented at the same time
to customs at the border was classified as parts prior to China joining the WTO.

Response of the United States (WT/DS340)

327. Footnote 129 of China's first written submi ssion addresses statements about CKD and SKD
kits made in a book cited by the complainants. The statements at issue appear to be correct.
328. Prior to its WTO accession on 11 December 2001, the Chinese government generally did not
allow the importation of CKD or SKD kits with essentially all of the parts required to assemble a
complete vehicle. However, if an automob ile manufacturer committed to the establishment of
significant manufacturing facilities in China, China sometimes would allow the importation of these
kits as needed to get the operations started.
329. With regard to kits that did not contain essentially all of the parts required to assemble a
complete vehicle (meaning kits that lack major asse mblies such as engines or other parts required to
meet the criteria for having the "essential character" of a complete vehicle within the meaning of the
General Interpretive Rules and their explanatory no tes), China applied import duties at rates that
varied depending on whether the automobile manuf acturer was sourcing 40, 60 or 80 per cent of its
parts locally - the higher percentage of parts s ourced locally, the lower the duties on the imported
parts.
330. In footnote 129 of its first submission, Chin a notably does not dispute the accuracy of these
facts. Rather, China disputes whether or not the groups of components mentioned in the source
should be called "kits". But whether China calls th em "kits" or not is beside the point. The source
supports the Complainants' assertion that the groups of components being imported into China prior to
accession were being assessed duties at rates far below the whole-vehicle rate, and again illustrates
that the purpose of paragraph 93 of the Working Part y report was to ensure that groups of parts and
components imported into China after accession woul d be assessed as parts, and not at the higher
whole-vehicle rate.
Response of Canada (WT/DS342)

331. Since there is no established general definition of the terms CKD and SKD, Canada does not
agree with China that this is a "misuse" of these te rms. Canada does agree, as set out in answer to
Question 61(a), that evidence of China's treatment of CKDs and SKDs prior to accession is limited.
As noted in response to that question, China' s own claims regarding treatment of CKDs are
contradictory.
332. Canada also agrees that these terms as used in Exhibit JE-25 are broader in scope than the
term used by the complainants, as they apparent ly included collections of parts that were not
sufficient to assemble a whole vehicle. As discussed in answer to Question 33, th is is consistent with
the broader definition of CKDs or SKDs in the auto industry. Further, Canada understands that the
basic information provided by that author to the effect that CKDs and SKDs were charged lower tariff
rates than assembled vehicles does hold true for the term as used in this dispute. This is so because
even if virtually all parts necessary to assemble a vehicle were imported in one shipment that arrived
together at the border (i.e., a CKD or SKD as the term is used in this dispute), those parts were
charged a tariff rate for CKDs or SKDs with less than 40% domestic content. While that rate was
higher than the rate for parts used in manufactured vehicles with greater domestic content, the rate
was nevertheless lower than the tariff rate for imported fully assembled vehicles.

75. ( All parties) Are there any differences between CKD kits and SKD kits? If so, please
explain.

Response of China

333. As China has explained in response to questio n 69, and as illustrated in response to that
question, CKD and SKD kits differ in their extent of prior assembly. An SKD kit is a CKD kit with
various parts and components at a more advanced stage of assembly.
Response of the European Communities (WT/DS339)

334. The difference between the concepts is the di fferent level of assembly and manufacture or
"fitting and equipping" to use the specific language used under chapter 87 of the HS system. A CKD
is a 'completely knocked-down" kit in which nothing or very little is fitted or equipped while an SKD
or a 'semi knocked-down kit' consists of partia lly assembled, fitted, equipped and/or processed
combinations of parts that together would make up a complete vehicle. Reference is also made to the
reply provided to question 47.
Response of the United States (WT/DS340)

335. Please see the response to question 69 above.
Response of Canada (WT/DS342)

336. See Canada's response to Question 33. However, Canada does not believe that this difference
is material for purposes of this dispute.
76. ( China) Article 21(1) of Decree 125 refers to "imports of CKD or SKD kits for the
purpose of assembling vehicles ." Are CKD or SKD kits imported for purposes other than
assembly of vehicles? If so, what are those other purposes?

Response of China

337. CKD and SKD kits are not imported for any purpose other than assembly into motor vehicles.
77. ( China) In support of the argument of circumvention, China submits in paragraph 21 of
its first written submission that "since the adoption of the challenged measures, auto
manufacturers have confirmed that approximately 120 of the 500 or so vehicle models that have
completed the evaluation process ... are assembled from imported parts and components having
the essential character of a motor vehicle."

 How many of these evaluation processes w ere related to importations done by the
manufacturer itself and how many by the suppli er? How many of these evaluation processes
were related to importations of CKD or SKD ki ts? How many of these evaluation processes
were disputed by the manufacturer under the pro ceedings of Article 12 of Announcement 4?
How many of these evaluation processes were disputed by the manufacturer before the courts in
China?

Response of China

338. As of 1 May 2007, the CGA has verified 713 vehicle models, of which 130 have been verified
as assembled from imported parts and components that have the essential character of a motor
vehicle. China is uncertain what the question means when it asks "how many of these evaluation
processes were related to importations done by the manufacturer itself and how many by the
supplier." Evaluations are performed by automobile manufacturers with respect to the vehicle models
that they assemble. They are not performed by part s suppliers. If the question is intended to ask how
many registered vehicle models ha ve imported parts that are imported exclusively by third-party
suppliers (and none by the manufacturer itself), the an swer is that there are 15 such models, all of
which are buses.
339. None of the evaluation processes have related to CKD or SKD kits. As China has noted, auto
manufacturers import CKD/SKD kits as motor vehicles, in accordance with GIR 2(a).
340. None of the evaluation processes have been di sputed by the manufacturer under Article 12 of
Announcement 4, and none have been disputed in court.
B. N
ATURE OF THE MEASURES
78. ( All parties) Please comment on the following argu ment contained in paragraph 14 of
Australia third party oral statement, made in relation to China's claim that a charge imposed
after the time or point or importation can still be a border charge if it relates to a condition of
liability that attached at the time of importation:

"Presumably, in an attempt to establish a nexus with importation, the measures
at issue include a declaration made at the time of importation. However, this
declaration appears to be entirely focu sed on the way in which the imported
parts will be used internally within China, rather than on the contents of a
consignment upon importation. ... Therefore ... the liability attaches internally ,
after the vehicle has been manufactured." (emphasis added)
Response of China

341. China has responded to essentially the same argu ment in response to question 54. China's
responses to questions 79 and 134 below are also per tinent to this question. In sum, the customs
process that China has established under the ch allenged measures serves to determine whether
multiple shipments of parts and components are rela ted to each other through their common assembly
into a finished motor vehicle. The liability to pa y the customs duty does not "attach internally"; it
attaches by reason of the importation of multiple shipments of parts and components that, in their
entirety, have the essential character of a motor ve hicle. The auto manufacturer's obligation to pay
this customs duty arises by reason of the importation of a group of auto parts that have the essential
character of a motor vehicle, whether it imports those parts in a single shipment or multiple
shipments.
Response of the European Communities (WT/DS339)

342. The European Communities entirely agrees with the argument contained in paragraph 14 of
Australia's third party oral statement. In this respect, the European Co mmunities refers to the
examples provided in paragraph 66 of its first wr itten submission, which clearly illustrate that the
15 % additional charge on auto parts is not dependent on the importation of the part, but on the use to

which this part was put in China. If a WTO Me mber could transform a measure triggered by the
internal use of imported products into a border measu re just by imposing a declaration at the border,
Article III of the GATT would be reduced to nullity.
Response of the United States (WT/DS340)

343. The United States agrees with this statement, and believes that this position is consistent with
the reasoning of the United States showing that Chin a's charges are internal ones, and not customs
duties.
Response of Canada (WT/DS342)

344. Canada agrees with Australia's statement, and in that regard refers the Panel to paragraphs 65
and 66 of Canada's first written submission, as an illustration of how liability attaches internally under
the measures.
79. ( China) If a country were to require retailers importing certain goods to declare at the
time and point of importation whether they would subsequently sell such goods internally,
would a sales tax eventually levied internally after the selling of these goods be considered as a
border charge, rather than an internal tax, simp ly because it is related to a "condition of
liability attached at the time of importation"? Would your response be different if, in addition
to the declaration at the border, the retailer were also required to place a bond?

Response of China

345. The short answers to these two questions are "no" and "no". In fact, these questions perfectly
illustrate the fallacy of the complainants' conten tion that China is seeking to create a loophole in
Article III.
346. China has repeatedly emphasized that it does not take the position that a WTO Member can
impose any charge as a liability of importation, and th ereby evade the disciplines of Article III. This
is a fictitious argument that the complainants have s ought to attribute to China. Within the scope of
Article II, the relevant question is whether the charge is one that the Member is allowed to impose by
reason of the importation of the product, in accord ance with its Schedule of Concessions and other
WTO obligations. As China has explained in res ponse to other questions, it is consistent with
Article II to impose these charges after the time or place of importation, provided that the charge
relates to a liability that arose by reason of the importation of the product.
347. This brings China, once again, to what it considers to be the central issue in this dispute: Is it
allowed under the rules of the Harmonized System, and in accordance with the practice of other WTO
Members, to classify as a "motor vehicle" multiple shipments of parts and components that, in their
entirety, have the essential character of a motor ve hicle? China has explained at length its position
that this is a valid interpretation of the term "m otor vehicle" under international customs rules and
practice. Thus, the challenged measures result in the imposition of ordinary customs duties that China
is allowed to impose by reason of the importation of the product.
348. The declaration that importers make at the ti me of importation, and the bond that they are
required to provide, are simply elements of the cu stoms procedure that Chin a has adopted to give
effect to this valid interpretation of the term "m otor vehicles" as it appears in China's Schedule of
Concessions. It is neither the declaration nor the bond that renders the duty valid under Article II.
What makes the duty valid is that it reflects a proper interpretation of the term "motor vehicles."

80. (Complainants) Would the complainants consider that the payment by the vehicle
manufacturer of the 25% charge on CKD and SK D kits at the border, as contemplated in
Article 2 of Decree 125, be characterised as a "border measure" or "ordinary customs duty"?
If so, would it be appropriate for the Panel to consider this specific case under Article II GATT?

Response of the European Communities (WT/DS339)

349. Provided the regular customs procedures are used in that context, the European Communities
agrees that it would be appropriate for the Panel to consider this specific case under Article II GATT.
The issue would therefore be whether it is in accord ance with Article II of the GATT to classify CKD
and SKD kits always and automatically as complete vehicles. As stated under paragraph 275 of the
EC's first written submission, such a general and automatic classification would not be consistent with
China's obligations under Article II.
Response of the United States (WT/DS340)

350. If the enterprise agrees to pay a 25% charge on an CKD or SKD at the border, the other
aspects of China's measures (such as verification of lo cal content) would not apply. In this limited
case, the charge would appear to be a customs duty. The issue would therefore be whether it is in
accordance with Article II of the GATT 1994 to classify CKD and SKD kits always and automatically
as complete vehicles, without regard to whet her, for example, only assembly operations were
involved in completing the whole vehicle. In additi on, the United States contends that such tariff
treatment of CKDs/SKDs is inconsistent with Chin a's obligations under paragraph 93 of the Working
Party Report.
Response of Canada (WT/DS342)

351. Where such a CKD or SKD is charged 25% based upon its condition as it arrives at the
border, i.e., commonly understood customs procedures are followed, Canada agrees that this is an
appropriate case to be considered under GATT Article II. That consideration would include , e.g., an
evaluation of whether the particular CKD or SK D could properly be said to have "the essential
character" of a whole vehicle, and whether the appropriate tariff rate was charged.
81. ( Canada) In paragraph 11 of its oral statement, Canada states that "there are clear
rules in international trade for assessing goods on importation. These rules recognize that there
must be flexibility on importation at the border..." (emphasis added) Please explain what these
clear rules are.

Response of Canada (WT/DS342)

352. These rules are those which govern the Harmonized System, including the International
Convention on the Harmonized Commodity Description and Coding System and the General Rules for
the Interpretation of the Harmonized System. This includes Notes and Explanatory Notes to the
Harmonized System. Decisions of the WCO's Harmonized System Committee may also be relevant.
82. In paragraph 4 of its oral statement, China referred to an example of an auto
manufacturer whose imports of parts and components come "from its own affiliates and from a
single country" (emphasis added).

(a) ( China) Could China clarify whether the measu res concerned are applied only to auto
part imports coming from companies affiliated with the importing automobile manufacturer
and from a single country? If so, please specify the relevant provisions of the measures
concerned; and

Response of China

353. The measures do not apply only to auto part imports coming from companies affiliated with
the importing automobile manufacturer and from a si ngle country. China referred to this specific
example in its opening statement simply to illustrate the complainants' positions in this dispute.
(b) ( All parties ) Canada refers to factors such as "origin" of imported parts, "who"
purchases those parts, and whether there was an earlier investigation (paragraph 24 of
Canada's oral statement) and "the timing of shipments or their frequency" (paragraph 34 of
Canada's oral statement). Please explain wheth er, and if so, to what extent, these factors are
relevant to the consideration of the nature of the challenged measures.

Response of China

354. These statements by Canada are highly pertinent to what China believes to be the central issue
in this dispute. Canada has effectively conceded that WTO Members can apply the principles of
GIR 2(a) to multiple shipments of parts and compon ents, consistent with the rules of the Harmonized
System. In Canada's view, the issue is one of how customs authorities go about doing this. That is,
Canada appears to believe that it is not a question of whether, but how.
355. This is a critical concession by Canada. Once it is conceded that the WCO has interpreted
GIR 2(a) to permit its application to multiple ship ments of related parts and components, and once it
is conceded that other WTO Members have taken a similar approach to resolving the relationship
between complete articles and parts of those articles, then the complainants must acknowledge that
customs authorities can design and implement cust oms procedures to accomplish this result.
Moreover, the complainants must acknowledge that these customs procedures relate to the
implementation and enforcement of customs duties th at Members are allowed to impose by reason of
the importation of parts and components that have the essential character of the complete article.
These procedures are therefore within the scope of Article II of the GATT 1994.
356. Once these important points are established, this dispute becomes one that is fundamentally
about the specific customs procedures that China h as adopted to resolve the classification relationship
between motor vehicles and parts of motor vehicles. China considers that Decree 125 establishes an
open, transparent, and predictable customs procedure for determining what Cana da has referred to as
the "commercial reality" underlying multiple shipments of auto parts and components.
59 A s C h i n a
has explained, this procedure determines whethe r multiple shipments of parts and components are
related to each other through their common assembly in to a specific vehicle model. In this way, the
procedure determines whether multiple shipments of parts and components are equivalent to a single
shipment of parts and components that China would have classified as a motor vehicle under
GIR 2(a).
357. As for the specific factors cited by Ca nada, the critical point is that China does conduct what
Canada refers to as an "investigation." That is the purpose of the evaluation and verification process –
to "investigate" whether an auto manufacturer im ports parts and components for a specific vehicle

59 See CHI-22.

model that, in their entirety, have the essential char acter of a motor vehicle. With respect to the
"origin" of imported parts, Chin a does not understand why this would be pertinent to the question of
whether an auto manufacturer has imported parts an d components in multiple shipments that have the
essential character of a motor vehicle.
60 With respect to "who" purchases the imported parts and
components, China is not certain as to what Canada means. To the extent that Canada is referring to
the application of Decree 125 to parts and component s that were imported by third-party suppliers,
China addresses this question in response to question 83. Finally, with respect to the "timing of
shipments or their frequency," China again does no t understand why this would be relevant to
determining whether an auto manufacturer has im ported parts and components in multiple shipments
that have the essential character of a motor vehicle.
Response of the European Communities (WT/DS339)

358. These factors demonstrate that the Chin ese measures are much broader than the
"circumvention" charges that were examined in EEC - Parts and Com ponents. Therefore they must a
fortiori fall under Article III of the GATT.
Response of the United States (WT/DS340)

359. Canada in its opening statemen t was responding to China's premise that its measure was
intended to stop importers, who were in the pr actice of importing CKDs, from evading the whole-
vehicle tariff applied to CKDs by splitting the CKD into two separate boxes. As the United States has
noted, the premise of China's argument is false: modern, full-scale manufacturing operations are not
in the business of importing CKDs; instead, as a matter of course, manufacturers purchase bulk
shipments of parts from various sources. And, nothing in China's measures is limited to, or targeted
at, some hypothetical manufacturer who is splitting a CKD shipment into two or more separate boxes.
360. Presumably, if a Customs authority were involved in an investigation as to whether an
importer was engaged in such a practice, it might examine factors such as those set out in the above
question. However, China's measures are not in fact aimed at such practices, and – as Canada rightly
pointed out -- the fact that China's measures do not take account of these factors further shows that
China's measures were not in fact intended to stop the alleged practice of splitting a CKD into
separate boxes.
Response of Canada (WT/DS342)

361. The principal reason for citing those specific factors in paragraph 24 of Canada's Oral
Statement is to demonstrate that Chinese measures are broader than the "circumvention" charges at
issue in EEC – Parts and Components . In that case, the charges were intended to prevent
"circumvention" of anti-dumping duties. Both the original anti-dumping duties and the anti-
circumvention charges were established following an investigation, and applied only to certain
companies which imported products from a particular country.61
362. These factors are relevant to a consideration of the present measures in two ways. First, it is
relevant because even the more targeted charges considered in EEC – Parts and Components , which
were directly linked to particular anti-dumping duti es, were still found to be internal charges subject
to Article III:2.

60 Indeed, as China points out in response to question 112, the decision of the HS Committee notes that
the application of GIR 2(a) to multiple shipments is not a Rule of Origin issue.
61 See EEC – Parts and Components, GATT Panel Report, at para. 2.8 and Annex I.

363. Second, these factors go to the analysis of China's defence under Article XX(d). Canada
accepts that Article XX(d), in principle, could be u sed to justify internal ch arges necessary to enforce
customs measures. However, as discussed in paragra ph 36 of Canada's Oral Statement, the measures
do not even attempt to target particular conduct. As such, even if the measures could be justified
under Article XX(d), they would still be arbitrary an d act as a disguised restriction on international
trade in auto parts.
83. ( China) In paragraph 27 of its oral statemen t, the United States submits that China
appears to concede that the imposition of a charge on a part imported by a third party is an
internal charge, not a customs duty based on footnote 20 of China's first written submission.
Does China agree with this statement?

Response of China

364. No. China considers that any charges im posed on an auto manufacturer pursuant to
Article 29 of Decree 125 objectively relate to the administration and enforcement of China's tariff
provisions for motor vehicles, as they relate to the proper classification of the imported parts and
components as part of a collection of imported parts and components that, in their entirety, have the
essential character of a motor vehicle. China notes, in this connection, that the EC has measures to
ensure that importers cannot evade the duties that a pply to the complete article by using third-party
importers.
62 Article 29 serves the same purpose.
365. China acknowledges, however, that this specifi c aspect of Decree 125 presents a different set
of issues in relation to the charact erization of the measure under Article II. In most cases, imported
parts that the auto manufacturer purchases from a th ird-party supplier in China will have completed
the necessary customs formalities and are no longer subj ect to customs control. In those cases, the
imported parts and components are in free circulation in China. Because China believes that these are
important considerations in the characterizati on of this aspect of the Decree 125, China has
specifically invoked the general exception in Article XX(d) of the GATT 1994 to justify this
provision. China believes that, even if the Panel were to find that this provision of Decree 125 is an
internal measure subject to the disciplines of Arti cle III, it is necessary to secure compliance with
China's customs laws and regulations, including its valid interpretation of the term "motor vehicles."
84. ( Complainants) The Panel in EEC – Parts and Components used the expression
"conditioned upon the importation of a product" (paragraph 5.5). In this connection, please
comment on China's position that the term "on their importation" can be interpreted to
encompass charges that Members impose as a condition of the importation of products from
other countries (China's oral statement, paragraph 25).

Response of the European Communities (WT/DS339)

366. The European Communities does not believe th at the panel used the expression "conditional
upon the importation of a product" as a legal test in EEC- Parts and Components. In paragraph 5.5 of
the panel report the panel appears to cite or at most rephrase the arguments made by the EEC at the
time. The actual test the panel used seems to be cont ained in paragraphs 5.6, 5.7 and 5.8 of the panel
report.
367. However, the European Communities understands that China aims at extending the time and
place at which the determination of a customs liability is normally made to a time well beyond the

62 See China's first written submission at para. 125.

time of the product being presented to customs on importation and even beyond the time of the
product being used internally in the manufactur e of other products. The European Communities
fundamentally disagrees with this position of China. As China considers that the charges in question
are "ordinary customs duties" they should be due "on importation" not "in connection with
importation" or be "conditional u pon importation" of a product. In reality the charges and
administrative requirements are internal measures im posed on the basis of the use of the parts in
China. There is no "connection" or "condition" th at relates to importation despite the ostensible
formal link made with customs authorities and customs procedures.
Response of the United States (WT/DS340)

368. The United States does not agree that the term "on their importation" in Article II, first
sentence, includes measu res that Members impose "conditional upon the importation of a product."
There is no textual or contextual basis presented by China (or otherwise) for su ch an interpretation.
To the extent that these two phrases have different meanings, the one chosen by China (and the one
not actually used in the GATT) is much broader, an d seems to be chosen by China in an attempt to
argue that its internal charge is a customs duty. In fact, China's phrase ("conditional upon") is so
broad that it would seem to allow an internal sal es tax to be different for domestic products and
imported products (because the higher tax on imported products would be "conditional" upon the fact
that the product had been imported). Such an in terpretation would, of c ourse, be impermissible
because it would conflict with (and make inutile) Article III:2.
369. China's suggested interpretation is also inconsis tent with the context of Article II:1(b) as a
whole. The first sentence of Article II:1(b) associates the phrase "on their importation" with "ordinary
customs duties". The second sentence of Article II: 1(b) uses a broader term – "imposed on or in
connection with the importation" – with the catch-a ll concept of "all other duties or charges of any
kind." But China's interpretation would destroy th is structure – it would (without reason) associate
the arguably even broader phrase "conditional upon importation" with ordinary customs duties, thus
rendering ineffective the decision by the drafters to use the broad concept "on or in connection with"
in association with "other duties and charges."
Response of Canada (WT/DS342)

370. Canada does not agree with China's pos ition that the phrase "conditioned upon the
importation of a product" is of any assistance in considering the measures. The phrase does not appear
in the text of Article II, nor does the panel in EEC – Parts and Components adopt the language as
relevant for interpreting that Article. In Canada's view, the term was not used by the panel in any legal
sense. Instead, the panel was referring merely to an argument put forward by the EEC, in the context
of the second sentence of Article II:1(b).
371. Even if the panel had accepted the EEC's argu ment, and allowed conditions to be imposed on
the importation of a product, China could not re ly on a similar argument. The second sentence of
Article II:1(b) refers to "other duties or charges". But China has clearly stated that it takes the position
that the charges under the measur es are "ordinary customs duties", not "other duties or charges". See
also Canada's response to Questions 97, 99 and 100.
372. As a further hypothetical, even if China ha d explicitly included in its Schedule a note
allowing it to impose conditions on the importation of auto parts as an "ordinary customs duty", it
could not rely on that condition to impose internal charges contrary to GATT Article III (which China
concedes that it imposes with respect to imports by anyone other than vehicle manufacturers). Panels

have consistently ruled that Members cannot use c onditions reflected in a Sc hedule so as to justify
measures otherwise inconsistent with their WTO obligations.
 63
85. ( All parties ) The complainants have presented their claims in such way that that the
Panel would be required to examine their claims under Articles III and the TRIMS Agreement
only if the measures at issue were to be considered as internal measures. In your view, if the
measures were to be considered as border measures, would th e Panel still be required to
address the complainants' claims under Article III and Article 2 of the TRIMs Agreement?

 In this connection, would the fact that th e Appellate Body (para. 211) upheld the Panel's
finding in EC - Bananas III that, inter alia, "border measures may be within the purview of the
national treatment clause" (Panel Report, para. 7.176) be of any relevance to this question?
Please explain.

Response of China

373. For the reasons that China has explained, th e challenged measures are within the scope of
Article II because they interpret and enforce China' s tariff rate provisions for motor vehicles, as set
forth in its Schedule of Concessions. If the Panel were to agree with China that the challenged
measures are subject to the disciplines of Article II, this would mean, in China's view, that the Panel
would not be required to consider the complainan ts' claims under Article III and Article 2 of the
TRIMs Agreement.
374. China considers that, within their respective spheres of application , Article II and Article III
of the GATT are mutually exclusive of each other. The critical issue is determining their respective
spheres of application. The basic purpose of Ar ticle III is to prohibit Members from discriminating
against imported products in comparison to the treatment that they provide to domestic products. One
of the purposes of Article II, however, is to count enance a specific type of discrimination against
imported products – the imposition of ordinary cu stoms duties within the limits of the importing
Member's Schedule of Concessions. The discrimina tion inherent in a customs duty that a Member
validly imposes is not a form of discrimination that is prohibited under Article III. If that were the
case, Article II would be inutile; the right to impose ordinary customs duties would be given in
Article II only to be taken away in Article III. This interpretation is not consistent with the object and
purpose of the GATT and is not consistent with principles of effective treaty interpretation.
375. The panel and Appellate Body reports in EC – Bananas III highlight the critical importance of
defining the respective applications of Article II and Article III in relation to a challenged measure. In
relevant part, EC – Bananas III concerned the procedures that the European Communities had
adopted for the allocation of import licenses unde r its tariff rate quota for third-party and non-
traditional ACP bananas. Under these procedures, "operators" who had marketed bananas from EC
and traditional ACP sources during the preceding th ree-year period – so-called "Category B"
operators – were allocated 30 per cent of the impor t licenses necessary to import third-party and non-
traditional ACP bananas under the TRQ. This system created an incentive fo r operators to purchase
EC and traditional ACP bananas in order to increase their share of third-party and non-traditional
ACP imports under the TRQ.
376. Critically, the EC's procedures for distribu ting import licenses for third-party and non-
traditional ACP bananas bore no relationship to the tariff rate quota that it was allowed to maintain .

63 EEC – Imports of Beef, GATT Panel Report, L/5099 - 28S/92, adopted 10 March 1981, at paras. 2.2,
4.5-4.6; United States –Sugar, GATT Panel Report, L/6514 - 36S/331, 22 adopted June, 1989, at para. 5.5.

The EC was allowed to maintain the TRQ with in the scope of its GATT commitments, and was
allowed to maintain a system of import licenses to give effect to this TRQ. The issue in dispute was
whether the EC's procedures for distributing these import licenses, and the eligibility criteria that it
adopted for this purpose, were within the scope of its rights and obligations under Article II. The
Appellate Body recognized this important distinc tion: "At issue in this appeal is not whether any
import licensing requirement, as such, is within th e scope of Article III:4, but whether the EC
procedures and requirements for the distribution of import licenses for imported bananas among
eligible operators within the European Communities are within the scope of this provision."
64 The
Appellate Body found that the EC's distribution procedures for import licenses went "far beyond the
mere import license requirements needed to administ er the tariff rate quota for third-country and non-
traditional ACP bananas or Lomé Convention requirements for the importation of bananas."65
377. As it relates to the present dispute, EC – Bananas III stands for the proposition that a law or
regulation that a Member adopts to implement and enforce a measure that it is allowed to maintain by
reason of the importation of a product (such as the imposition of a customs duty or the administration
of a TRQ), including any portion of such law or regulation, must be germane to that purpose. This is
what the panel meant when it stated that "border measures may be within the purview of the national
treatment clause." 66 As the panel stated, the "mere fact" th at the distribution criteria favouring the
purchase of EC and traditional ACP bananas were included within a measure that ostensibly pertained
to the administration of the TRQ did not determine whether the distribution criteria were subject to
the disciplines of Article II or Article III. 67 What mattered, as the Appellate Body confirmed in its
report, was whether this aspect of the measure was an element of administering the valid border
measure (the TRQ), and therefore within the scope of Article II, or whether this aspect of the measure
served instead to affect the internal sale, distribution, or use of the product.
68
378. As China has demonstrated, the challenged measures implement and enforce a valid
interpretation of China's tariff provisions for motor ve hicles, in a manner that is consistent with the
rules of the Harmonized System and the pr actices of other WTO Members under similar
circumstances. Unlike the measures at issue in EC – Bananas III , the measures are germane to the
enforcement of China's rights and obligations under Ar ticle II, in that they define the conditions under
which China will consider the importation of multiple shipments of auto parts and components to be

64 EC – Bananas III (AB), at para. 211.
65 EC – Bananas III (AB), at para. 211. This distinction had been recognized by the panel. The panel
stated that "we have to distinguish the mere requirem ent to present a licence upon importation of a product as
such from the procedures applied by the EC in the context of the licence allocation which are internal laws,
regulations and requirements affecting the internal sale of imported products." EC – Bananas III (Panel), at
para. 7.177. The panel stated that "although licences are a condition for the importation of bananas into the EC
at in-quote tariff rates, we find that the administration of licence distribution procedures and the eligibility
criteria for the allocation of licences to operators form part of the EC's internal legislation. … Therefore, the
[EC's] argument that licensing procedures are beyond the purview of the GATT national treatment clause
cannot, in our view, be sustained …" Id. at para. 7.178 (emphases added).
66 EC – Bananas III (Panel), at para. 7.176.
67 EC – Bananas III (Panel), at para. 7.177.
68 It is therefore not the case, as the United States a ppeared to suggest at the first substantive meeting,
that every aspect of a measure can be analyzed for its conformity with both Article II and Article III. To the
extent that a measure, or some aspect thereof, gives effect to a form of discrimination that a Member is allowed
to undertake pursuant to Article II, that same element of discrimination cannot be challenged under Article III.
For example, when a Member requires an importer to maintain certain records with respect to imported products
for the purposes of customs administration, this "discrimination" against imported products is not subject to the
disciplines of Article III. It is simply an aspect of administering and enforcing the "discrimination" that the
Member is entitled to undertake within the scope of its Article II commitments.

equivalent to the importation of a motor vehicle, in accordance with the principles of GIR 2(a). The
measures are therefore within the sphere of applicati on of Article II, and not subject to the disciplines
of Article III.
379. The same conclusion pertains in respect of Article 2 of the TRIMs Agreement . Under
Article 2 of the TRIMs Agreement, a Member may not apply "any TRIM that is inconsistent with the
provisions of Article III or Article XI of GATT 1994." Because the challenged measures are not
within the scope of either Article III or Article XI of the GATT, they are not subject to the disciplines
of the TRIMs Agreement.
Response of the European Communities (WT/DS339)

380. The European Communities does not believe th at it has presented its claims under the TRIMs
Agreement and Article III of the GATT in a way that woul d require the Panel first to decide whether
the measures at issue are to be considered as internal measures or not. Indeed, the European
Communities explicitly stated in its oral statement under paragraphs 13 and 21 that an analysis under
the TRIMs Agreement does not require such an ex ante preliminary consideration. It is China that has
decided to base its defence on a premise that the Pane l must first decide whether the measures at issue
are internal or border measures.
381. The European Communities considers th at the Appellate Body's finding in EC – Bananas III
is relevant in this context. China appears to c onsider that the general description of a Measure as a
"border measure" or "border charge" automatical ly excludes an analysis of that measure under
Article III of the GATT and/or under the TRIMs Agreement. In other words, China appears to argue
that a "border measure" in the case at hand equals "s ubject to Article II of the GATT". The European
Communities considers that a measure that attempts to operate ostensibly at the border but which in
reality applies internally is subject to an analysis under Article III of the GATT and the TRIMs
Agreement.
Response of the United States (WT/DS340)

382. As the United States stressed in its oral statement, the United States did not intend for its first
submission to indicate that Article III and the TRIM s Agreement only apply if China's charge is an
internal one, instead of a customs duty. To the contrary, the United States submits that regardless
 of
whether the charge is considered an internal one or a customs duty, the measures are a straightforward
breach of Article III:4, Article III:5, and the TR IMs Agreement. The thresholds established by
China's measures must be met in order to avoid the increase in the amount of 15 percentage points of
the charge on imported auto parts. As such, ma nufacturers have a strong incentive to purchase local
parts, which results in less favorable treatment under Article III:4, a mixing requirement under
Article III:5, and a prohibited local content requirement under the TRIMs Agreement.
383. Paragraph 211 of EC - Bananas III is directly supportive of this point. In that dispute, the
Appellate Body explained as follows:
"211. At issue in this appeal is not whether any import licensing requirement, as
such, is within the scope of Article III:4, but whether the EC procedures and
requirements for the distribution of im port licences for imported bananas among
eligible operators within the European Communities are within the scope of this
provision. The EC licensing procedures and requirements include the operator
category rules, under which 30 per cent of the import licences for third-country and
non-traditional ACP bananas are allocated to operators that market EC or traditional

ACP bananas, and the activity function rules, under which Category A and B licences
are distributed among operators on the basis of their economic activities as importers,
customs clearers or ripeners. These rules go far beyond the mere import licence
requirements needed to administer the tariff quota for third-country and
non-traditional ACP bananas or Lomé Conve ntion requirements for the importation
of bananas. These rules are intended, among other things, to cross-subsidize
distributors of EC (and ACP) bananas and to ensure that EC banana ripeners obtain a
share of the quota rents. As such, these ru les affect "the internal sale, offering for
sale, purchase, ..." within the meaning of Article III:4, and therefore fall within the
scope of this provision. Therefore, we ag ree with the conclusion of the Panel on this
point."
384. As the Appellate Body described, the EC measures (licensing requirements) were border
measures, but the criteria for allocating the licenses a ffected the internal sale, offering for sale, and
purchase within the meaning of Article III:4. The analys is in the current dispute is the same: even if
China's charges are considered cust oms duties, the fact that the leve l of these charges are conditioned
upon the amount of local content used by the manufac turer affects the internal sale, offering for sale,
and purchase of imported and domestic parts. As such, they are subject to analysis under Article III:4.
And, because the measures favor manufacturers wh o use an amount of domestic parts that meets
China's thresholds, the measures accord less favorab le treatment to imported parts and thus breach
China's obligations under Article III:4.
Response of Canada (WT/DS342)

385. Canada does not consider that any aspect of the measures could be interpreted so as to
preclude an Article III or TRIMs analysis. Canada has already referred to China's concession that
charges imposed on parts imported by any party in China other than vehicle manufacturers are
internal. There is no question that such char ges would be examined under GATT Article III and
TRIMS Article 2. That noted, a border measure that imposes a charge at the time of importation, in
accordance with China's Schedule, would fall within the ambit of Article II. No analysis under
Article III:2 would be required.
386. The administrative burdens imposed by the measures on imported auto parts must be assessed
under Article III:4. It is irrelevant where that burde n applies. Canada suggests that in analysing the
measures' administrative requirements, it is not necessary to make a preliminary determination of
whether those requirements are "border measures" or "internal measures" before considering whether
they violate GATT Articles III:4 and III:5.
387. Yes. The Appellate Body recognized that GA TT Article III may apply to measures otherwise
described as "border measures", where those measures "go far beyond" the requirements to administer
standard border procedures, and a ffect the "internal sale, offering for sale, purchase,…" within the
meaning of Article III:4.
69 Canada considers that the measures go far beyond anything typical of a
scheduled border charge or typical customs procedure and deny national treatment to imported
products, as set out at paragraphs 44 to 64 and 102 of Canada's first written submission.
86. ( European Communities ) China contends that the challenged measures, which it has
adopted to prevent circumvention of its tariff rates for motor vehicles, operate on the same basis
as the EC's anti-circumvention measure that wa s revised as a result of the panel's findings in

69Appellate Body Report, EC – Bananas III , WT/DS27/AB/R, adopted September 25, 1997 at
para. 211.

EEC – Parts and Components. (first written submission of China, paras.57-61) Please comment
in detail on this statement, including the di fferences and similarities between the challenged
measures and the old and revised EEC measures related to EEC – Parts and Components.

Response of the European Communities (WT/DS339)

388. The Anti-Dumping rules of the European Communities are not before the Panel. In any event,
the European Communities considers that the premi se of China's argument is fundamentally flawed.
Even if it were to be considered ( quod non) that the Chinese measures enfo rce Customs duties, trying
to extract from EC AD anti-circumvention rules or any other such rules general principles legitimising
anti-circumvention rules of Customs duties would be totally inappropriate. Anti Dumping measures
are subject to entirely separate obligations within the covered agreements which are defined in
Article VI of the GATT and the Agreement on the Implementation of Article VI of the GATT 1994.
Furthermore, the Ministerial Decision on Anti-Ci rcumvention adopted by the Trade Negotiations
Committee on 15 December 1993 explicitly recognises that uniform rules on anti-circumvention of
anti-dumping measures have not been defined. Any comparison is therefore bound to be
compromised by this fundamental problem with the premise of the comparison.
389. If one ignores this very basic problem for the comparison, there is perhaps a very general
similarity between the old EEC measures th at were subject to the panel report in EEC – Parts and
Components and the Chinese measures in the sense that the final determination on the applicable
duties was made after the assembly operations.
390. Under the new AD anti-circumvention rules, the possible AD duties on the parts will be
imposed at the border, and not anymore once they are assembled in the finished product.
391. Reference is also made to the reply given to question 132.
87. ( All parties ) In light of the language of GATT Articles I, II, III as well as the
Interpretative Note Ad Article III, how relevant, in your view, is the precise time and place of the
collection of a charge, or the enforcement of a law or regulation, to the characterization of such
charge or law/regulation?

Response of China

392. With the possible exception of the Note Ad Article III, China does not consider that the rights
and obligations of WTO Members set forth in GATT Ar ticle I, II, and III are defined by reference to
the precise time and place at which a charge is collected, or a law or regulation is enforced. None of
these articles contains terminology that is directly or necessarily linked to the time or place at which
the action is taken. On the contrary, these articles use a variety of different formulations to describe
the types of measures to which the relevant provisions pertain, all of which seem to focus on the event
or condition that triggers the right or obligation. For example:
• Article I:1 refers to "customs duties and charges of any kind imposed on or in connection
with importation
," and likewise refers to "all rules and formalities in connection with
importation …"
• Article II:1(b) refers to ordinary customs duties imposed on products " on their
importation into the territory," and refers also to "other duties or charges of any kind
imposed on or in connection with the importation …"

• Article II:2 refers to charges that Members may apply " at any time on the importation of
any product …" This is a particularly interesting formulation, as it appears to
disassociate the notion of time from the process of "importation," a term that is used
throughout Articles I and II.
• Article III:2 and Article III:4 both refer to "the products of the territory of any
contracting party imported into the territory of any other contracting party …"
393. In China's view, the common theme among these vari ous provisions, to the extent one can be
discerned, are the notions of importation and imported as the events or conditions that trigger the
substantive right or obligation. On one side are ri ghts and obligations that the Member has in respect
of products of other Members by reason of, or as a condition of, the "importation" of those products.
On the other side are rights and obligations that the Member has in respect of products of other
Members by reason of, or as a condition of, the fact that they have been "imported" into that
Member's territory. The time or pl ace at which the event occurs (e.g ., the collection of the charge, or
the enforcement of the law or regulation) is not central to this distinction; what matter is the event or
condition that gave rise to the relevant right or obligation.
70
394. This distinction requires an understanding of wh at the process of "importation" entails, as
well as an understanding of what it means for products to be "imported." China has already sought to
provide its views on this distinction, principally in connection with its responses to questions 37 and
55. In sum, China considers that the process of "importation" is complete, and that goods have been
"imported," once all of the customs formalities requi red in connection with the importation of those
goods have been satisfied, and the goods are no longer subject to customs control. As China has
stressed in response to other questions, includi ng question 79, WTO Members are not allowed to
impose any charge on imported products, or enforce any type of measure against imported products,
simply because it is collected or enforced as pa rt of the "importation" process. Again, China
considers that what matters is whether the measure is one that the Member is allowed to impose by
reason of, or as a condition of, the importation of the product.
Response of the European Communities (WT/DS339)

395. The precise time and place of the collection of a charge, or the enforcement of a law or
regulation may be relevant for the characterization of such charge or law/regulation under Articles I,
II and III of the GATT. It is not possible to give a "quantitative" answer that applies across the board.
However, for instance the actual payment of a charge i.e. the transfer of the monies due to importation
of a good may occur after importation but the dete rmination of the amount due must be made on
importation.

70 As noted, the one possible exception to this observation is the Note Ad Article III, which refers to an
internal tax or regulatory measure that applies to both the imported product and the like domestic product, and
which is "collected or enforced in the case of the impor ted product at the time or point of importation …" But
even this one reference to "the time or point of importation" is itself ambiguous, as it still requires an
understanding of what importation entails, when it occurs, and where it occurs. As China has sought to
demonstrate (e.g., in response to question 55), the process of "importation" (or "customs clearance") does not
necessarily conclude when the goods physically cross the border. The process of importation, including the
completion of all necessary customs formalities, is often concluded long after the time at which the goods
physically crossed the border, and when the goods are at a place other than the frontier.

Response of the United States (WT/DS340)

396. The United States considers that the precise time and place of the collection of a charge is
relevant to the characterization of such charge as an internal one or as a border charge. However, as
the question notes by its reference to Ad Article III, an internal tax applied to imported products at the
border is still considered an internal tax, despite that the time and place of its collection are at the
border and upon importation. The United States submits that this question must be examined based
on the particular facts and circumstances of each case. In this dispute, as the United States has
explained, the key factors in favor of finding China's charge to be an internal charge include (1) that
the level of the charge depends on details of th e manufacturing operations that take place within
China, after importation; (2) that the level of that charge cannot be determined until the manufacturing
process is complete; (3) that the charge is imposed on manufacturers, not importers; (4) that the
charge is imposed even on imported parts that have been imported and processed in China by
unrelated manufacturers; (5) that the parts deemed to be a single "whole vehicle" may have been
sourced from different exporters and imported at separ ate times; and (6) that such parts may indeed
even have been sourced from different countries. Moreover, identical
 imported parts in the same
shipment can be subject to different charges (that are allegedly "c ustoms duties") depending on their
internal use – for example, if one part is used within China as a replacement part and the other part is
used within China to manufacture a vehicle that fails to meet China's local content requirement.
Response of Canada (WT/DS342)

397. In assessing the characterization of a charge, one must consider why, as well as how or when,
the charge is imposed. As set out in more detail in response to Question 32, in respect of border
charges, Canada's view is that the precise time and place of collection of a charge is not determinative
in characterizing a charge or law/regulation as subject to Article III or II. Border charges may be
collected well after a product has been imported in to a Member, so long as the calculation of that
charge is based upon the condition of the product as it arrived at the border. Conversely, a clearly
internal charge (for example, a value-added tax) ma y be collected at the exact moment that a product
enters the country, in accordance with Article II:2(a) and Ad Article III. For a charge, what is
significant is whether the charge relates to the pr oduct as presented at a Member's border. Any border
charge, whether collected at the border or at some later time, may only relate to the product at that
point in time. If it does not (i.e., a charge based on end-use), then it must be an internal charge.
88. ( All parties ) Please explain whether a charge, law or regulation must apply to both
domestic and imported products to be considered internal in light of the language of Note Ad
Article III as well as the Panel's findings in EC – Asbestos (paras. 8.93-8.95), EEC – Animal Feed
(para. 4.16-4.18) and Dominican Republic – Import and Sale of Cigarettes (paras. 7.25).

Response of China

398. China considers that this is an extraordinarily difficult question of interpretation. In China's
view, the heart of the interpretive problem is Artic le II:1(b), second sentence, which refers to "other
duties or charges of any kind imposed on or in connection with the importation " of a product. Under
one interpretation, any charge that applies exclus ively to imported products, and that is not an
ordinary customs duty covered by Article II:1(b), firs t sentence, is an "other duty or charge" within
the scope of Article II:1(b), second sentence. This view finds limited support in the panel report in
Dominican Republic – Import and Sale of Cigarettes , although it is important to note that Honduras,
the complainant in that case, did "not contest the fact that the transitional surcharge is an ODC within

the meaning of Article II:1(b)."
71 It also finds support in the panel report in EC – Asbestos , which
implied that an internal measure under Article III is one that applies to both the imported product and
the domestic product, even if the measures in respect of the imported and domestic product are not
identical.72
399. This interpretation is complicated by the Note Ad Article III, which refers to "[a]ny internal
tax or other internal charge, or any law, regul ation or requirement of the kind referred to in
paragraph 1 which applies to an imported produc t and to the like domestic product and is collected or
enforced in the case of the imported product at the time or point of importation …" The italicized
language which applies to an imported product and to the like domestic product could be read as
describing what an "internal tax or charge" is – it as a tax or charge applied to imported products and
the like domestic products. This would support the apparent reading of the Note Ad Article III in EC-
Asbestos. On the other hand, the italicized language could be read as qualifying the type of "internal
tax or charge" to which the Note Ad Article III applies – it applies only to "internal taxes or charges"
that are imposed on both the imported product and the domestic like product. This second reading
would support the view that an "internal tax or charge" is not necessarily one that applies to both the
imported product and the domestic like product. Th is second reading is supported by the fact that,
under the first reading, the italicized language is essentially redundant – if the language "which
applies to an imported product and to the like domes tic product" describes what an "internal tax or
charge" is, then the language is not essential to th e intended meaning of that sentence. That is, under
the first reading, the sentence would have the same meaning if it were written without the italicized
language, as follows: "[a]ny internal tax or othe r internal charge, or any law, regulation or
requirement of the kind referred to in paragraph 1 wh ich is collected or enforced in the case of the
imported product at the time or point of importation …".
400. China does not consider that a resolution of this complex interpretive issue is necessary to the
resolution of the present dispute. For the reasons that China has explained, the challenged measures
implement China's tariff provisions for "motor vehicles," and result in the imposition of the ordinary
customs duties on motor vehicles that China is allo wed to collect under its Schedule of Concessions.
These are not "other duties or char ges" within the meaning of Article II:1(b), second sentence. Thus,
this dispute does not implicate the relationship between "other duties or charges" under Article II:1(b),
second sentence, and "internal taxes or charges" that are applied exclusively to "imported" products
within the scope of Article III.
Response of the European Communities (WT/DS339)

401. The language of Article III does not require that a charge, law or regulation must apply to
both domestic and imported products to be considered internal under Article III of the GATT 1994. In
fact, under Article III:1 and III:2 referen ce is made explicitly to "imported or domestic products"
(emphasis added). Therefore, a charge, law or regul ation does not need to apply to both domestic and
imported products to be considered internal and su bject to Article III of the GATT. The Ad Note to
Article III concerns specific situations where both the domestic and the imported like good are subject
to charges, laws, regulations or requirements but ar e collected or enforced in respect of the imported
good at the time or point of importation. If the sco pe of Article III was limited to situations where
internal charges, laws, regulations or requirements are applied to both domestic and imported goods, it
would render the most blatant discriminations (i.e . situations such as is the case with the Chinese
measures where the internal charges, laws, regulat ions or requirements apply internally only to
imported goods) outside the scope of Article III.

71 Dominican Republic – Import and Sale of Cigarettes, at para. 7.23.

Response of the United States (WT/DS340)

402. The language of Article III does not require that a charge, law or regulation must apply to
both domestic and imported products to be considered internal under Article III of the GATT 1994.
In fact, under Article III:1 and III:2, refe rence is made explicitly to "imported or domestic products."
Moreover, if the charge had to be applied to bot h imported and domestic pro ducts to be within the
scope of Article III, Members freely could favor domestic products – contrary to the intent of
Article III – through the simple expedient of imposing a high internal charge (a sales tax for example)
that applied only to imported products, while comp letely exempting domestic products from the sales
tax. In fact, the charge in Belgium - Family Allowances exempted domestic products, and the
GATT 1947 Panel nonetheless found that it was an inte rnal charge that was inconsistent with
obligations under Article III:2.
Response of Canada (WT/DS342)

403. Canada does not believe that a charge, law or regulation must apply to both domestic and
imported products to be considered internal. The language of Article III itself imposes no such
requirement, and Ad Article III simply clarifies that certain types of internal measures (which apply
equally to imported products and to like domestic products but are applied at the border) are subject to
Article III. In effect, Ad Article III allows internal measures to be applied at the border on imported
products rather than wait until those internal products have entered the internal market, but only if
those internal measures also apply equally (and separately) to domestic products. The reverse does not
apply, and there is nothing permitting measures rela ting to the importation of goods to be applied to
internal trade. Such an interpretation would effectiv ely eliminate the value of Article III's requirement
to provide national treatment, since it would allow blatant measures violating national treatment ( e.g.,
"all imported goods must pay an extra 100% char ge") as long as the measures do not apply to
domestic products.
404. A charge need not apply directly to both imported and domestic goods. Instead, it is correct to
consider whether that charge adversely affects th e conditions of competition for imported goods. This
principle is well-established in cases where a ch arge, law or regulation only applies to imported
goods, but, as a consequence, confers an advantage for those producers that use or purchase domestic
goods (see Canada's first written submission, at pa ragraphs 97-99). This is consistent with EC –
Asbestos (concluding that what might appear to be a measure restricting importation contrary to
Article XI could also be an internal measure) and EEC – Animal Feed Proteins.
405. The panel in Dominican Republic – Import and Sale of Cigarettes did suggest in passing that
the charge in question there was "not an internal tax … since it does not apply to domestic products",
but as set out in paragraphs 7.22 and 7.23, there was no dispute that the charges in question were
"other duties and charges" subject to Article II. The only question was whether those charges were
recorded in the Schedule of the Dominican Republic.
89. ( All parties) What is the meaning of " at any
time on the importation" in the chapeau of
GATT Article II:2 and " at the time or point of importation" in the GATT Interpretative Note
Ad Article III? Do they convey the same or different no tion of time and space? Can these
provisions be of any guidance for the Panel in its characterization of the nature of the
challenged measures?

Response of China

406. For the reasons set forth in response to questi on 87, China does not consider that any of the
various formulations surrounding the word "importati on" in Article I, Article II, or Article III
(including the Note Ad Article III) are clearly tied to a notion of time or space. In fact, as China noted
in that response, the formulation in the chapeau to Article II:2 (" at any time on the importation")
appears to disassociate the notion of "importation" from a specific time or place. As China also noted,
while the Note Ad Article III refers to the "time or point of importation," even this formulation
requires some understanding of what "importation" means, when it occurs, and where it occurs. Thus,
China does not believe that these references to time and space provide guidance for the Panel in its
characterization of the nature of the challenged meas ures. For the reasons that China has explained,
China believes that the event or condition giving rise to the measure is the most relevant
consideration.
Response of the European Communities (WT/DS339)

407. The words "at any time" in the chapeau of Article II:2 GATT would seem to refer to the
general right of members to impose the relevant char ges, duties and fees at any time. In other words,
"at any time" refers back to the words before them and not to the words "on importation" that come
after. The words "at the time or point of importation" in Ad Article III in turn seem to refer to the time
or point of importation. The words "at any time" and "at the time" in these provisions convey
therefore a completely different notion of time and space. Comparing these formulations would not
seem to provide any guidance for the Panel.
Response of the United States (WT/DS340)

408. The United States is not aware of how these provisions could be helpful in a characterization
of the challenged measures. Neither the complain ants nor China contends that the measures fall
within the scope of Article II:2 or Note Ad Article III. Instead, the provisions at issue are Article II:1
and Article III:2. To be sure, the language of ot her GATT provisions (such as Article II:2 or Note Ad
Article III) might be referred to for context, but it is unclear how those provisions provide context for
any interpretative issues in this dispute.
Response of Canada (WT/DS342)

409. Both phrases refer to the same concept: that there is a process of importation during which
products physically enter the territory of a WTO Member and are cleared through customs. "At any
time" during that process internal taxes may be imposed in accordance with Article II:2(a), but,
despite the charge being imposed at the "time or point" of importation, Ad Article III clarifies that it is
still an internal measure and subject to Article III.
410. In Canada's view, "at any time" should be read in relation to the remainder of the phrase "on
the importation". The latter phrase indicates that the point of "importation", and not after the goods
are imported, is the relevant time to apply the va rious types of charges that are permissible under
Article II:2, namely anti-dumping duties, border charges equivalent to internal charges, or fees for the
costs associated with importation. For example, a customs assessment of a good taken on presentation
may occur independent of the assessment of administra tive costs rendered in respect of that particular
importation. However, "at any time" read together with "on the importation" constrains the flexibility
of customs officials to apply any charge not otherwise contemplated in Article II:2. The phrase "at the
time" in Ad Article III appears to establish that the actual point of importation is discrete from the

passage of the good into the internal market for pur poses of Article III. Neither of these provisions
would seem to provide insight into timing issues in respect of Article II:1(b).
90. ( Complainants) Do you consider that the factors mentioned by China in paragraph 67 of
its first written submission are relevant to the characterization of a measure as a border
measure. If so, please explain whether the challenged measures:

Response of the European Communities (WT/DS339)

411. The factors mentioned by China in paragraph 67 of its first written submission clearly aim at
extending the scope of Article II GATT into meas ures that should be examined under Article III
GATT. Article II:1(b), first sentence does not contain any language that would allow the
unprecedented extension of its scope in the way China suggests in paragraph 67. As considered by the
Appellate Body in EC – Bananas III, rules that are attached to a border measure should be considered
under Article III if they affect internal sale.
Response of the United States (WT/DS340)

412. The United States does not agree with China's cont entions in paragraph 67 of its first written
submission. In fact, China's assertions are entirely circular – China starts with an assumption that its
charges are "valid customs liabilities" and a "liabilit y that attached at the time of importation."
Neither of these assumptions is true. As the Unite d States has explained, the charges are internal
ones, and the liability actually attaches not at the time of importation, but only after manufacturing.
In fact, China requires a bond at the proper 10 per cent parts rate, and the manufacturer is only liable
for the 25 per cent "whole-vehicle rate" if the imported part is used to produce a vehicle that does not
meet China's local content thresholds.
413. In the response to Question 32, the United States explains in detail why the customs
enforcement mechanisms that Ch ina refers to in paragraph 67 have no relation to the Chinese
measures at issue in this dispute.
Response of Canada (WT/DS342)

414. Canada does not agree with China's statement in paragraph 67 of its first written submission.
As Canada has stated previously, while payment of duties may be calculated or paid after importation,
the duties must be calculated based upon the state of goods as they are presented at the border – that is
to say "at the time or point of importation".
(a) bear an objective relationship to the admi nistration and enforcement of a valid customs
liability; and

Response of the European Communities (WT/DS339)

415. Even if the criterion suggested by China woul d be accepted, the measures do not bear an
objective relationship to the administration and enforcement of a valid customs liability since the
liability is established only after the manufacture of the final product.
Response of Canada (WT/DS342)

416. An internal charge may have a relationship with a customs duty, but that does not mean that it
is justifiable under Article II if the charge is im posed based on anything other than the state of a good

as presented at the border. Liability applied to imported products under the measures occurs only after
the final related product, the complete automobile, rolls off the assembly line. As a result, Canada
sees nothing in the measures to suggest a relations hip with the administration and enforcement of
valid customs liabilities.
(b) relate to a condition of liability that attached at the time of importation.

Response of the European Communities (WT/DS339)

417. The measures do not relate to a condition of liability that attached at the time of importation
since the liability is triggered only after the manuf acture of the final product and depending on the
internal use of the imported product in China. Reference is also made to the reply given to
question 84.
Response of Canada (WT/DS342)

418. Canada agrees that a border charge need not be paid at the time of importation, but it must
relate to the "snapshot" of the good as it arrives at th at time. As discussed in greater detail in response
to Question 84, any "conditions" must be set out in a Member's Schedule, and cannot violate other
provisions of the GATT. The conditions created by th e measures are not set out in China's Schedule,
and apply in any event in respect of the internal use of imported products, thereby violating Article III
(as discussed in response to Question 37).
91. ( European Communities) In paragraph 27 of its written oral statement, China considers
that a charge is "conditional upon" the impo rtation of a product if the charge bears an
"objectively ascertainable relationship to the fulf ilment of a customs liability". Footnote 4 to
that paragraph suggests that China's statement has been inspired by an EEC comment on the
findings of the Panel Report in EEC – Parts and Components. Please comment on the relevance
of that comment to the instant case, in particul ar to the characterization of the measures as
internal or border measures.

Response of the European Communities (WT/DS339)

419. As is often the case the EEC as the losing pa rty was not pleased with the panel report and
made comments accordingly. These comments were made exclusively in the context of Anti-
Dumping anti-circumvention measures. Subsequen tly the EEC accepted to adopt the report. The
comments made by the EEC at the time are therefore entirely irrelevant for the present case.

92. ( China) China considers that the meas ures are border measures because inter alia they
"do not impose duties upon parts and components after they have unconditionally entered
China's customs territory." (paragraph 60 of China's first written submission, emphasis
added). Are the charges imposed upon auto pa rts imported by suppliers under Article 29 of
Decree 125 also not imposed after they have unconditionally entered China's customs territory?
More broadly, and taking into account your ow n understanding of a border measure, can a
measure related to a product that has unconditionally entered the territory of a country still be a
border measure? If so, how?

Response of China

420. China has answered this question, in substance, in response to question 83.

93. ( China) Could China clarify whether the "charge" at issue is calculated in accordance
with the declaration made by the importer at the time of importation, or on the basis of the
"Verification Report" issued by the Verificati on Center after the imported parts have been
incorporated into the relevant vehicle model, in light of China's statement in paragraph 32 of its
first written submission and Article 28 of Decree 125.

Response of China

421. The charge is assessed in accordan ce with the declaration made at the time of importation.
The verification report is the conclusion of the determination that is made prior to the importation of
auto parts for a particular vehicle model. Once it ha s been verified that a particular vehicle model is
assembled from imported parts and components that, in their entirety, have the essential character of a
motor vehicle, the auto manufacturer must thereafte r declare those parts as parts of a complete motor
vehicle, and pay the applicable duty rate for motor vehicles. This obligation will not change until the
auto manufacturer applies for, and obtains, a new verification of the vehicle model based on a change
in the composition of the imported auto parts, as provided for under Article 20 of Decree 125.
94. ( United States ) In paragraph 143 of its first written submission, China refers to an
argument made by the United States in EEC – Parts and Components that "[i]t was a general
principle of international customs practice that substance should prevail over the form of a
transaction. In certain situations assembly op erations could constitute a sham to evade the
payment of anti-dumping duties. This was no different from the routine problems faced every
day by all contracting parties of preventing effo rts to evade the collection of legitimate customs
tariffs on merchandise." Based on this stat ement, China argues that the United States has
directly analogized the circumvention of AD/CV duties to the circumvention of ordinary
customs duties.
Please comment on China's position in this regard.

Response of the United States (WT/DS340)

422. The above summary of a statement made by the United States in a submission in a
GATT 1947 dispute does not in fact compare AD/CVD circumvention to "circumvention" of customs
duties. To the contrary, it refers to the routine i ssue of customs enforcement – there is no reference to
any action by US Customs authorities to condition th e level of a charge – as China has done – based
on the detailed conduct of internal manufacturing operations.
95. ( China) China claims in paragraph 111 of its first written submission that it is common
practice by WTO Members, including China, to maintain measures that prohibit the use of
domestic assembly operations as a means of circumventing ordinary customs duties.

 Please provide examples of imported products other than imported auto parts to which
China applies this anti-circumvention principle in the context of their ordinary customs duties.
Also, provide the legal basis under China's laws and regulations for such practice.

Response of China

423. As China has explained in response to question 13, China does not believe that there is a
freestanding "anti-circumvention principle" at issue in this dispute. What is at issue is how China and
other WTO Members deal with the relationship between complete articles and parts of those articles
in assessing duties, in the specific circumstance in which the complete article is subject to a higher
rate of duty than its constituent parts.

424. China has explained in response to question 57 that there are only a limited number of
circumstances in which this issue arises in China's tariff schedule. For the reasons stated in that
response, China has not chosen to adopt comparable measures to deal with these other circumstances.
96. ( All parties) In respect of Article II:1(b) of the GATT 1994:

(a) What is the definition of "ordinary customs duties" within the meaning of
Article II:1(b), first sentence?; and

(b) What is the definition of "other duties or charges" within the meaning of Article II:1(b),
second sentence?

Response of China

425. China considers that "ordin ary customs duties" are the ad valorem or specific duties that a
Member has bound in its Schedule of Commitments under the column heading of "bound rate," and
that the Member is allowed to impose on the produc ts of other Members by reason of the importation
of that product into its customs territory.
426. China considers that "other duties or charg es" include, at a minimum, those duties and
charges that a Member has bound in its Schedul e of Commitments under the column heading of
"ODCs." As noted in response to question 88, ther e is a complex interpretive question as to whether
the term "other duties or charges" includes any charge that a Member applies exclusively to imported
products and that is not an ordinary customs duty.
Response of the European Communities (WT/DS339)

(a) What is the definition of "ordinary customs duties" within the meaning of
Article II:1(b), first sentence?; and

427. The GATT 1994 does not define the concept of "ordinary customs duty". However, it
generally denotes financial charges in the form of a tax imposed on products "on importation" and the
liability to which is created by the importati on. Ordinary customs duties can be specific, ad valorem
or mixed. A specific customs duty on a product is an amount based on the weight, volume or quantity
of that product while an ad valorem customs duty on a good is an amount based on the value of that
good. A mixed duty is a customs duty comprising of an ad valorem duty to which a specific duty is
added or subtracted. The ordinary customs duties, which are due on importation are set out in a
country's tariff schedules. Most national tariffs su ch as China's follow the structure set out by the
Harmonised System.
(b) What is the definition of "other duties or charges" within the meaning of Article II:1(b),
second sentence?
428. The reference to "other duties or charges" in Article II:1(b), second sentence aims generally at
preventing undermining the prohibition of Article II:1(b), first sentence, of the GATT 1994, to impose
ordinary customs duties in excess of the bindings. According to paragraph 1 of the Understanding on
the Interpretation of Article II:1(b) of the GATT 19 94 "in order to ensure tr ansparency of the legal
rights and obligations deriving from pa ragraph 1(b) of Article II, the nature and level of any 'other
duties or charges' levied on bound tariff items, as referr ed to in that provision, shall be recorded in the
Schedules of concessions annexed to GATT 1994 agains t the tariff item to which they apply. It is
understood that such recording does not change the legal character of 'other duties or charges' ".

Response of the United States (WT/DS340)

429. The GATT 1994 does not define the term "ordinary customs duty". The United States
understands an ordinary customs duty means a tax imposed on a good upon its importation, and
calculated based on the quantity or value of the good at the time of importation. Ordinary customs
duties can be specific, ad valorem or mixed. A sp ecific customs duty on a good is an amount based
on the weight, volume or quantity of that product upon importation. An ad valorem customs duty on
a good is an amount based on the value of that good upon importation. A mixed duty is a
combination of an ad valorem duty and a specific duty.
430. "Other duties or charges" in Article II:1(b) , second sentence is intended as a catch-all phrase
to prevent the avoidance of a Member's bindings on ordinary customs duties. According to
paragraph 1 of the Understanding on the Interpretation of Article II:1(b) of the GATT 1994 "in order
to ensure transparency of the legal rights and ob ligations deriving from paragr aph 1(b) of Article II,
the nature and level of any 'other duties or charges' levied on bound tariff items, as referred to in that
provision, shall be recorded in the Schedules of concessions annexed to GATT 1994 against the tariff
item to which they apply. It is understood that su ch recording does not change the legal character of
'other duties or charges' ".
Response of Canada (WT/DS342)
(a) What is the definition of "ordinary customs duties" within the meaning of
Article II:1(b), first sentence?; and

431. As reported in the Guide to GATT Law and Practice:
The word 'ordinary' was used to distinguish between the rates on regular tariffs shown
in the columns of the schedules (in French "droits de douane proprement dit") and the
various supplementary duties and charges [imposed on imports] such as primage
duty.
73
432. In practical terms, "ordinary customs duties" within the meaning of Article II are duties which
are charged on imported products during the process of importation, and which are no greater than the
bound rates set out in a Member's Schedule. They do not include supplementary charges of any kind
that are direct or in connection with importation, and can be specific (based on, e.g., quantity or
weight), ad valorem (based on value), or a mix of the two.
(b) What is the definition of "other duties or charges" within the meaning of Article II:1(b),
second sentence?
433. The Guide to GATT Law and Practice notes that "other duties and charges" were defined by
the GATT Council to include only charges that discriminate against imports, and do not include the
charges set forth in Article II:2 (charges equiva lent to internal taxes, anti-dumping charges, etc.).
"Other duties and charges" are charged during the process of importation, and are set out in a
Member's Schedule in the column for "other duties or charges", as required by the Understanding on
the Interpretation of Article II:1(b) of the GATT 1994.
434. China's Schedule does not contain any "other duties or charges" relevant to this dispute.

73 Guide to GATT Law and Practice, Volume I, at p. 78 (Exhibit CDA-6).

97. ( All parties) What is the difference between a charge imposed "on ... the importation"
and a charge imposed "in connection with the importation" within the meaning of
Article II:1(b), second sentence of the GATT?

Response of China

435. While there is considerable ambiguity in this terminology, China considers that the most
likely explanation for the use of the different form ulation in Article II:1(b), second sentence, is that
the types of charges at issue ("other duties or charges" ) are more varied in nature than "ordinary
customs duties," the subject matter of Article II:1(b) , first sentence. As explained in response to
question 96, an "ordinary customs duty" is an ad valorem or specific duty that a Member is allowed to
impose by reason of the importation of the product. Th ere is a single event that triggers the Member's
right to impose the ordinary customs duty, and the importer's obligation to pay it – the importation of
the product into the customs territory. (As Chin a has explained at length in response to other
questions, this does not mean that the ordina ry customs duty must be collected at the time or place of
importation.) An "other duty or charge," by cont rast, may have other, more specific events or
conditions that trigger the right to impose the char ge and the obligation to pay it. These events or
conditions would be spelled out in the Member's Schedule of Concessions. Because these events or
conditions are more varied, the drafters may ha ve used the "in connection with" language in
Article II:1(b), second sentence, to reflect this fact.
Response of the European Communities (WT/DS339)

436. In view of the obligation to record the nature a nd level of any "other duties or charges" in the
Schedules of concessions in accordance with paragr aph 1 of the Understanding on the Interpretation
of Article II:1(b) of the GATT, the difference do es not seem to have any practical meaning beyond
the difference of scope between Article II:1(b), fi rst and second sentence. In any event, there is no
difference from the point of view of making the relevant customs classification of the product, which
is to be made in accordance with the objective characteristics of the product as presented at the border
and on the basis of the declaration to the customs.
Response of the United States (WT/DS340)

437. Please see the US response to Question 84.
Response of Canada (WT/DS342)

438. The phrase "in connection with importation" origin ally may have been intended to reflect the
fact that such duties or charges were not set out in a Schedule and could have been applied in ways
other than those for ordinary customs duties. However, given paragraph 1 of the Understanding on the
Interpretation of Article II:1(b) of the GATT 1994, there is no practical difference in meaning.
439. Only Article II:1(b), first sentence, is relevant to resolving this dispute, because China alleges
it is enforcing "ordinary custom duties" and does not consider its measures to apply "other duties or
charges".
98. ( European Communities) Responding to the above question the European Communities
stated during the first substantive meeting, inter alia , that there was no GATT/WTO
jurisprudence on the meaning of the term "in connection with the importation". Please
elaborate more on this in light of the fact that the decision in the GATT Panel Report in EEC –
Parts and Components
 examined an EEC argument that its measure was a border measure

precisely because it was levied "in co nnection with the importation" (see, inter alia, paras. 5.5
and 5.7 of that Panel Report).

Response of the European Communities (WT/DS339)

440. The European Communities is not aware of juri sprudence that would define the words "in
connection with importation" generally. In para 5.5 of EEC – Parts and Components the panel
appears to simply quote or at most rephrase the arguments made by EEC at the time. Under
paragraphs 5.6 and 5.7 the panel c onsidered that the policy purpose of a charge, the mere description
or categorization of a charge under the domestic law of a contracting party or the treatment of the
goods "as not being in free circulation" are not relevant to provide the required 'connection with
importation'. To apply this reasoning to the presen t case, the description or categorization of the
charges made under Chinese law is not relevant for determining whether the charges are levied "in
connection with importation". In particular, the fact that Chinese customs authorities are involved in
the procedures and that the charge to be paid by the manufacturer on the imported parts is called a
duty is irrelevant for determining whether there is a connection with importation within the meaning
of Article II:1(b) of the GATT. If one were to acce pt China's arguments that the imported auto parts
are subject to bonding requirements or that the measures are addressing circumvention of customs
duties, both arguments would be equally irrelevant.
99. ( All parties ) What is the difference between a law or regulation enforced "on the
importation" and a law or regulation enforced "in connection with the importation"?

Response of China

441. China is uncertain of the textual basis for this question, as neither Article II nor Article III
(nor Article I) uses this terminology in relation to the enforcement of laws of regulations. For the
reasons that China has set forth in response to other questions, China believes that what is relevant for
the purpose of evaluating whether the measure is subject to the disciplines of Article II or Article III is
the event or condition that gives rise to the enforcement of the law or regulation.
Response of the European Communities (WT/DS339)

442. It would seem that outside the concept of duties and/or charges, this language is only used
under provisions indirectly related to this case i. e. Articles I and XI GATT. Article II:1(b), second
sentence refers to "in connection with the importa tion" but only in respect of "other duties or
charges". If this is the context of the question i.e. the Panel seeks to know the view of the Parties on a
law or regulation that enforces the payment of other duties or charges in connection with the
importation of a product as opposed to a law or regula tion that is enforced "on the importation", the
European Communities refers to the differe nce between the first and second sentence of
Article II:1(b). A law or regulation that is enfo rced "in connection with the importation" can only
enforce "other duties or charges" not "ordinary customs duties".
443. Reference is also made to the reply given to question 87 and the examples provided there
under.
Response of the United States (WT/DS340)

444. The first phrase – "on their importation" – is narrower in scope than "in connection with
importation." Aside from this view, however, the Un ited States is not aware of any issue in this
dispute with regard to laws and regulation which relates to this distinction.

Response of Canada (WT/DS342)

445. As Article II applies only to charges, the word s "on the importation" in that Article are only
relevant to laws or regulations to the extent that they impose charges. In that context, the difference
between a law and a regulation is as set out in answ er to Question 97. A law or regulation connected
to the language of Article II:1(b) must relate, by de finition, to an "ordinary customs duty" or "other
duty or charge" or it would not be covered under this Article. Simply put, if not related to an "ordinary
customs duty" or "other duty or charge", a law or regulation would not fall within the scope of
Article II:1(b). Accordingly, there should be no ta ngible difference to interpreting "on importation" or
"in connection with importation" when speaking of border charges imposed on importation solely
with respect to this provision.
100. ( All parties) Please explain whether, and if so, how, the phrases "on importation" or "in
connection with importation" as indicated in the second sentence of Article II:1(b), second
sentence are respectively relevant in defining the scope of "ordinary customs duties" under
Article II:1(b), first sentence.

Response of China

446. For the reasons that China has explained in response to questions 96 and 97, China does not
believe that the "in connection w ith" language in Article II:1(b), second sentence, is relevant in
defining the scope of "ordinary customs duties" under Article II:1(b), first sentence. Ordinary
customs duties are the ad valorem or specific duties that a Member has bound in its Schedule of
Commitments under the column heading of "bound rate ," and that the Member is allowed to impose
on the products of other Members by reason of the importation of that product into its customs
territory. The event or condition that gives rise to the Member's right to impose the ordinary customs
duty, and the importer's obligation to pay it, is the importation of the product into the Member's
customs territory.
Response of the European Communities (WT/DS339)

447. The first sentence of Article II:1(b) only re fers to "on importation" whereas the second
sentence of Article II:1(b) refers to both "on impor tation" and "in connection with importation". The
prohibition to impose ordinary customs duties in exce ss of those set forth in the Schedule applies "on
importation" whereas the prohibition to impose "other duties and charges" applies also to situations
"in connection with importation". A position such as China's that the 25 % duty imposed on imported
automotive parts is an "ordinary customs duty" but imposed "in connection with importation" would
seem contradictory on the face of the text of Article II:1(b) of the GATT 1994. In other words,
"ordinary customs duties" cannot be imposed "in connection with importation".
Response of the United States (WT/DS340)

448. As the United States explained in its response to Question 84, the United States submits that it
is significant that the drafters of the GATT matche d "upon importation" to "ordinary customs duties",
while the broader phrase "in connection with importati on" is matched to "other duties and charges".
This matching indicates that there is a tighter nexus between "ordinary customs duties" and
importation than between "other duties and charges" and importation.

Response of Canada (WT/DS342)

449. Both phrases relate to "other duties and charges" in the second sentence of Article II:1(b), not
"ordinary customs duties" referred to in the first sentence. Accordingly, "ordinary customs duties" are
not applied "in connection with im portation" as understood in Article II:1(b), second sentence. This
interpretation has been confirmed in the Understanding on the Interpretation of Article II:1(b) of the
GATT 1994, and by the Appellate Body and panel in Chile – Price Band.
74
450. The phrase "on their importation", read in cont ext, is the one that qualifies how products
described in Part I of a Member's Schedule are exempt from "ordinary cust oms duties" in excess of
those set out in the Schedule itself. The second sente nce of Article II:1(b) specifically precludes the
application of "other duties or charges" either on (at the time of) or in connection with (linked to,
although perhaps not contemporaneous with, the ph ysical act of importation) the goods being
imported, in excess of a limited class of permissible charges into which the measures clearly do not
fall.
101. ( All parties) In the parties' view, could different aspects of the measures be respectively
considered as either internal measures or border measures? In other words, could one part of
the measure be a border measure while the other part be an internal measure?

 Also, would the fact that CKD and SKD kits can be exempted from the measures at
issue under Article 2 of Decree 125 be relevant to this consideration in any manner? Likewise,
would charges levied under Article 29 of Decree 125 be relevant to this consideration in any
manner?

Response of China

451. There is no question that different aspects of the same measure can be respectively considered
as either internal measures or border measures. Th e Appellate Body has considered that a "measure"
is an act or instrument of a Member "containing rules or norms."
75 It is self-evident that, in any
measure, some of the rules and norms may pertai n to the implementation of a Member's rights and
obligations under Article II, while other rules and nor ms in the same measure may pertain to internal
matters that are subject to the disciplines of Ar ticle III. As China suggested in response to
question 85, what is relevant, in China's view, is whether the particular rule or norm at issue is
germane to the administration and enforcement of an action that the Member is allowed to take (such
as the imposition of a customs duty) by reason of th e importation of a product from another Member.
Such rules or norms within a measure are subject to the disciplines of Article II of the GATT.
452. With respect to CKD/SKD kits, China does not c onsider that the possibility of "dividing" a
measure into border elements and internal elements is relevant to this dispute, as it is beyond doubt
that CKD/SKD kits are properly classified as motor vehicles under GIR 2(a). With respect to charges
levied under Article 29 of Decree 125, China has stated in response to question 92 that the application
of duties to imported auto parts that are already in free circulation within the customs territory of
China is conceptually different, for the purpose of an alysis under Article II, from the application of
duties to auto parts that the auto manufacturer imports directly.

74 While not resolving the issue of what exactly would constitute an "other duty or charge", both the
panel and Appellate Body in Chile – Price Band recognized there is a difference between the two. See
paras. 273-287 of the Appellate Body Report and paras. 7.103-7.108 of the Panel Report.
75 US – Corrosion-Resistant Steel Sunset Review, at para. 82.

Response of the European Communities (WT/DS339)
453. In principle this would be possible. Howeve r, the measures would seem to be written as a
whole and splitting their provisions into separate parts is difficult. Nevertheless, the option given
under Article 2 of Decree 125 to manufacturers that import CKD or SKD kits to conduct the clearance
procedure and pay duties at the Customs office where the manufacturer is located and thus avoiding
the further application of the measures could be singled out as a matter to be examined under
Article II of the GATT while the rest of the measures would be subject to the TRIMs Agreement and
Article III of the GATT. In contrast, Article 29 of Decree 125 is not a provision that can be separated
from the other provisions of the measures. This is a general provision that applies to automobile
manufacturers that purchase automotive parts from suppliers and/or do not use the imported parts
within a year from importation. Article 29 uses the general language of the measures on "deemed
whole vehicles" and is directly connected with th e overall logic of the measures according to which
the classification of the imported parts depends on their in ternal use in China. This is an intrinsic part
of the mechanism set up by the measures to discrimina te against the use of imported auto parts in the
manufacture of complete vehicles, and ensures in this way the development of the Chinese vehicle
and auto parts industry.
Response of the United States (WT/DS340)

454. In principle, it is possible that the same measure would impose both internal taxes and
customs duties.
455. As the United States has noted, where an importer declared a CKD at the border and paid a 25
per cent tax, this aspect of the measure would appe ar to be a customs duty, to be examined under
Article II.
456. As noted in the US oral statement, China app ears to concede that Article 29 (in so far as it
applies to parts sourced from manufacturers in China) imposes an internal charge that is inconsistent
with Article III:2.
457. It bears repeating that, in the view of the United States, any
 charge imposed by China's
measures above the 10 per cent duty owed (and for wh ich a bond is posted) on imported parts is an
internal charge, not just the additional charge imposed on parts sourced from manufacturers pursuant
to Article 29.
Response of Canada (WT/DS342)

458. A measure may be applied at a Member's border, but that is not determinative of whether that
measure affects internal trade in a manner understo od in Article III. Canada considers that charges
under the measures (as they apply to Deemed Whole Vehicles) are properly characterized as internal
charges – a position that China concedes except w ith respect to imports directly by vehicle
manufacturers. The only exception to this could be with regard to CKDs and SKDs that, as presented
at the border in a single shipment, contain all or nearly all of the parts necessary to assemble the
vehicle. Nonetheless, as discussed in response to Question 61, China has committed in its Working
Party Report to apply a tariff rate of no more th an 10% for CKDs and SKDs. Any charge over this
rate results in less favourable treatment than China is obliged to provide Canada for CKDs and SKDs,
and is therefore inconsistent with Article II of the GATT.
 Also, would the fact that CKD and SKD kits can be exempted from the measures at
issue under Article 2 of Decree 125 be relevant to this consideration in any manner? Likewise,

would charges levied under Article 29 of Decree 125 be relevant to this consideration in any
manner?

459. No, as CKDs and SKDs are not actually exempt from the application of the measures. They
are only "exempted" to the extent an importe r is willing to accept their classification under
Article 21(1) as a Deemed Whole Vehicle, which effectively means the measures apply to them. As
noted in the answer to the first part of Questi on 101 above, the measures could be seen as applying a
"border charge" only to the extent that CKDs and SKDs are classified when, as presented at the border
in a single shipment, they contain all or nearly all of the parts necessary to constitute a motor vehicle.
In all other instances, and for all auto parts, the a pplication of the measures results in internal charges
that are inconsistent with Article III.
460. In respect of Article 29, the charge applied to imported auto parts can only be considered a
border charge to the extent it represents the appli cable tariff rate for auto parts listed in China's
Schedule. The charges of 15%, if a vehicle manuf acturer provides evidence that the parts supplier
already paid the parts duty owed, and of 25%, if such documentation cannot be produced, are internal.
In the latter case, the charge is not only internal, but both punitive and completely unrelated to the
actual importation of the original auto parts.
102. ( China) Please explain why the 60% threshold criterion under Article 21(3) of
Decree 125 would not constitute a local content requirement.

Response of China

461. As China explains in response to question 117 below, the value of imported parts and
components in relation to the value of the finished article is one factor that customs authorities
consider in applying the essential character test under GIR 2(a). China provides specific examples of
this practice in response to question 117. The 60 per cent threshold criterion under Article 21(3) of
Decree 125 reflects this aspect of the essential charact er test. China considers that a collection of
imported parts and components that meets this threshold will necessarily be recognizable as a motor
vehicle, and therefore have the essential character of a motor vehicle. It is not a local content
requirement.
Comments by the United States on China's response to question 102
462. In its response, China claims: "As China expl ains in response to question 117 below, the
value of imported parts and components in relation to the value of the finished article is one factor
that customs authorities consider in applying the essential character test under GIR 2(a). China
provides specific examples of this practice in r esponse to question 117. The 60 per cent threshold
criterion under Article 21(3) of Decree 125 reflects this aspect of the essential character test."
463. This statement by China mischar acterizes the application of Article 21(3) of Decree 125 to
importers because it treats value of imported parts as 1 of 3 methods that automatically triggers the
conclusion that the parts constitute complete vehicl es. This is not an essential character test, but a
strict value threshold. Article 21(3) of Decree 125 is not a factor in determining "essential character"
but is the sole factor used by China that results in a local content requirement.
464. Further, the examples provided by China in Exhibits CHI-16, CHI-42, and CHI-45, do not
support the use of value as a sole criterion for establishing essential character. Exhibit CHI-16 (NY
M83114) clearly states that: "[t]he nature of the item, its bulk, quantity, or value may be looked to in a
determination of essential character. It is our be lief that the 34-piece Glock 17 model parts kit

proposed to be imported, absent the receiver com ponent, constitutes the aggregate of distinctive
component parts that establish its identity as what it is, a complete or finished pistol." The United
States did not rely on value to determine "essentia l character" under GIR 2(a), but instead it relied on
the fact that the kit was "imported without the frame but with all other necessary parts" as an
unfinished, unassembled pistol.
465. In Exhibit CHI-42 (HQ 086555), the United States recognizes, in the context of GIR 2(a),
that: "The nature of the item, its bulk, quantity, or value may be looked to [to determine an article's
essential character. However, such a determinati on varies between different types of merchandise.
[citing to Explanatory Note (VIII) to GIR 3(b) and not to ENs for GIR 2(a)]." In that ruling, the
United States stated that an incomplete or unfin ished backhoe excavator would be classified as an
excavator, if it has the essential character of an ex cavator. The incomplete or unfinished excavator
must be easily recognizable as an excavator. In that case, the United States concluded that the
propelling base of an excavator imparted the essen tial character because it was substantial enough
within the meaning of GIR 2(a). The US did not rely on value to determine "essential character"
under GIR 2(a), but examined the nature of the item.
466. In Exhibit CHI-45, a US customs ruling descr ibes an intermodal railway car missing certain
components that would make it a stand-alone railway freight car designed to carry certain size truck
trailers. As part of its facts, the ruling noted that the percentage value of the imported product
compared to the completed article. In its "Law a nd Analysis" section, the ruling cites to GIR 2(a) and
concludes that the article as imported constituted an unfinished railway or tramway freight car. The
ruling simply does not provide any reasoning or set forth a basis for its conclusion, and thus does not
support China's allegations that US Customs u ses value-added tests as a basis for classification
decisions.
103. ( Complainants) Do you agree with the statement made by China in paragraph 41 of its
first written submission that the Panel must at the outset decide on whether the measures
concerned are border or internal measures. If not, why?

Response of the European Communities (WT/DS339)

467. As the European Communities stated already in paragraphs 13 and 21 of its oral statement,
the TRIMs Agreement does not require a preliminary assessment as to whether a measure is a "border
measure" or an "internal measure". Furthermore, the fact that a given measure might be generally
described as a "border measure" in the sense of being enforced "on or in connection with importation"
does not necessarily preclude an analysis under Article III of the GATT. In any event, the European
Communities is of the view that the measures at issue in this case are subject to the TRIMs Agreement
and Article III. This suggests that the measures ar e generally rather "internal measures" than "border
measures" even if they are contained in customs language.
Response of the United States (WT/DS340)

468. As the United States emphasized in its oral st atement, the United States does not agree.
China's measures are plain breaches of Article III: 4, Article III:5, and the TRIMs Agreement,
regardless of whether the charges are internal ones subject to Article III:2 or customs duties subject to
Article II.

Response of Canada (WT/DS342)

469. As discussed in response to Question 85, Cana da agrees that charges under the measures are
either internal or border charges (and China has conceded that all charges except those paid by vehicle
manufacturers for parts they import directly are internal) but that the measures' administrative
requirements do not need to be characterized as "border" or "internal" at the outset.
104. ( China) Please comment on the complainants' position that one of the ways in which the
measures modify the "conditions of competition" is by subjecting a manufacturer using any
imported auto parts to a burdensome administra tive regime. (e.g. Canada's first written
submission, paragraph 102)

Response of China

470. As China explained at the first meeting of the Panel, what the complainants have
characterized as a "burdensome administrative regime" is the customs process that China has
established to determine whether an auto manufact urer imports and assembles a collection of auto
parts that, in its entirety, has the essential charact er of a motor vehicle. China has explained in
response to several questions, principally question 1 34, that the purpose of the customs process that
China has put in place is to establish the rela tionship among multiple shipments of parts and
components for the purpose of assessing duties that apply to the complete article.
471. China does not consider that the process it h as established for this purpose is any more
"burdensome" than the customs processes that Memb ers have adopted to deal with other complex
issues of customs administration, such as inwa rd processing and duty drawback regimes.
Article VIII:1(c) of the GATT 1994 explicitly recogni zes that customs processes can be complex.
The mere fact that these processes can be comple x does not mean that they are subject to the
disciplines of Article III.
105. ( Complainants) Are the charges levied in relation to imports of CKD and SKD kits
under the second paragraph of Article 20 of De cree 125 "border charges"? If so, do such
charges come within the disciplines of Article II of the GATT? If so, are they "ordinary
customs duties" within the meaning of GATT Article II:1(b), first sentence, or "other duties or
charges" under GATT Article II:1(b), second sentence?

Response of the European Communities (WT/DS339)

472. The European Communities understands that reference is made to the second subparagraph of
Article 2 of Decree 125 and not Article 20. If this is the case, the European Communities is of the
view that if the importer uses the option under Artic le 2 of Decree 125 to declare CKD and SKD kits
to customs under standard customs procedures and the classification is made on the basis of standard
customs rules i.e. according to the objective charact eristics of the products as presented, the charges
imposed are "border charges" under Article II of th e GATT. China has indicated that the charges
would be "ordinary customs duties". In view of th e fact that the charges imposed on such kits have
not been recorded in China's Schedules of con cessions in accordance with paragraph 1 of the
Understanding on the Interpretation of Article II:1(b) of the GATT 1994, the charges cannot be "other
duties of charges". Therefore, th e European Communities can agree w ith China that in this specific
instance the charges would be "ordinary customs duties".

Response of the United States (WT/DS340)

473. The United States understands this question to refe r to Article 2 (not 20) of Decree 125. As
the United States explained in response to Question 80, this would appear to be an ordinary customs
duty.
Response of Canada (WT/DS342)

474. As discussed in response to Question 33, the charges may only be considered border charges
to the extent that they are applied to parts which arrive at the border in one shipment and, as presented
at the border, have the essential ch aracter of a whole vehicle. In such instances, the charges may be
considered as border charges. As discussed in response to Question 61, those parts should then be
charged ordinary customs duties at a rate of 10%. Of course, the assessment of the parts would have
to be consistent with applicable tariff lines and interpretative rules, such that a mere collection of parts
itself would not be sufficient to constitute a CKD or SKD if further processing is required.
106. ( Complainants) If the charges levied in relation to imports of CKD and SKD kits under
the second paragraph of Article 2 of Decree 125 are "border charges" un der Article II of the
GATT, would the Panel have to still decide on the claims under Article III:4 and III:5 of the
GATT and Article 2 of the TRIMs Agreement?

Response of the European Communities (WT/DS339)

475. Provided that China confirms that
− only the normal general customs procedures ar e applied in the context of the second
paragraph of Article 2 of Decree 125 and
− a CKD or SKD kit consists of all the parts necessary to manufacture a vehicle presented
to customs at the same time and in a single consignment
it would be sufficient for the Panel to decide whet her it is in accordance with China's Schedule of
commitments to apply to such kits generally and in all cases the duty on complete motor vehicles in
the case of the second subparagraph of Article 2. This re ply is to be understood in the light of the fact
that the European Communities has not made a separate claim under paragraph 93 of China's
Accession Protocol.

Response of the United States (WT/DS340)

476. Yes, these claims would still apply, because – as the United States has explained – an
ordinary customs duty can be a pplied inconsistently with Ar ticle III:4, III:5 and the TRIMs
Agreement if the level of the duty depends on local content or local mixing requirements.
Response of Canada (WT/DS342)

477. As discussed in response to Questions 85 and 101, other than charges on CKDs and SKDs as
defined by the complainants, the measures ap ply "internal charges", and impose additional
administrative burdens which must be considered under GATT Article III:2, III:4, III:5 and Article 2
of the TRIMs Agreement.
107. ( Complainants) In paragraph 20 of its written oral statement, China interprets the word
"commerce" in GATT Article II:1(a) "to be sy nonymous with 'imports.'" Do you agree?
Please explain you answer.

Response of the European Communities (WT/DS339)

478. It is not clear to the European Communiti es why China wishes to interpret the word
'commerce' to be synonymous with "imports". The ordinary meaning of "commerce" is "buying and
selling; the exchange of merchandise or services, esp ecially on a large scale" (Shorter Oxford English
Dictionary).
Response of the United States (WT/DS340)

479. The United States does not agree – "commerce" is a broader term than "imports". In fact, the
United States understands that Members may bind in their schedules export duties as well as import
duties.
Response of Canada (WT/DS342)

480. While the two are related, Canada notes that "c ommerce" is the more general concept, which
includes "imports" as a sub-component. The Shorter Oxford English Dictionary defines "commerce"
as "buying and selling; the exchange of mercha ndise or services, esp. on a large scale".
76 Thus, while
related, it would not be appropriate to limit "commerce" simply to "im ports", which is but one part of
overall "commerce".
108. China has stated that "the charges that China imposes under the challenged measures
relate back to a condition that attached at the time of importation. That condition is that when
the auto manufacturer fulfils its stated intention to import and assemble parts and components
that have the essential character of a motor vehicl e, it will be obligated to pay the applicable
duty rate for motor vehicles, just as if it had imported those parts and components in a single
shipment" (paragraph 31 of its first oral statement).

(a) ( China) Could China clarify whether the products at issue cannot cross the border
unless the condition as described by China is fulfilled;
Response of China

481. As China has explained in response to question 55, there is an important distinction in
international customs practice, as reflected in the Revised Kyoto C onvention, between the completion
of customs formalities in relation to an import and the release of that import. Imported products are
frequently released – i.e., placed at the disposition of the importer at the border – before they have
completed "clearance." Goods released on this basi s may be subject to additional customs procedures
to ensure compliance with the relevant customs laws and regulations.
482. Consistent with these international customs prac tices, auto parts and components that an auto
manufacturer imports for a registered vehicle model are "released" to the auto manufacturer at the
border, but remain subject to a customs procedur e, secured by a bond, to ensure compliance with
China's tariff rates for motor vehicles. This pro cedure ensures that the importation and assembly of
multiple shipments of parts and components receives the same tariff treatment under GIR 2(a) without
regard to whether the parts and components enter Ch ina in one shipment or in multiple shipments.
The obligation to pay the applicable duty rate for motor vehicles arises as a "condition" of – that is, by

76 Shorter Oxford English Dictionary , 5 th ed. (Oxford: Oxford University Press, 2002), at p. 459
(Exhibit CDA-7).

reason of – the importation of auto parts and components that China would have classified as a motor
vehicle had they entered China in a single shipment.
Comments by the United States on China's response to question 108(a)
483. China's response to this question from the Pane l suggests that because auto parts may be
released into the control of an importer prior to the completion of all customs procedures that the
"condition" of the auto parts upon importation may also be determined based on their use in the
domestic market after release into the custody of the auto manufacturer. Under the Harmonized
System, the condition of the good when the shipment is entered into China is the condition of the
good upon importation regardless of when all customs procedures may be completed. Accordingly,
the United States disagrees with China's implication that it has a right to classify imported auto parts
"without regard to whether the parts and compone nts enter China in one shipment or multiple
shipments."
(b) ( China) Please explain how the charges can be considered as "a condition attached at
the time of importation" when there are no qualifications in its tariff Schedule;

Response of China

484. China has answered this questi on in response to previous questions, principally questions 27
and 54. In brief, China does not consider that it was required to inscribe a "term, condition or
qualification" in its Schedule of Concessions in order to interpret and enforce its Schedule of
Concessions in accordance with the rules of the Harmonized System. The "condition" of the auto
parts and components at the time of importation is that they form part of a collection of imported auto
parts and components that, in their entirety, have the essential character of a motor vehicle. This
condition is established by the prior evaluation of the vehicle model to which those parts and
components relate, and by the declaration of the importer at the time of importation. The auto
manufacturer is obligated to pay the applicable duty rate for motor vehicles when it joins that
shipment of auto parts and components with othe r shipments of imported auto parts and components
to assemble a vehicle model that it has previously registered as meeting one or more of the thresholds
set forth in Decree 125.
(c) ( China) China stated during the first substantive meeting that the determination of
whether certain auto parts should be characte rized as complete vehicles is made prior to
importation. In light of this statement, plea se explain how the condition as described by China
above can be considered as "a condition attached at the time of importation"; and

Response of China

485. As described in response to the previous qu estion, and in responses to question 134, the
purpose of the prior evaluation and verification is to establish the relationship among multiple
shipments of parts and components for the purpose of assessing duties that apply to the complete
article. This evaluation and verification establishe s whether multiple shipments of auto parts and
components are related to each other through their common assembly into a vehicle model that China
would have classified as a motor vehicle had th e parts and components entered China in a single
shipment.
486. As China explained in response to question 5, once a manufacturer has registered a vehicle
model as meeting one or more of the thresholds in Article 21 of Decree 125, the manufacturer must
thereafter import parts for that vehicle model separat ely from other auto parts, and must declare the

imported parts as parts of a registered vehicle model. Because the auto manufacturer has imported
parts and components that, in their entirety, have the essential character of a motor vehicle, it is
required to pay the applicable duty rate for motor vehicles as a condition of – that is, by reason of –
the importation of these related parts and components.
(d) ( China) China has also stated during the first substantive meeting that the "intention"
of importers is irrelevant to the interpretation of General Interpretative Rule 2(a) and what is
relevant for the purpose of tariff classification is the determination of whether the parts
concerned have the essential character of a complete article (i.e. complete vehicle in this case).
How does China reconcile this position with it s statement cited above that the condition
attached at the time of importation is relat ed to the determination of whether the auto
manufacturer fulfils its stated intention to import and assemble parts and components that have
the essential character of a motor vehicle.

Response of China

487. There are two different notions of "intention" at issue here. China's point in relation to
GIR 2(a) is that there is no considera tion under GIR 2(a) of whether the importer intends to assemble
parts and components into the finished article – th at intention is presumed. Thus, if an importer
imports a completely unassembled motor vehicle in a single container with the intention of selling the
various parts and components as replacement parts, th is intention is irrelevant to the classification
determination – the customs authorities should classi fy the entry as a complete motor vehicle in
accordance with GIR 2(a).
488. As China has explained in response to previous questions, the purpose of the prior evaluation
and verification of specific vehicle models is to establish whether the auto manufacturer has the
practice or intention of importing multiple shipments of parts and components that, in their entirety,
have the essential character of a motor vehicle. As explained, the auto manufacturer is obligated to
pay the applicable duty rate for motor vehicles fo r these imports. Under the customs procedure that
China has established for this purpo se, the auto manufacturer pays th e applicable customs duties after
it has assembled the multiple shipments of parts and components into the registered vehicle model.
Comments by the United States on China's response to question 108(d)
489. In its response, China states: "China has expl ained in response to previous questions, the
purpose of the prior evaluation and verification of sp ecific vehicle models is to establish whether the
auto manufacturer has the practice or intentio n of importing multiple shipments of parts and
components that, in their entirety, have the essential ch aracter of a motor vehicle. As explained, the
auto manufacturer is obligated to pay the applicab le duty rate for motor vehicles for these imports.
Under the customs procedures that China has establis hed for this purpose, the auto manufacturer pays
the applicable customs duties after it has assembled the multiple shipments of parts and components
into the registered vehicle model."
490. This practice by China ignores the proper application of the Harmonized System, which
provides that merchandise should be classified in its condition as presented without regard to what
occurs to the merchandise after importation.
109. ( All parties ) Do you agree, and why, with the following argument contained in
paragraph 14 of Australia's third party oral statement, which was made in relation to China's
claim that a charge imposed after the time or point of importation can still be a border charge if
it relates to a condition of liability that attached at the time of importation:

"Presumably, in an attempt to establish a nexus with importation, the measures
at issue include a declaration made at the time of importation. However, this
declaration appears to be entirely focu sed on the way in which the imported
parts will be used internally within China, rather than on the contents of a
consignment upon importation. ... Therefore ... the liability attaches internally ,
after the vehicle has been manufactured." (emphasis added)
Response of China

491. China has answered this question in response to question 78.
Response of the European Communities (WT/DS339)

492. The European Communities entirely agrees w ith the argument made by Australia in
paragraph 14 of its oral statement. See also reply to question 78.
Response of the United States (WT/DS340)

493. Please see the United States response to Question 78.
Response of Canada (WT/DS342)

494. Canada agrees with Australia's statement, and in that regard refers the Panel to paragraphs 65
and 66 of Canada's first written submission as an ill ustration of how liability attaches internally under
the measures.
C. A
RTICLE II OF THE GATT 1994
110. ( All parties) Rule 2(a) of the General Interpretative Rules states, inter alia, that " Any
reference in a heading to an article shall be taken to include a reference to that article
incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has
the essential character of the complete or finished article." Please explain what " as presented"
means as referred to in Rule 2(a)?

Response of China

495. China considers that the term "as presented" in GIR 2(a) is, on its own, susceptible to
different interpretations when applied to unassemb led or disassembled articles that are imported in
multiple shipments. However, in light of the in terpretation adopted by the WCO, discussed below,
China considers that the term should be read to in clude "as presented in a customs declaration," or "as
presented in light of the facts and circumstances surrounding the import transaction."
496. Under the Harmonized System Convention , the General Interpretative Rules are a part of the
Harmonized System. Accordingly, China considers that it is appropriate to interpret GIR 2(a),
including the term "as presented", in accordance with Article 31 of the Vienna Convention . China
believes that there are two relevant points, in this respect.
497. First, GIR 2(a) uses the term "as presented" in the context of resolving the tariff classification
relationship between complete articles and parts of articles. With respect to unassembled and
disassembled articles, GIR 2(a) resolves this classifi cation relationship by establishing that parts and

components are classified as the complete article if, "as presented," they have the essential character
of that article. In this context, it would be arbitr ary to conclude that the same collection of parts and
components, used to assemble the sa me finished article, should obtain a different classification result
based solely on whether the parts and components are contained in one shipment or in multiple
shipments. This interpretation would vitiate the ru le's resolution of the relationship between parts and
wholes, because it would leave the resolution of that question entirely at the discretion of the
importer. It would, moreover, violate the general principle that substance should prevail over form in
the administration of customs laws.
498. The second relevant element of analysis under the Vienna Convention is Article 31(3)(a),
"any subsequent agreement between the parties re garding the interpretation of the treaty or the
application of its provisions." As the Panel is aware, and as explained in response to question 112, the
Harmonized System Committee has interpreted GIR 2(a) specifically as it pertains to "the
classification of goods assembled from elements orig inating in or arriving from different countries."
The interpretation of the HS Committee, as adopted by the WCO, is that the application of GIR 2(a)
in this circumstance is a matter "to be settled by each country in accordance with its own national
regulations." This interpretation necessarily bear s upon the understanding of the term "as presented."
If the term "as presented" were limited to the cont ents of a single shipment, there would be no scope
for members of the Harmonized System to apply the principles of GIR 2(a) to goods assembled from
multiple shipments. The fact that the WCO has found that members of the Harmonized System may
apply the principles of GIR 2(a) to goods assemble d from multiple shipments can only mean that the
term "as presented" is not limited to single shipments.
499. These considerations support the conclusion that the term "as presented" must be interpreted
to allow national customs authorities to apply the principles of GIR 2(a) to goods that are assembled
domestically from multiple shipments of imported parts and components. As discussed in response to
question 112, any such application of GIR 2(a) re mains constrained by the principles of GIR 2(a)
itself.
Response of the European Communities (WT/DS339)

500. When goods are classified in the Harmonised System it is always done on the basis of the
objective characteristics of the product at the time of importation, that is, as imported and presented to
Customs on a shipment-by-shipment basis. The inte ntions of the importer and differing duty rates are
irrelevant. This is the essence of the words "as presented" in Rule 2(a).
Response of the United States (WT/DS340)

501. For purposes of Rule 2(a), "as presented" refers to the condition of the article at the time of its
importation. Under US Customs law, it is well se ttled that classification is based upon the condition
of goods at the time of importation.
Response of Canada (WT/DS342)

502. The assessment of whether an incomplete or unf inished article has the "essential character" of
the complete or finished article must be made based on the objective characteristics of that article, and
solely that article, in the state it is pres ented to customs officials at the border (i.e ., the "snapshot").
That is the meaning of "as presented" in Rule 2(a). In EC – Chicken Cuts , the Appellate Body
confirmed that classification must be based on the objective characteristics of an article as presented
when it quoted the WCO statement that "[w]hen goods are classified in the Harmonized System, it is

always done on the basis of the objective characteristics of the product at the time of importation".
77
No consideration is to be given to separate consi gnments arriving at different times, end-use or value
of the article, but simply to objective characteristics of the product as presented at the border.
Comments by the United States on China's response to question 110
503. China defines the term "as presented" under GIR 2(a) as meaning, "in light of the facts or
circumstances surrounding the import transaction." For the purposes of China's "anti-circumvention"
measures, these facts and circumstances include the post importation assembly of imported auto parts
into finished motor vehicles. This proposed inte rpretation of the term "as presented" undermines the
very uniformity that the Harmonized System was d esigned to protect because China disregards the
actual form of the shipment of the goods in favor of a future condition of the goods as integrated into
a whole motor vehicle. This future condition does not exist at the time of importation of the auto part.
504. The United States disagrees with China's claim th at the term "as presented" is not limited to
single shipments because of the language of the Harmonized System "decision" described in
paragraph 10 of Annex IJ/7 to Doc. 39.600.
78 This "decision" is not entitled to any additional weight
based on Article 31(3)(a) of the Vienna Convention, which provides that in the interpretation of a
treaty, there shall be taken into account "any subseq uent agreement between the parties regarding the
interpretation of the treaty or application of its provisions." The original comment was by the
Nomenclature Committee, which w as responsible for the interpreta tion of the Customs Cooperation
Council Nomenclature (the predecessor to the Ha rmonized System). As the "decision" was only
reflected in the report of the Committee and no ame ndments were made to the Explanatory Notes nor
was a Classification Opinion adopted, paragraph 10 has little weight, as it is not an enforceable
decision of the Harmonized System Committee.
505. Furthermore, the "decision" was not adopted by the WCO. The "decision" also does not not
mean that a member customs administration can abrogate the requirements of the General
Interpretative Rules by regulation at the domestic leve l. Nor is the "decision" an interpretation of the
meaning of "as presented." In fact, the "d ecision" does not in any way address the phrase "as
presented."
506. Indeed, China's theory of the meaning of "as presented" is contrary to a decision of the
Nomenclature Committee during its 42nd session in 1979 . This decision adopted the proposal of the
Danish Delegation that "the word "imported" in the English version of the nomenclature of the
Harmonized System be replaced by "presented" in or der to align the French and English versions and
so that the English version would also be applicable to exported goods when necessary.
79 T h i s
substitution was also made in the context of GIR 2(a) for purposes of consistency. "As presented"
means the condition of the good when it is importe d, and the reason why "as presented" replaced
"imported" in the context of GIR 2(a) is editorial, not substantive.
507. This interpretation is, in fact, supported by a letter issued by the Nomenclature and
Classification Directorate in October of 1989, wherein it explained that "the replacement of 'imported'
by 'presented' was in fact an editorial amendment, adopted to make it quite clear that the provisions of

77 EC – Chicken Cuts, Appellate Body Report, at para. 230 (emphasis added).
78 Exhibit CHI-29
79 See Annex F/2 to Doc. 25.300E (Exhibit US-1).

the Rules concerned apply for a given article in the state in which it is presented for Customs
clearance."
80
508. Goods are presented for customs clearance at th e time of importation. Even if customs
clearance is not completed until some time thereafter , assembly that occurs after the presentation is
not a condition that existed when the goods were pr esented for customs clearance (at the time of their
importation). Accordingly, China' s interpretation of "as presented" (which includes post-importation
assembly in the domestic market) is incorrect. For the aforementioned reasons, "as presented" is the
condition of the good upon importation..
111. ( Complainants) Please comment on China's statement in paragraph 160 of its first
written submission and in paragraph 13 of its or al statement in relation to the WCO affirmed
decision concerning Rule 2(a) of the General Inte rpretative Rules. In particular, please clarify
the legal status of this WCO decision, including whether it is binding on the parties to the WCO
or the WTO Members.

Response of China

509. The Decision of the Harmonized System Committ ee is, by its terms, an interpretation of
General Interpretative Rule 2(a). Under Article 7 of the Harmonized System Convention, one of the
functions of the Harmonized System Committee is "to prepare recommendations to secure uniformity
in the interpretation and application of the Harmoni zed System." As described by the WCO, the HS
Committee "is the single international body which can provide authoritative advice with regard to
tariff classification."
81 Under Article 8 of the Harmonized System Convention, any "advice on the
interpretation of the Harmonized System and recommendations to secure uniformity in the
interpretation and application of the Harmonized System" that the HS Committee adopts are "deemed
to be approved" by the WCO if no member objects to its adoption within a specified period.
510. As a consequence of these provisions, the d ecision of the HS Committee is an authoritative
interpretation of GIR 2(a) adopted by the member s of the WCO. It reflects the WCO's official
interpretation of GIR 2(a) as applied to the classi fication of articles that are assembled from multiple
shipments of parts and components. The decision of the WCO is that this particular application of
GIR 2(a) is a matter "to be settled by each country in accordance with its own national regulations."
This interpretation of GIR 2(a) dates back to a decision taken by the Nomenclature Committee when
GIR 2(a) was first drafted in the early 1960s. 82 The 1995 decision of the HS Committee merely
reaffirmed this longstanding interpretation of GIR 2(a) in the context of the Harmonized System.
511. The General Interpretative Rules are part of the Harmonized System and are binding on the
members of the WCO. Logically, this should incl ude authoritative interpretations of the General
Interpretative Rules adopted by the WCO. But the question of whether the decision of the HS
Committee is formally "binding" on the WCO members is not relevant to the present dispute. In
finding that the application of GIR 2(a) to multiple shipments is a matter to be resolved under national
laws and regulations, the WCO has necessarily in terpreted GIR 2(a) as containing no prohibition on
this particular application of the rule, and has found that this application of the rule is not otherwise

80 Letter from Nomenclature and Classification Directorate dated 2 October 1989, with annexes
(Exhibit US-1).
81 WCO, The Harmonized System: The language of international trade, JE-36
82 See WCO, Harmonized System Committee, Doc. 39 .235 (8 February 1995) at para. 28 ("The
Secretariat has set out below a decision taken by th e Nomenclature Committee when General Interpretative
Rule 2(a) and its accompanying Explanatory Note were drafted …").

inconsistent with the Harmonized System. By its nature, this is not an interpretation that would
"bind" the WCO members; it is an interpretation th at leaves this matter within the authority of each
WCO member
.83
512. As discussed in more detail in response to ot her questions, the Appellate Body has repeatedly
affirmed the importance of the Harmonized System to the interpretation of WTO Members' Schedules
of Concessions. This includes the General Interpretive Rules. As it pertains to the present dispute,
the importance of the interpretation adopted by th e WCO is that WTO Memb ers have been aware,
since at least 1995, that the Harmonized System allo ws Members to classify multiple imports of parts
and components in accordance with the principles of GI R 2(a). This is part of the context in which
WTO Members have negotiated and entered into tari ff concessions, and it is part of the context in
which China negotiated its Schedule of Concessions with other WTO Members in connection with its
accession to the WTO. Under Article 31 of the Vienna Convention , the decision of the WCO
concerning the interpretation of GIR 2(a) is therefor e relevant context to the interpretation of China's
tariff provisions for motor vehicles.
Response of the European Communities (WT/DS339)

513. In general, the WCO's decisions do not bind the contracting parties of the WCO.84
514. Exhibit CHI-29 to which reference is made in paragraph 160 of China's first written
submission must also be put in its proper context. Paragraphs 1 to 8 of the decision have nothing to do
with the issue of "split consignments". Paragraphs 1 to 8 relate to the judgment of the European Court
of Justice in case C-35/93 Dr Eisbein (ECR 1994, p. I-02655) where the issue was the relevance of
the complexity of the assembly operation in the context of rule 2 (a) of the Harmonised System.
515. As a completely separate issue the committe e decided to include the Nomenclature
Committee's decision relating to split consignments in to its report. However, Rule 2 (a) has not been
amended in any way pursuant to the discussion in the committee. Therefore China's submission that
the decision of the committee would somehow affect the "as presented" criterion under Rule 2 (a) in
the context of split consignments is entirely without merit.
Response of the United States (WT/DS340)

516. In the context of the Harmonized System, a decision taken by the Harmonized System
Committee is not legally binding on its members. Decisions of this committee are considered advice
and guides to the interpretation of the Harmonized System. US Customs considers that these
decisions often provide valuable insight into how the Harmonized System Committee views certain
provisions. In rendering its decisions, the Harm onized System Committee "also usually decides
whether the decision merits an amendment to the [E xplanatory Notes], the issuance of a classification
opinion to be added to the Compendium, or to merely report the decision in the report of the session.
If the decision results in amendments of the [Explanatory Note] or goes into the Compendium, it, then
should receive considerable weight. . . . . Decisi ons of the [Harmonized System Committee] that are

83 To put the matter differently, the decision adop ted by the WCO precludes a WCO member from
arguing that another WCO member is not allowed to apply GIR 2(a) to multiple shipments, even if the
complaining WCO member does not itself apply GIR 2(a) in th is manner. In this sense, the decision of the HS
Committee is "binding."
84 Even the most authoritative WCO's acts i.e. classification opinions are not binding in the EC legal
order and this has been confirmed by the European Court of Justice in case C-206/03, Commissioners of
Customs & Excise v SmithKline Beecham plc (European Court reports 2005 Page I-00415).

merely given in the report should be given little we ight." See Treasury Decision (T.D.) 89-80, which
sets forth the US position as to the proper guidance on the use of certain documents for interpretation
of the Harmonized System. Since its implementa tion of the Harmonized System in 1989, the US
Customs administration has cited this T.D. in almost every administrative ruling on tariff
classification matters.
517. There were two "decisions" taken by the WCO as reflected in Annex IJ/7 to Doc. 39.600
(HSC/16- Report). The first decision taken was to remove the reference to "simple assembly" in the
Explanatory Note to General Interpretative Rule 2(a) . In regards to the first "decision", US Customs
gives this decision considerable weight and has classified goods in accordance with the WCO's
decision to remove the reference to "simple assembly".
518. The second "decision" described in paragraph 10 of Annex IJ/7 to Doc. 39.600 is merely a
discussion of the contracting parties as to how the Harmonized System Committee views "split
shipments". The original comment was by th e Nomenclature Committee. The Nomenclature
Committee was responsible for the interpretation of the Customs Cooperation Council Nomenclature
(CCCN), which was predecessor to the Harmonized Sy stem. As the "decision" was only reflected in
the report of the Committee and no amendments were made to the Explanatory Notes nor was a
Classification Opinion adopted, US Customs finds that paragraph 10 has little weight. Also,
paragraph 10 does not mean that a member administration can abrogate the requirements of the
General Interpretative Rules by regulation at the domestic level.
Response of Canada (WT/DS342)

519. A WCO decision is not binding on WCO or WTO Members. The General Interpretative
Rules, Section and Chapter Notes, including Subheading Notes, are binding on signatories to the
Harmonized System. The Explanatory Notes, while not binding, constitute the official interpretation
of the Harmonized System at the international le vel and are an indispensable complement to the
System. No similar guidance is provided for other non-binding instruments such as WCO decisions.
Such decisions, particularly those that do not re flect a consensus of the WCO membership, must be
accorded less weight in the interpretative hierar chy of the Harmonized System, after the General
Interpretative Rules, Section and Chapter Notes and Explanatory Notes.
Comments by the United States on China's response to question 111
520. In its first sentence of its response, China clai ms that: "The Decision [Exhibit CHI-29] of the
Harmonized System Committee is, by its terms, an inte rpretation of General Interpretative Rule 2(a)."
This is not an accurate interpretation of what Exhibit CHI-29 actually re presents. As the United
States noted in its initial response to this question, there were two "decisions" taken by the WCO as
reflected in Annex IJ/7 to Doc. 39.600 (HSC/16- Report). The first "decision" taken was an
agreement by the Harmonized System Committee (HSC) to remove the reference of "simple
assembly" to the Explanatory Note to General Inte rpretative Rule 2(a). In regards to the first
"decision", the United States Customs Service giv es this decision considerable weight and has
classified in accordance with the WCO's decision to remove the reference of "simple assembly".
521. In its response to this question, China states that: "As a consequence of these provisions, the
decision of the HS Committee is an authoritative in terpretation of GIR 2(a) adopted by the members
of the WCO. It reflects the WCO's official interp retation of GIR 2(a) as applied to the classification
of articles that are assembled from multiple shipment s of parts and components. The decision of the
WCO is that this particular application of GIR 2( a) is a matter 'to be settled by each country in
accordance with its own national regulations.' This interpretation of GIR 2(a) dates back to a decision

taken by the Nomenclature Committee when GIR 2( a) was first drafted in the early 1960s." This
statement is not accurate. At its 16th Session, th e Nomenclature Committee specifically decided that
the Explanatory Notes for the new GIR that: "No provision would be made for application of the Rule
to parts and split consignments of unassembled or disassembled articles."
85
522. China further states: "[S]ince at least 1995, th at the Harmonized System allows Members to
classify multiple imports of parts and components in accordance with the principles of GIR 2(a)." In
short, the portion of the document that China builds its case around is nonbinding on HS contracting
parties and deserves little or no weight in the WTO proceeding. The basic "decision" is a comment by
the Nomenclature Committee inte rpreting the Customs Cooperation Council Nomenclature, to which
the US was never a party. The incorporation of that comment in the HSC/16 report merely indicates
that neither the status of split consignments nor the classification of goods assembled from imported
goods of various origins are within the jurisdiction of the HS Convention nor the HS Committee. The
"decision" taken in the HSC does not interpret GIR 2(a). In fact, it is taken in the midst of a
discussion on how simple assembly and further manufact uring relate to the application of GIR 2(a).
86
In subsequent sessions, the HS Committee stated th at industrial production with the use of machine
tools was beyond the scope of allowable assembly contemplated by GIR 2 (a).87
523. Thus, the "decision" that China relies on has no direct impact on the interpretation of
GIR 2(a). It in no way diminishes China's obliga tions under the HS Convention. China must still
classify goods as presented, using the entire nomenclat ure, rather than classify goods by effectively
eliminating from use many headings of chapters 84 and 85. China cannot abrogate its responsibilities
to an international agreement through domestic regulation.
112. ( All parties) How should General Interpretative Rule 2(a) be interpreted in light of this
decision?

Response of China

524. The decision of the HS Committee acknowledges the arbitrary classification results that can
occur when a set of related parts and components is broken into multiple shipments. This can occur
when a single import transaction is broken into "split consignments," usually for reasons of shipping
and often without the prior knowledge of the impor ter, or when a manufacturer imports parts and
components in multiple shipments and assembles th em domestically. In these circumstances, the
same collection of imported parts and components can obtain a different classification based solely on
the form in which the parts and components are impor ted. This is inconsis tent with the general
principle that substance should prevail over form in international customs practice.
525. As explained in response to question 111, the Nomenclature Committee of the Customs
Cooperation Council (the precursor to the WCO) rec ognized the existence of this issue when it first
drafted GIR 2(a) in the early 1960s. It was at th at time that the Nomenclatu re Committee agreed that
the application of GIR 2(a) to split consignments and multiple shipments was a matter "to be settled

85 See Annex E to Doc. 13.450 E (NC/16/Apr. 1966) (Ex. US-2).
86 The United States notified the public regarding its position on the various Harmonized System
documentation that is available through the WCO. See T. D. 89-80, 54 FR 35127 (1989) (Exhibit US-4). Within
that notice, the United States indicated that a decision by the HSC that is memorialized merely by a reference in
an HSC report is accorded little weight. That T.D. is routinely cited in Headquarters rulings issued by the United
States.
87 See Annex H/25 to Doc. 40.600E (HSC/18- Report), citing to paragraph 15 of Doc. 40.447 (HSC/18)
(Exhibit US-3).

by each country in accordance with its own nationa l regulations," an interpretation that the HS
Committee reaffirmed in the context of the Harmonized System in 1995.
526. In light of these decisions, GIR 2(a) must be interpreted to allow national customs authorities
to apply the principles of GIR 2(a) to goods that are assembled domestically from multiple shipments
of imported parts and components.
88 Any such application of GIR 2(a) must still conform to the
principles of GIR 2(a), in that any collection of parts and components that customs authorities classify
as a complete article must have the essential character of that article. In add ition, this application of
GIR 2(a) remains constrained by the limits of GIR 2(a) itself, which pertains only to the classification
of unassembled or disassembled parts and compone nts that can be assembled by means of the
assembly methods specified in Explanatory Note VII to GIR 2(a).
527. The fact that the WCO has specifically inte rpreted GIR 2(a) to allow members of the
Harmonized System to apply the principles of that rule to multiple shipments of parts and components
is highly relevant to the interpretive issue before the Panel. In EC – Chicken Cuts , the Appellate
Body considered the application of GIR 3(a) to the interpretation of the relevant portions of the EC's
Schedule of Concessions. GIR 3(a) concerns the circumstance in which "goods are prima facie
classifiable under two or more headings." In c onsidering whether the panel erred in finding that
GIR 3(a) was not applicable to the facts of that case, the Appellate Body noted that "nothing on the
Panel record indicates how the term ' prima facie ' has been interpreted by the WCO's Harmonized
System Committee, or the WCO itself." 89 It is implicit in this statement that, if the WCO had
interpreted the term " prima facie " in GIR 3(a), this interpretation would have been relevant to the
panel's consideration of whether GIR 3(a) was applicable to the facts of that case.
528. In the present dispute, unlike in EC – Chicken Cuts , the WCO has interpreted the relevant
General Interpretative Rule in a respect that is directly relevant to the interpretation of the term "motor
vehicles" in China's Schedule of Concessions. As the Appellate Body's statement in EC – Chicken
Cuts makes clear, the interpretation of GIR 2(a) a dopted by the HS Committee and approved by the
WCO is relevant to the application of GIR 2(a) to th e facts of this dispute. What this interpretation
demonstrates is that the measures challenged in th is dispute are consistent with GIR 2(a) and the
Harmonized System. Under GIR 2(a), as interprete d by the WCO, China can apply the classification
principles of GIR 2(a) to multiple imports of parts and components that are assembled into a complete
article. That is what the challenged measures do.
Response of the European Communities (WT/DS339)

529. That decision has no influence on the interpretation of GIR 2(a).
Response of the United States (WT/DS340)

530. The WCO decision removed the reference to "simple assembly" from the Explanatory Notes
from General Interpretative Rule 2(a). As an e xplanatory note can neither expand nor restrict the
terms of the Harmonized System, US Customs believes that the interpretation of General

88 The decision of the HS Committee refers to "goods assembled from elements originating in or
arriving from different countries." There is no reason to believe that the decision of the HS Committee is not
equally relevant to goods assembled from elements originating in or arriving from a single country. The number
and identity of the countries from which the parts originat ed would only be relevant, if at all, for purposes of
applying rules of origin. As pointed out in paragraph 6 of the HS Committee decision, the General
Interpretative Rules pertain solely to classification under the Harmonized System, and have no bearing on rules
of origin.
89 EC – Chicken Cuts at para. 234 n. 443.

Interpretative Rule 2(a) has been unaffected. In applying General In terpretative Rule 2(a), it suggests
that customs officials can see the entir e article at the time of entry. If an article is not classifiable by
General Interpretative Rule 2(a), then General Interpretative Rule 1 requires the separate classification
of the components.
Response of Canada (WT/DS342)

531. A WCO decision that is not adopted in the form of a modification or addition to the General
Interpretative Rules or included in, or as an Explanatory Note to, the General Interpretative Rules may
provide guidance but cannot be determinative of ho w to apply the General Interpretative Rules. Any
discretion that might be afforded to Members on how to classify split shipments must naturally be
limited so as not to violate tariff commitments. As a result, this decision should have no bearing on
the interpretation of Rule 2(a).
Comments by the United States on China's response to question 112
532. Please see the above comments on China's respon se to question 111. Contrary to China's
claim in its response that "[i]n light of these decisions, GIR 2(a) must be interpreted to allow national
customs authorities to apply the principles of GIR 2( a) to goods that are assembled domestically from
multiple shipments of imported parts and components," the only impact of the HSC/16 report is that
the reference to "simple" for assembly should be removed. Any other interpretation would be
contrary to the proper application of the Harmonized System.
113. ( Complainants) Please comment on China's position that Note VII of the Explanatory
Notes to Rule 2(a) of the General Interpretative Rules is relevant in delineating the boundary
between complete articles and parts of those articles (paragraph 100 of China's first written
submission).

Response of the European Communities (WT/DS339)

533. Note VII of the Explanatory Notes to Rule 2 (a) is generally releva nt in delineating the
boundary between complete articles and parts of t hose articles provided that the basic conditions of
Rule 2 (a) are respected. However, as China fundame ntally disregards the basic elements of Rule 2
(a) and in particular the "as presented" condition, the way in which China uses Note VII is necessarily
fundamentally erroneous.
534. China also struggles to apply Note VII even under the erroneous terms China wishes to give
it. Under paragraph 101 of its first written submission China states that the separate tariff heading for
parts therefore encompasses the importation of part s "other than for the purposes of assembling a
complete article from imported parts" This statement is difficult to square with the fact that under the
measures parts that are imported for the purposes of assembling a complete car are classified as parts
if the necessary local content is ensured.
535. Furthermore, as explained already under ques tion 39 the description provided by China of
judgment of the Court of Justice of the European Communities in case 165/78 Michaelis under
paragraphs 102 and 103 of its first written submission is misleading and taken out of context.
Response of the United States (WT/DS340)

536. General Interpretative Rule 2(a) provides for the classification, at the time of entry, of
complete unassembled motor vehicles as if they were assembled under the same heading.

Explanatory Note (VII) to General Interpretative Rule 2(a) gives guidance for situations where if the
component parts are in excess of the number required for that article when complete, that the
component part should be classified separately. General Interpretative Rule 2(a) does not refer to
"split shipments" nor does it purport to create th e authority for allowing split shipments. The
Explanatory Notes for General Interpretative Rule 2(a) infer that the goods are presented as a single
shipment.
Response of Canada (WT/DS342)

537. As set out in response to Question 111, Canada agrees that Explanatory Notes in the
Harmonized System are to be followed when ap plicable. However, China has misapplied this
Explanatory Note and has ignored its proper use in the Harmonized System.
538. First, China has ignored the hierarchy of appli cation of the General Interpretative Rules. As
stated in the WCO Handbook, the six General Interpretative Rules
90 "are applied in a hierarchical
fashion, i.e. Rule 1 takes precedence over Rule 2, Rule 2 over Rule 3, etc." This means that, following
General Interpretative Rule 1, products must be properly classified first in their appropriate heading.
As noted in Canada's Oral Statement at paragra ph 19, this includes intermediate products, notably
"chassis with engines". While China seeks to rely on Explanatory Note VII to Rule 2(a), it suggests
that it can ignore the equally authoritative Explan atory Notes for heading 87.06, which sets out what
constitutes a "chassis with engine", and makes clear that many combinations of Assemblies that the
measures Deem Whole Vehicles at most should be cl assified under heading 87.06 (and consequently
charged a duty rate of 10%).
539. Further, China has misapplied this Explanatory Note. As discussed in answer to Question 39,
it covers situations where all parts arrive at the border in one shipment. In such situations, all parts
that are necessary to form the article are classified together if they have the "essential character" of
that complete or finished article as presente d, while any excess parts not required to form that article
contained in the same shipment can be classified as parts.
540. China also fails to address the fact that E xplanatory Note VII states "no further working
operations" can be considered when determining whether an article, as presented, has the essential
character of a complete or unfinished article. Ind eed, the measures specifically provide in Article 24
that Assemblies and key parts that are substantially transformed (and which, therefore, must have
undergone further working operations) are still deemed to be imported under the measures.
114. ( Complainants) In the complainants' view, do the General Rules for the Interpretation
of the HS constitute context for the interpretation of a term in a Member's Schedule within the
meaning of the Vienna Convention on the Law of Treaties?

90 The Rules (without interpretative notes) are attached for ease of reference as Exhibit CDA-8.

Response of the European Communities (WT/DS339)

541. Yes. This has been confirmed by the Appellate Body e.g. in EC – Chicken Cuts
(paragraph 199) where it stated that "the above circ umstances confirm that, prior to, during, as well as
after the Uruguay Round negotiations, there was broad consensus among the GATT Contracting
Parties to use the Harmonized System as the basis for thei r WTO Schedules, notably with respect to
agricultural products. In our view, this consensus constitutes an "agreement" between WTO Members
"relating to" the WTO Agreement that was "made in connection with the conclusion of" that
Agreement, within the meaning of Article 31(2)(a) of the Vienna Convention. As such, this agreement
is "context" under Article 31(2)(a) for the purpose of interpreting the WTO agreements, of which the
EC Schedule is an integral part. In this light, we consider that the Harmonized System is relevant for
purposes of interpreting tariff commitments in the WTO Members' Schedules."
542. The European Communities considers that th e Harmonised System could also fulfil the
criteria in Article 31(3)(c) of the Vienna Convent ion as a "relevant rule[] of international law
applicable in the relations between the parties".
Response of the United States (WT/DS340)

543. This indeed was the finding of the Appellate Body in EC – Chicken Cuts (Appellate Body
Report, at para.199). As an initial point, the United States notes that the United States is not a party to
the Vienna Convention, but that the United Stat es does accept that the Vienna Convention reflects
customary rules of interpretation of public interna tional law. More importantly, the United States
notes that although the Appellate Body found that the HS provides context for interpretation of a
Member's schedule, the Appellate Body did not fu lly explain its reasoning and the United States does
not agree with this Appellate Body finding.
544. In fact, during the EC – Chicken Cuts proceeding, the United States disagreed with the
proposition that the HS qualifies as "context" under Ar ticle 31(2). The HS is neither an agreement
relating to the WTO Agreement that all the Member s made in connection with the conclusion of the
WTO Agreement, nor an instrument made by one or more Members in connection with the
conclusion of the WTO Agreement and accepted by the other Members as an instrument related to the
WTO Agreement. The United States does consider th at the HS and its Explanatory Notes could be
deemed as part of the "circumstances of the conc lusion" of China's accession negotiations within the
meaning of Article 32 of the Vienna Convention a nd, therefore, could be used as a "supplementary
means of interpretation" of China's Schedule.
Response of Canada (WT/DS342)

545. Yes. See EC – Chicken Cuts.
91
115. ( Complainants) If the charges at issue were considered as tariff duties, do the
complaining parties agree that Rule 2(a) of th e General Interpretative Rules is relevant context
for the interpretation of the term "motor vehicles" in China's Schedule?

Response of the European Communities (WT/DS339)

546. Rule 2(a) is not relevant in interpreting a Member's Schedule from a general point of view
unless one singles out a very specific product that is assumed to have been presented to the customs. It

91 EC – Chicken Cuts, Appellate Body Report, at para.199.

is a rule that assists the Customs in specific instances where a given incomplete or unfinished article
as presented to customs appears to have the essen tial characteristics of the complete or finished
article. It should also be kept in mind that Chap ter 87 of the Harmonized System contains a specific
chapter note, which according to Explanatory notes IV and VIII is a specific application of Rule 2 (a)
in the context of the chapter. In accordance with Rule 1, the Chap ter Notes take precedence over the
more general formulation of Rule 2 (a).
Response of the United States (WT/DS340)

547. Please see the response to Question 114.
Response of Canada (WT/DS342)

548. As set out in response to Questions 111, 113 and 114, Rule 2(a) is broadly relevant to the
extent that it may apply, in certain limited inst ances, within the Harmonized System to interpreting
China's Schedule. Rule 2(a) is not context on its ow n. It can only be taken into consideration after
applying Rule 1, which requires a determination of whether a particular automotive product "as
presented" at the border is an auto part, an intermediate product or a complete vehicle.
549. China attempts to argue the interpretative issue is "motor vehicles" to confuse the issue when,
instead, Rule 2(a) applies to that article "as presented". An "auto part", not a "motor vehicle", is the
"article" presented at the border. Accordingly, si nce the objective assessment of "essential character"
is based on a single shipment of an auto part or parts, not a collection of separate shipments, the
correct term to interpret is "auto part".
116. ( Complainants) Please comment on China's statement in paragraph 147 of its first
written submission in relation to Rule 2(a) of the General Interpretative Rules. In particular,
with respect to your own policies, do the complainants agree with the statements made by China
on the policy practices of other Members in the last three bullet points in paragraph 147?

Response of the European Communities (WT/DS339)

550. No, because China's statement mixes corre ct and incorrect information on customs
classification together with its position on the rele vance of anti-dumping rules. For instance China
refers erroneously to multiple shipments in connecti on with anti-circumvention. In the EC GIR 2(a)
applies only to goods presented at the same time and place. As stated on numerous occasions, the EC
is of the view that anti-dumping measures have nothing to do with tariff classification.
Response of the United States (WT/DS340)

551. The United States has not applied the interpretive rules of General Interpretative Rule 2(a) to
classify multiple shipments of parts and components as having the essential character of the complete
article. Instead, US Customs has found that bulk shipments for inventory purposes are not covered by
General Interpretative Rule 2(a), as bulk shipme nts for inventory are not for the convenience of
packing, handling or transport.
552. Duty liability arises at the time of importation. The assessment of duties is not based on the
actual use of the merchandise after importation. The Harmonized Tariff Schedule of the United States
does contain a very limited number of provisions known as "actual use provisions," but these
provisions classify the good as entered based on the st ated intention of the importer. Under these
provisions, the importer may claim a reduced rate of duty if the importer claims that the good will be

used only for a specific purpose. For goods classified under actual use provisions and entered for
consumption, any use contrary to that which is specified in the HTSUS provision is contrary to law.
553. With respect to its own policies, the United States has not "adopted measures that track the
final use of imported parts and components as a means of evaluating whether the parts and
components were imported for the purpose of circumve nting duty liability on the complete article."
The United States has not adopted any such measures because duty liability is based upon the
classification of the article in its condition as im ported. Once an article has been entered for
consumption into the United States, its subsequent use is not relevant for pu rposes of duty liability.
For example, it is not considered a circumvention of duty liability when parts of a machine, subject to
a lower rate of duty than the final machine, are separately imported in different shipments into the
United States (and entered at their respective lowe r rates of duty) for subsequent assembly or
manufacture into the final machine.
554. China also alleges in paragraph 147 that "Member [sic] have imposed bonding or other
security requirements to ensure collection of any duty liability on the completed article" into which
"parts and components were imported for the purpose of circumventing duty liability on the complete
article." As explained above, given that the United States does not specifically track the
post-importation usage of goods classifiable as part s or components, there are no bonding or other
security requirements based on the classification and corresponding rate of duty of a completed article
into which a part or component could be integrated.
Response of Canada (WT/DS342)

555. No. China's statement attempts to collapse different legal ideas and practices into one
unrelated whole to which it would apply Rule 2(a) out of context.
556. The Appellate Body has found that to establish a "subsequent practice" within
Article 31(3)(b) of the Vienna Convention, the following two elements must be shown: 1) there must
be a common, consistent, discernible pattern of acts or pronouncements; and 2) those acts or
pronouncements must imply agreement among WTO Members.
92 China cannot point to "acts or
pronouncements" of WTO Members, with respect to the three points it attempts to argue constitute
"subsequent practice". A single act of one WTO Member cannot constitute subsequent practice.
557. With respect to the third last bullet in para graph 147 of China's first written submission,
suggesting that Members have applied Rule 2(a) to classify multiple shipments to avoid payment of
duties, China has in fact only presented one example to support this alleged subsequent practice. That
example is Canada's furniture memorandum (Exhibit CHI-22), discussed in response to Question 124.
558. With respect to the second last bullet, China has presented no evidence of any WTO Member
charging ordinary customs duties above the rates set out in a Member's Schedule based on
"conditions" applied at the border. As discussed extensively in response to Question 32, the examples
China gives of customs laws of other countries merely reinforce the ev idence that WTO Members
impose ordinary customs duties based upon the state of the goods as they arrive at the border.
Similarly, China's attempt to rely upon progr ams that result in the imposition of charges lower than
those set out in a Member's Schedule based upon s ubsequent activity within a Member is clearly
misplaced.

92 Appellate Body Report, US – Gambling, WT/DS285/AB/R, adopted April 20, 2005, at para. 192.

559. With respect to the final bullet, Canada cannot see any evidence th at China has presented
relating to the measures requiring tracking the final u se of imported parts. However, other than the
examples discussed above, the only practices to whic h Canada believes China has referred are those
of the EC and the United States relating to true "anti-circumvention in the anti-dumping context,
which is legally irrelevant.
117. ( All parties) The European Communities explains in paragraph 262 of its first written
submission that a situation foreseen under Article 21(2)(a) of Decree 125, namely importation of
both an engine assembly and a body assembly together, is far away from the categories foreseen
by the Chinese tariff schedule examined in the light of the general Explanatory Notes for
Chapter 87 whereby an incomplete or unfinished ve hicle may be classified as the corresponding
complete or finished vehicle provided it has the essential character of the latter.

(a) Do you consider that the two examples of incomplete or unfinished vehicles in the
General Notes for Chapter 87 correspond to any of the criteria set out in Article 21 of
Decree 125?; and

Response of China

560. As China discusses in response to question 131 , the two examples provided in the Chapter
Notes for Chapter 87 are simply examples of the app lication of GIR 2(a) to motor vehicles. As the
EC's own classification practice demonstrates, these two examples do not define the boundaries of the
application of the essential character test to motor vehicles.
561. With respect to the first example, "a motor vehi cle, not yet fitted with the wheels or tyres and
battery," China considers that this is at least an "SKD kit," and could be classified simply as a motor
vehicle. Wheels, tyres, and batteries are all consumable items, and are commonly added to the
vehicle in the domestic market.
562. With respect to the second example, "a motor ve hicle not equipped with its engine or with its
interior fittings," this would likely correspond to Article 21(2)(b) of Decree 125, as it constitutes a
"body … plus at least three other assemblies."
Response of the European Communities (WT/DS339)

563. The criteria set out in Article 21 of Decree 125 are, in essence, totally different from the
examples of incomplete or unfinished vehicles in the general notes for chap ter 87. For each of the
different criteria under Article 21 of Decree 125, the EC has established that the measures require that
parts are classified as complete vehicles and im pose on them the 25% duty on complete vehicles in
breach of China's schedule of concessions and Article II of the GATT (see first written submission of
the European Communities, paragraphs 237 to 281).
564. First, parts which were imported at different ti mes, from different origins and by different
importers will be combined for classification as complete vehicles, which is in direct contradiction
with the "as presented" rule. In that respect, if CKD and SKD kits may in some circumstances be
assimilated to the examples in the notes, this may only be if 100 % of the parts are presented to
customs at the same time. A pre-determination as under Article 21(1) of the Decree 125 that CKD and
SKD kits will in all circumstances be classified as a complete vehicle breaches this rule.
565. Second, the measures also require classifying as complete vehicles a combination of parts
which is far from having the essential character of a co mplete vehicle. In each of the combinations

provided for under Article 21(2) of Decree 125, importe d parts will be classified as complete vehicles
even though parts, or "assemblies" essential for the functioning of a vehicle will be missing in the
combination of imported parts. This is further aggrav ated by the fact that an "assembly" need not be
imported in its entirety, or even manufactured in China from exclusively imported parts to be
"Deemed Imported" and thus to count against the th resholds set out in the measures. Under Article 22
of Decree 125, it is sufficient that a certain number of key parts, or value of key parts are imported
and incorporated in one "assembly" to treat th at "assembly" as imported and count it against the
thresholds of Article 21(2) of Decree 125. This me ans that the import of a relatively limited quantity
or value of parts is sufficient to impose the classification of those parts as complete Vehicles. Thus,
for a class M1 vehicle, the import of five key parts of the vehicle body and six key parts of the engine
will be sufficient to make both Deemed Imported Assemblies and all imported parts Deemed Whole
Vehicles (see Exhibit EC - 1). Further, from July 1, 2008 and the entry into force of the class A/B
distinction, the imports of, e.g., one door, one e ngine hood, one engine bloc k and one cylinder head
will be sufficient to make the vehicle body an d the engine Deemed Imported Assemblies (see
Exhibit EC - 2). To put these figures in context, the average number of parts in a complete vehicle is
in the thousands.
566. In respect of Article 21(3) it is clear that the examples of incomplete or unfinished vehicles in
the General Notes for Chapter 87 do not operate on the basis of the aggregate price of the parts, which
is an entirely alien concept to customs classificati on. It is therefore impossible even to begin any
reasonable comparison between the examples of chapter 87 of the HS system and Article 21(3) of
decree 125 because they are based on completely different criteria the latter having nothing to do with
customs rules.
Response of the United States (WT/DS340)

567. The criteria set out in Article 21 of Decree 125 for determining when parts are Deemed
Whole Vehicles in most cases go far beyond what can appropriately considered to be parts with the
"essential character" of a motor vehicle, under the Harmonized System (including application of the
Chapter note to Chapter 87). There might be a few combinations of parts Deemed Whole Vehicles by
Article 21 that could conceivably properly be classified under the Harmonized System as whole
vehicles if presented together in one shipment at the border. For example the body, chassis-frame,
transmission, steering system and both axles (which would be one "Main Assembly" and four other
"Assemblies" within the meaning of Article 21) mi ght appropriately under the Harmonized System be
classified as a whole vehicle, based upon the Gene ral Chapter Note example ("a motor vehicle not
equipped with its engine"). Howeve r, that would require an individual assessment that the additional
Assemblies and other parts were enough to constitute the "essential character" of a motor vehicle. But
in the vast majority of cases, parts Deemed Whole Vehicles under Article 21, even if they were
presented together at the border, could only be classified as intermediate products or parts.
568. With respect to Decree 125, three options to de termine if an article constitutes an incomplete
vehicle were established. These are:
Option 1: body and engine
Option 2: body or engi ne plus three more other assemblies (chassis-frame, steering
system, transmission, brake system, drive axle, and non-driving axle).
Option 3: five or more other assemblies.

569. Taking into account Examples A and B of an in complete vehicle in the General Explanatory
Notes to Chapter 87, neither Option 1 nor Option 3 would meet the requirements of either example.

570. In the case of Option 2, if the article comprised the body, chassis-frame, transmission,
steering system and both axles it would satisfy Example B which reads: "A motor vehicle not
equipped with its engine or with its interior fittings."
Response of Canada (WT/DS342)

571. The criteria set out in Article 21 of Decree 125 go far beyond what can appropriately be
considered to be parts with the "essential character" of a motor vehicle. As set out in more detail in
answer to Question 128, CKDs/SKDs described in Article 21 could conceivably be classified under
the Harmonized System as whole vehicles. Of course , that would only be relevant were those parts
presented together in one shipment at the border. At that point, an individual assessment of the parts
should be made, without consideration of end use.
572. With respect to Decree 125, three options to de termine if an article constitutes an incomplete
vehicle were established. These are:
Option 1: Body and engine;
Option 2: Body or engine plus three more other assemblies (chassis-frame, steering
system, transmission, brake system, drive axle, and non-driving axle); and
Option 3: Five or more other assemblies.
573. Using examples A and B of an incomplete vehicle in the General Explanatory Notes to
Chapter 87, neither Option 1 nor Option 3 would meet the requirements of either example. Example B
describes the case of a "motor vehicle not equipped with its engine or with its interior fittings". It may
be possible that most assemblies (but not all), t ogether with the body or engine, could take on the
essential character of a motor vehicle. That determination is, however, in the abstract. Article 21 is not
exhaustive, is broad enough to capture any number of imported parts combinations, and has nothing to
do with presentation of those parts at the border. In the vast majority of cases, parts that are Deemed
Whole Vehicles under Article 21, even if they were presented together at the border, could only be
classified as intermediate products or parts. It is not for the complainants to determine where that
threshold, in the light of the broad scope of Decree 125, should be set.
Comments by the United States on China's response to question 117(a)
574. In examining the examples in the General E xplanatory Notes to Chapter 87, China asserts
that: "With respect to the second example, 'a motor vehicle not equipped with its engine or with its
interior fittings,' this would likely correspond to Article 21(2)(b) of Decree 125, as it constitutes a
'body … plus at least three other assemblies.' " The United States submits that this conclusion is
unsupported because China has not established wh ich types of assemblies would constitute an
incomplete or unfinished motor vehicle.
(b) In your view, what auto part products, ot her than those referred to in the general
Explanatory Notes for Chapter 87, would qualif y as an "incomplete or unfinished vehicle
having the essential character of a complete or finished vehicle"? Please explain by referring to
specific examples.

Response of China

575. There are a variety of factors that customs authorities consider in evaluating whether an
incomplete or unfinished article has the essential char acter of a complete or finished article. With
respect to machines, such as motor vehicles, a principal consideration is whether the incomplete or

unfinished article is recognizable as that type of machine in its assembled condition. Three examples,
drawn from US customs practice, illustrate this consideration:
− In HQ 086555 (16 April 1990) (CHI-42), the US Customs considered whether incomplete
backhoe excavators from Japan had the essential character of a backhoe excavator. The
missing components included the bucket, the arm, the boom, and the cab assembly. In
essence, the imported article was the propelli ng base to which the cab and the operating
extensions of the excavator would be attached . The US Customs found that this incomplete
backhoe was recognizable as a backhoe, and therefore had the essential character of a
backhoe.
− In HQ 084896 (18 October 1989) (CHI-43), the US Customs considered the classification of a
luxury four-wheel drive motor vehicle that was missing its engine and transmission.
Notwithstanding the fact that this vehicle was clearly not operational as a motor vehicle, the
US Customs found that it had the essential character of a motor vehicle.
− In NY H80093 (4 May 2001) (CHI-44), the US Customs considered the classification of a
centrifuge imported with the bowl, gearing, and base of the centrifuge, but without the motor,
valves, and the various electronic elements and controls. Because this item was recognizable
as a centrifuge, the US Customs found that it had the essential character of a centrifuge.
576. As these classification rulings demonstrate, th e essential character test does not require the
presence of every component that is "essential" to th e use or operation of the machine in its finished
form. This important aspect of the essential ch aracter test is further illustrated by the EC
classification determination of incomplete pick-up tr ucks that China has already submitted (CHI-14).
Thus, for example, while a method of propulsion is clearly an essential element of a finished motor
vehicle, neither the engine nor the transmission mu st be present for an incomplete motor vehicle to
have its essential character.
577. Another factor that customs authorities apply in evaluating the essential character of an
incomplete or unfinished article is the value of the incomplete article in relation to the value of the
finished article. This consideration has already b een seen in CHI-16, the US tariff classification of
incomplete, unassembled pistol kits from Austria. As the US Customs observed in that decision, "the
nature of the item, its bulk, quantity, or value may be looked to in a determination of essential
character." Among the relevant facts in that de termination was that the unassembled, incomplete
SKD pistol kit constituted 94.5 per cent of the import cost of the finished pistol. Value was also a
relevant fact in the backhoe excavator determina tion described above; the various combinations of
backhoe components that the US Customs classified as a complete backhoe represented as little as 87
per cent of the total value of the excavator. In ye t another classification determination, concerning an
incomplete railway car, the US Customs classified the incomplete article under the applicable heading
for railway cars, and not the corresponding provisions for parts, even though the imported
components represented only 57 per cent of the finished railway car
.93
578. These factors and examples demonstrate that, contrary to the EC's position at the first
substantive meeting, the two examples set forth in the general Explanatory Notes to Chapter 87 do not
define the range of possible applications of the es sential character test to parts and components of
motor vehicles. China considers that the different combinations of auto parts and components set
forth in Articles 21 of Decree 125 all result in an incomplete article that is plainly recognizable as a

93 HG 081691 (18 January 1989) (CHI-45).

motor vehicle. These combinations therefore ha ve the essential character of a motor vehicle under
GIR 2(a).
Response of the European Communities (WT/DS339)
579. It is possible that an SKD kit and even a CKD kit under Article 21(1) of Decree 125 could in
some instances be considered as "an incomplete or unfinished vehicle having the essential character of
a complete of finished vehicle" if the kits consis t of all the parts necessary to assemble a vehicle and
provided only assembly operations are involved. Ho wever, such a determination must be made on a
case by case basis and not be required in all cases as is the case with the Chinese measures.
Response of the United States (WT/DS340)

580. US authorities have found the following goods c onstitute "incomplete or unfinished vehicles
having the essential character of a complete or finished vehicle":
Four-wheel drive luxury motor vehicle imported without the engine, transmission, as well as
other minor components described as "minor elements of design" was classified under
heading 87.03 as having the essential character of a complete vehicle by application of
General Interpretative Rule 2(a).

A dump hauler cab with instruments, front frame portion, front axle and suspension, diesel
engine, transmission, differential gear, plus electrical and hydraulic system was classified
under heading 87.04 as having the essential character of a complete vehicle by application of
General Interpretative Rule 2(a) because it contained both the motive power source and the
cab from which the vehicle is operated, as we ll as the transmission which reduces the speed
between the crankshaft and the rear drive axle and the hydraulic braking system for the entire
vehicle.

Cab assemblies consisting of the basic shell (inc luding doors), certain glass (e.g., windshield
and windows), windshield wipers, headlights, a nd parts of the dashboard (steering column,
signal indicator, possibly the steering mechanism) was classified as having the essential
character of a cab under heading 87.07 by app lication of General Interpretative Rule 2(a),
because they possess the aggregate of distinc tive component parts which establish their
identity as driving cabs. The parts or components added after importation are in the nature of
accoutrements which furnish or otherwise outf it the cab assemblies who se identity is already
clearly established.

Motor chassis with enclosed cabs for dump tr ucks or dumper cab chassis and dumper bodies
that were disassembled prior to shipment, w as classified under heading 87.04 by application
of General Interpretative Rule 2(a) as the cab chassis are complete subassemblies clearly
dedicated to receiving dumper bodies.

581. US authorities have found that the following types of goods do not constitute incomplete or
unfinished motor vehicles of chapter 87 by application of General Interpretative Rule 2(a):
Bulk parts consisting of panel parts, frame, engine assembly, transmission assembly, trim
parts, chassis parts (other than the frame), and other miscellaneous parts (nuts, bolts, washers,
bushings and similar miscellaneous fasteners and pins), shipped in unequal numbers and
shipped either together or at different times to be put into inventory for eventual assembly

with US components and components produced in a foreign trade zone. The United States
determined that parts imported in bulk and principally used for inventory purposes do not
impart the essential character of a motor vehicle as the imported components were not
advanced to the point that they were recognizab le as a motor vehicle. Further there was no
evidence that any of these components were inte nded to be assembled into a specific motor
vehicle, nor was there any evidence that th ey constitute something other than discrete
components intended for inventory for a manufacturing operation.

The United States determined that parts importe d in bulk and principally used for inventory
purposes do not impart the essential character of finished cab assemblies and that the
components needed to be individually classified, regardless of whether the shipment of cabs,
frames assemblies, and miscellaneous parts we re entered on the same day or entered on
different dates.

Response of Canada (WT/DS342)

582. There are thousands of parts incorporated in to various assemblies and sub-assemblies. As a
result, there are numerous potential combinations that would have the essential character of a
complete vehicle and would have to be assessed on a case-by-case basis. Canada notes that in most
cases combinations of parts could be classified as either a chassis with engine (87.06) or body (87.07).
Therefore, to have the essential character of a comple te vehicle a shipment of parts presented together
at the border would have to include at a minimum the body, the chassis and most other parts of the
vehicle (though not necessarily the engine).
Comments by the United States on China's response to question 117(b)
583. China cites to three examples of US customs practices in Exhibits CHI-42, 43, and 44. Of the
three examples, only one (Exhibit CHI-43) is directly on point to the panel's question, which asks for
examples of auto parts products that would qualify as an "incomplete or unfinished vehicle having the
essential character of a complete or finished vehi cle." Exhibit CHI-43 was also identified by the
United States along with several other rulings in its original response to this question.
584. China also asserts in its respon se that "Value" should be taken in to consideration. In regards
to whether "value" criterion constitutes the essential character of these assemb lies, the United States
respectfully refers the Panel to the above US comment on China's response to Panel question 102.
118. ( European Communities) The European Communities has stated in paragraph 270 of its
first written submission that CKD and SKD kits cannot be classified as complete vehicles
because nothing or very little is fitted or equippe d in he case of CKD kits and because SKD kits
will not attain the necessary degree of fitting and equipping to be classified as complete vehicles.

(a) In light of this statement, what degree of fitting or equipping of auto parts do you
consider as necessary for such part s to be classified as complete vehicles within the meaning of
the General Notes for Chapter 87?; and

Response of the European Communities (WT/DS339)

585. The European Communities has not stated in paragraph 270 of its first written submission
what question 118 states. Paragraph 270 concerns only CKDs whereas SKDs are considered under
paragraphs 272 and 273 of the first written submission. However, it is true that in respect of CKDs

the European Communities has in its first written s ubmission taken the view that the lack of "fitting
and equipping" is an obstacle for classifying a C KD as a complete vehicle. This is a borderline
question where the presence of all the parts necessary to assemble a vehicle must be weighed against a
product that is more advanced from the point of vi ew of "fitting and equipping" but may lack some
minor parts when presented to customs. The questi on therefore is whether the quantitative element of
having all the parts necessary presented at the sa me time can outweigh the lack of the qualitative
element i.e. the "fitting and equipping". The Eur opean Communities is prepared to accept that in
some instances this can be the case and a CKD co uld be classified as a complete vehicle provided
only assembly operations are involved. However, such a determination must be made on a case by
case basis and taking into account inter alia the technical complexity of the vehicle type.
586. With regard to SKDs the position of the European Communities is more refined than what the
question suggests. This position is explained in paragraph 272 and 273 of the first written
submission. The determination whether an SKD can be classified as the complete vehicle must also be
made on a case by case basis. In this respect the European Communities would like to correct the first
sentence of paragraph 273 of its first written submission, which should read "SKDs will often
 not
attain the necessary degree of fitting and equipping to be classified as complete vehicles". The word
"often" was accidentally omitted from the sentence, which seems relatively evident on the basis of
paragraph 272 that discusses the various possible scenarios.
587. A measure that requires to systematically classify CKDs and SKDs as complete vehicles
would therefore be in breach of Article II of the GATT.
(b) Please elaborate on your response in light of Rule 2(a) of the General Interpretative
Rules and the Panel's statement in Indonesia – Autos that "It appears that, in order to avoid
paying 200 per cent duties on CBU passenger cars, EC and US car producers ship to Indonesia
virtually complete CKD kits that are effectively " cars in a box ". Accordingly, we believe that
they can properly be considered to have charac teristics closely resembling those of a complete
car." (Panel Report, para. 14.197,emphasis added).

588. See reply to point (a).
119. ( European Communities) In paragraph 277 of its first written submission, the European
Communities states that a criterion of 60 per cent of the aggregate price of the parts not only
means that the parts are not necessarily fitted and/or equipped together but also means that
fundamentally important parts may be missing. Please explain, in the European Communities'
view, what auto parts could be considered as "important parts"?

Response of the European Communities (WT/DS339)

589. This statement in paragraph 277 of the first written submission is made from a general point
of view. Missing parts that consist of 40 % of the aggregate price of all the parts must mean in any
possible configuration that the combination of pa rts would not have the e ssential character of a
complete or finished vehicle. In a complete vehicle, all parts are important for its functioning.
590. As an illustration, the Panel can refer to the ex ample provided by China in paragraph 19 of its
first written submission, in which the body (14,25 %), the engine (15,32 %), the transmission
(10,02 %), and the non-driving axle (1,17 %) consist of 40,76 % of the aggregate price of all the parts.
120. ( European Communities) China states in paragraph 89 of its first written submission
that the European Communities contradicts the application of Rule 2(a) of the General

Interpretative Rules to the term "motor vehicl es" by stating that there is a clear separation
between complete vehicles and the parts and co mponents thereof. Please comment on this
statement.

Response of the European Communities (WT/DS339)

591. China's tariff schedules and chapter 87 of the Ha rmonised System contains a clear separation
between complete motor vehicles (headings 87.01 to 87.05) and the parts and accessories of the motor
vehicles of headings 87.01 to 87.05 (heading 87.08). The headings or their interpretative notes do not
contain any language that would provide a basis for blurring this clear distinction in the way China
does. This clear general categorisation must be sep arated from an application of the schedules and the
HS system in the context of an individual shipme nt as presented to the Customs. Of course, there are
exceptional situations such as CKDs and SKDs wh ere the borderline between complete vehicles and
parts thereof may be difficult to draw and must be made on a case by case basis. However, this is a
different matter from the general question as to wh ether the schedules provide for a clear separation
between complete motor vehicles and parts thereof.
121. ( Complainants) Do you agree with China's illustration of the relationship between
substance and form of importing activities in pa ragraph 97 of its first written submission? If
not, why?

Response of the European Communities (WT/DS339)

592. This illustration is given by China in a contex t where China tries to apply GIR 2 (a) of the
Harmonised System without respecting the "as pre sented" condition there under. This amounts to
disregarding the very basic rule of tariff classifica tion, i.e. that when goods are classified in the
Harmonised System it is always done on the basis of the objective characteristics of the product at the
time of importation, that is, as imported and presented to Customs on a shipment-by-shipment basis.
593. The example is also alien to reality. The industry does not function in the way the
"illustration" in paragraph 97 suggests. Different au tomotive parts are manufactured in different parts
of the world and are genuinely shipped to the cust omers in separate shipments. Completely different
parts such as windscreens, navigation systems, batteries, tyres or screws are manufactured by
completely different companies located in different countries. To suggest that the manufacturer orders
all of the parts from one company, then separates the parts into different containers in order to benefit
from the lower duty rates in China for parts is comp letely alien to reality. However, even if such
practices would exist, they would not circumvent the rules on customs classification. Furthermore,
even in a simple vehicle type there are thousands of parts. An example of a motor vehicle that consists
of 10 components has nothing to do with reality.
594. The example is also totally alien to the meas ures. Except under Article 21(1) of Decree 125
(to the extent that CKDs and SKDs are defined as kits including all pa rts necessary to build a
complete vehicle), there is no need under the measur es to import all parts to have them classified as
complete vehicles and attract the 25% duty. Under Article 21(2) of Decree 125, the combination of
some assemblies will be sufficient. In fact, the im port of some parts will suffice as Article 22 deems
assemblies imported if a certain number of key parts, or value of parts were imported and
incorporated in the assembly (see EC FWS, paras. 40 et seq). Under Article 21(3), it will be sufficient
to import parts for 60% of the complete vehicle price.

Response of the United States (WT/DS340)

595. As an initial matter, the United States again notes that China's example – premised on
separating CKDs into split shipments – has nothing to do with the measure that China actually
adopted. China's measure applies to all automotiv e manufacturing operations – including operations
that import bulk components from all over the world to produce vehicles in China.
596. The United States does not agree with the illustration stated in paragraph 97 as it overly
simplifies the number of components and sub-assembli es that comprise a complete motor vehicle.
The illustration as presented also appears to breach the obligations of cont racting parties to the
Harmonized System to apply the General Interp retative Rules 1 and 2(a), because it ignores the
specific tariff headings set out in China's schedule, and applies GIR 2(a) to separate shipments at the
whim of China's authorities, without any regard to how the goods were presented to Customs
authorities.
Response of Canada (WT/DS342)

597. No. China's measures instead result in form prevailing over substance, since they apply
completely arbitrary thresholds contrary to proper classification under the Harmonized System.
China's example is a gross oversimplification of the commercial reality of auto parts trade and
automobile production. In normal manufacturing, part s are shipped at different times from different
suppliers and undergo complex manufacturing processes at different plants in China or abroad before
they are ready to be incorporated into a motor vehicle.
598. With respect to China's illustration in paragraph 97 of its first written submission, as set out in
answer to Questions 32 and 33, separate shipments of parts do not have the "essential character" of a
"motor vehicle" as presented at the border. Furthe rmore, as set out in more detail in answer to
Question 128, even if, arguendo, it were permissible to assess multiple shipments, the thresholds
under the measures would still be meaningless sin ce they have no relationship to the proper
classification of auto parts. Except perhaps in respect of Article 21(1) of Decree 125, to the extent that
imported CKDs or SKDs may have all or nearly all of the parts needed to manufacture a motor
vehicle, an auto manufacturer may import far fe wer than 100% of the parts for a vehicle and still
suffer from China's form over substance distinction.
122. ( China) In relation to your statement in paragraph 97, does China consider that the
processes required for the assembly of vehicles using CKD or SKD kits are different from those
required for the assembly of vehicles using auto parts other than CKD or SKD kits? Please
explain your position in terms of specific factors, including cost and time.

Response of China

599. The short answer to this question is "no". The process to assemble a puzzle is the same
whether the pieces of the puzzle are in one box or in several boxes. The same is true of motor
vehicles: Once the necessary parts and components ha ve arrived at the point of assembly, the process
for assembling them into a complete vehicle is th e same, regardless of when and how the parts and
components arrived. (These assembly processes are detailed in response to question 71.) The same
answer applies to SKD kits. An SKD kit is a CKD kit at a more advanced stage of assembly. In
effect, it reflects a decision to undertake part of the assembly operations at one location, and the
remainder of the assembly operations at another location. Other than the fact that the vehicle is at a
more advanced stage of assembly when it arrives at its final point of assembly, structuring the import
transaction in this manner does not affect the nature of the assembly process.

123. ( China) Regarding the EC decision provided in Exhibit CHI-18, please comment on the
fact that in that decision, "all parts were present including engine and gearbox".

Response of China

600. China submitted the Binding Tariff Information (BTI) in CHI-18 to demonstrate that the
European Communities, like customs authorities all over the world, classifies completely
unassembled or disassembled motor vehicles as "motor vehicles," and not as "parts" of motor
vehicles. This practice by the EC is contrary to its position in its first written submission that a
"complete set of parts … remain[s] parts until they are fitted and processed together as a complete
vehicle."
94 The EC appears to have abandoned this position during the first substantive meeting of the
Panel, and now acknowledges that the correct classification of a completely unassembled or
disassembled motor vehicle under GIR 2(a) is as a "motor vehicle." The fact that "all parts were
present including engine and gearbox" simply establishes that, in this particular instance, the vehicle
in question was a completely disassembled motor vehicle (and not, for example, an incomplete set of
disassembled parts and components that nonetheless had the essential character of a motor vehicle).
124. In respect of the tariff classification d ecision by the Canada Border Services Agency,

(a) ( China) Referring to the CBSA's determination in paragraph 119 of its first written
submission, China submits that this determinat ion by the CBSA is indistinguishable from
China's interpretation of its own Schedule of Concessions relevant to the present case. Please
elaborate on this statement in relation to the criteria under Article 21 of Decree 125.

Response of China

601. As China noted in paragraph 119 of its firs t written submission, one of the principal
differences between the CBSA determination and Decr ee 125 is that Decree 125 specifies, in detail,
the precise thresholds at which China will cons ider a collection of imported auto parts and
components to have the essential character of a moto r vehicle. This is the purpose of Article 21 of
Decree 125. The CBSA determination, by contrast , refers only to determ ining the "commercial
reality" of a series of import transactions. The CBSA determination, for example, refers to "what was
actually purchased by the importer: complete furnitu re or unrelated parts," without elaborating upon
the meaning of "unrelated parts". Presumably, this refers to imported parts that are not, in fact,
assembled with other imported parts and components in to complete furniture. This is suggested by
the next paragraph of the determination, which stat es that "[a]rticles that are imported specifically
either as replacement parts or to be incorporated with domes tic components in the manufacture of
domestic furniture will be classified in their own right under the appropriate Harmonized System
heading." This statement implies that, at a certa in threshold, Canada would no longer consider a
collection of imported furniture parts to have the essential character of complete furniture, without
specifying where that threshold is.
602. The fact that China has provided detailed thres holds in Article 21 of Decree 125 makes these
measures more transparent and predictable to importe rs. As China noted throughout the first meeting
of the Panel, if importers believe that the applica tion of these thresholds to a particular set of facts
results in an incorrect tariff classification, there are both domestic and international procedures to
challenge these determinations. However, as the CB SA determination illustrates, the application of
GIR 2(a) to multiple shipments of parts that are ass embled domestically is not inconsistent with the
Harmonized System.

94 EC first written submission at para. 270.

(b) ( Canada) Please explain in detail how the CBSA furniture decision can be distinguished
from the measures at issue, including with resp ect to when the decision of whether a good has
the essential characteristic has been made by the Canadian customs office in that case; and

Response of Canada (WT/DS342)

603. In the case of disassembled furniture imported on the basis of a split shipment, the furniture
has been completely manufactured and only disasse mbled for ease of transport. The furniture is
purchased as a complete unit by a retailer. The Canadian rule does not apply to furniture
manufacturers. It imposes no reporting requirements fo r importers of furniture parts relating to their
sale within Canada.
604. To determine if the importing retailer is in f act importing complete furniture in disassembled
form, Canadian customs officials examine the pur chase orders and import documentation in order to
ascertain that the imported goods are covered under the same purchase order. There is no assumption
of a violation: if an importer declares that it is im porting furniture parts, in the absence of contrary
evidence obtained by Canadian customs officials, th ey are charged at the parts rate. If there is
evidence that finished furniture has been purchased by a retailer but shipped disassembled, Canadian
customs officials are not required to charge furniture parts at the finished furniture tariff rate but,
instead, are afforded discretion whether such a determination is warranted.
605. In contrast, the measures apply to multiple shipments between different exporters and
importers throughout the supply chain. Auto parts imported by parts manufacturers that process the
imported articles before they are sold on the Chinese market to other parts manufacturers or to vehicle
manufacturers are covered. A vehicle manufacturer is deemed to be circumventing Chinese law unless
it can supply a very detailed parts audit trail to establish the domestic content of the completed
vehicle. Further, customs officials must assess part s that are Deemed Whole Vehicles at the complete
vehicle rate, with no discretion to do otherwise. In sum, the measures are in most material aspects
completely different from Canada's rules on classification of furniture parts.
(c) ( Canada) With respect to the part of the CBSA decision that "articles imported to be
incorporated with domestic components in th e manufacture of domestic furniture will be
classified in their own right under the appropriate Harmonized System heading", could Canada
explain whether there is any threshold level of domestic components that need to be
incorporated into domestic furniture to satisfy this standard.

606. No, there is no threshold level of domestic content. Paragraph 7 of the Memorandum does not
apply to imported furnitur e that is manufactured abroad and re-assembled in Canada, but rather it
applies to domestic furniture manufactured in Ca nada. Canadian-manufactured furniture is not
covered by this Memorandum since it is only meant to cover imported furniture that is dissassembled
and subject to re-assembly in Canada.
125. ( Canada) In respect of Canada's reference to "snapshot" during the substantive
meeting regarding the determination of whether a good has the essential characteristic has to be
made on importation:

(a) Could Canada explain its reference to "snaps hot" in the context of Rule 2(a) of the
General Interpretative Rules;

Response of Canada (WT/DS342)

607. The "snapshot" refers to the product as presen ted at the border. That is, the "essential
character" of the product is established with the phy sical act of importation, in a single shipment. The
"essential character" is determined on the basis of the objective characteristics of that good, in the
light of any information provided by the importe r and with reference to the importing Member's
Schedule. Tariff liability attaches on the basis of that sn apshot at the border. No consideration is to be
given to other shipments with which the product may later be incorporated, the end use of the product,
or the value of the good. Assessment is only based on that product as presented. See also Canada's
response to Question 110.
(b) When does the customs' appreciation start and end?; and

608. Customs appreciation starts when the article arrives at the border and ends once customs
officials have objectively classified that article based on its state as presented at the border. Thus,
appreciation must occur during the physical act of importing a good, and cannot happen once goods
are "imported" (clear customs). In cases where a good is transported to a bonded zone upon its arrival,
appreciation must occur before that good clears cu stoms and is released from that zone to the
importer.
609. The WCO has confirmed, which fact has been noted by the Appellate Body,
95 that the
appreciation is based on the assessment of the essentia l character of a good at the time of importation,
and cannot be done so as to reflect the handling of the goods after importation. Such assessment may
be on the basis of a visual inspection of the product, including indications on the packing,
accompanying documentation or laboratory analysis. Rega rdless, it is always done on the basis of the
objective characteristics of the produc t at the time of importation and on the basis of the terms of the
Harmonized System headings and any related Section or Chapter Notes.
(c) In Canada's view, can subsequent pr ocessing beyond the border be taken into
consideration for the tariff classification purpo se? Could Canada relate its answer to this
question to the example of the CBSA's tariff cla ssification decision on furniture imports as
referred to by China in paragraph 113-119 of China's first written submission. In particular, to
what extent does the information required by Canada from the importer at the point of
importation differ from that required by China under the measures at issue.

610. Subsequent processing that occurs after importa tion cannot be taken into consideration for
purposes of product classification related to a Memb er's Schedule. As set out in response to
Question 124, Canada's tariff classification practi ce for furniture does not relate to subsequent
processing, nor to manufacturers of either finished fu rniture or furniture parts. It applies only to
finished furniture that has been disassembled before shipping. No information is required from the
retailer regarding subsequent use of the furniture. No tracking is required of imported furniture parts
purchased as parts. Classification based on acc ompanying documentation (e.g., invoice) is an
accepted form of objective classification, as stated by the WCO in its answers to panel questions in
EC – Chicken Cuts.
 96

95 EC – Chicken Cuts , Appellate Body Report, at para. 230, ref. Questions 1 and 7 of the WCO's
response to questions posed by the panel.
96 Ibid., Panel Report, Annex C-12, WCO response to Question 1, "The determination of the essential
character of a product can be done in several ways. The most obvious is through a visual inspection of the

126. ( United States ) The final determination on imported "Large Newspaper Printing
Presses and Components" as provided in Exhibit CHI-25 states, inter alia, that "to facilitate the
Department's performance of the value test, all foreign producers/exporters and US importers
in the LNPP industry shall be required to provide various information as indicated in the notice
"on the documentation accompanying each entry" from Germany and Japan of elements
pursuant to a LNPP contract." Please explain the exact point in time "each entry" in this notice
is referring to. In other words, when do exporters and importers have to provide information to
the DOC?

Response of the United States (WT/DS340)

611. There are several reasons why the US anti-dum ping duty orders on large newspaper printing
presses (LNPPs) from Germany and Japan, wh ich were revoked effective 1999 and 2001,
respectively, are irrelevant to this dispute. As an initial matter, in its response to Question 67 above,
and in response to Question 140 below, the United States explains at length why "circumvention" in
the antidumping context is not relevant to this dispute. The United States also has the following
comments that are specific to the antidumping duties imposed on LNPPs.
612. First, unlike automobiles, which are routinel y imported fully assembled, it is not feasible to
import fully assembled LNPPs, which must be housed in significantly sized buildings. Given the
unique nature of this product, and to ensure the effective administration of the anti-dumping order, the
US Department of Commerce developed the product c overage of the LNPPs investigations to include
LNPP systems, additions and the five major press system components, whether assembled or
unassembled, that are capable of printing or otherwise manipulating a roll of paper more than two
pages across. Because even the five major co mponents were typically imported unassembled, the
Department of Commerce provided for the "value test " cited by China in its first written submission.
Specifically, if the sum of the value of elements imported to fulfill a LNPP contract was at least
50 per cent of the value, measured in terms of the cost of manufacture, of any of the five named
components covered by the scope into which they ar e incorporated, then the imported elements were
covered products.
613. Second, while the potential of circumvention of an anti-dumping duty order always exists and
was referred to by the Department of Commerce in the LNPPs determination, the value test was
actually part of a process the Department of Commerce provided so that importers could demonstrate
that their merchandise was not subject to the anti-dumping duty order. In other words, the requested
entry documentation was required if producers or impor ters intended to demonstrate that the relevant
entries should not be subject to the anti-dumping duty order. If such documentation was provided no
later than 75 days prior to the intended date of entry, the Department of Commerce could
preliminarily determine that such merchandise wa s outside the product coverage of the order and
instruct the US Customs Service to suspend liquidati on at a zero deposit rate. Under the Department
of Commerce's procedures, this ruling would become final unless subjected to administrative review.
127. ( China) China submits in paragraph 133 of its first written submission that the value-
based test adopted by the US Commerce required the US Commerce to wait until after all of the
elements comprising the LNPP component are im ported and the LNPP component is produced
before making a determination as to whether the imported parts were within the scope of the
order.

product, including indications on the packing. Reference can also be made to accompanying documents. In
some cases, however, laboratory analysis may be required".

To the extent that such value-based-test adopted by the US were to be considered as serving the
same purpose as China's measures, could China explain what is the rationale behind certain
procedural requirements under Decree 125 that are imposed on auto manufacturers prior to the
importation of auto parts, including self-evaluation and the Verification Center's review?

Response of China

614. As China has explained in response to several questions, principally questions 38 and 78, the
purpose of the evaluation and verification process is to determine whether multiple shipments and
parts and components are related to each other through their common assembly into a motor vehicle
model that China would have classified as a "motor vehicle" had those parts and components entered
China in a single shipment. This determination is made in advance of importation principally so that
China can impose an appropriate customs procedur e on these related shipments of auto parts and
components to ensure compliance with China's customs laws.
128. ( Complainants) Please explain under which specific tariff headings of China's Schedule
should the categories of auto parts under paragraphs (1), (2) and (3) of Articles 21 of Decree 125
fall?

Response of the European Communities (WT/DS339)

615. Even a simple motor vehicle that does not contain modern electronics would consist of
thousands of parts, which in addition are separated into different specific tariff headings depending on
the vehicle type. It is therefore not possible to provide an exhaustive answer. Furthermore, automotive
parts are rarely imported in the form of the 'assemb lies' foreseen under Article 21 of Decree 125. The
"assemblies" often consist of many parts imported separately and the "assemblies" normally become
such only after manufacture. Furthermore, an "asse mbly" can be deemed imported when actually only
a certain number of key parts, or value of parts were imported and incorporated in the "assembly"
(Article 22 of Decree 125). The notion of "assemblies" is a creation of the contested measures, and is
not foreseen by the Chinese schedules and the HS syst em. This demonstrates very concretely how the
Chinese measures operate internally in China and depending on the use of the parts after importation.
616. However, some general indications at the four digit level can be given:
Article 21(1):

SKDs and CKDs may in some circumstances be classified as the complete vehicle if all the parts
necessary to assemble a vehicle are presented to Customs at the same time and provided only
assembly operations are involved. In such a case the kits would be classified under headings 87.01 to
87.05 depending on the specific vehicle type in question. If the conditions for classification as a
complete vehicle are not fulfilled in casu, the parts that were presented to customs would be classified
separately under the specific headings for automotive parts. The most relevant four digit headings are
87.08, 84.07, 84.08, 84.09, 84.83 and 85.11 but also ot her headings may be relevant depending on the
vehicle type. In the case of an SKD, also headings 87.06 and 87.07 may be relevant depending on the
level of "fitting and equipping".

Article 21(2):

Complete engines (the "engine assembly") are cl assified under headings 84.07 and 84.08 and parts
thereof under heading 84.09 at the four digit level.

Complete bodies (the "body assembly") are classi fied under heading 87.07 and parts thereof under
heading 87.08 at the four digit level.

The other "assemblies" under Decree 125 do not have a specific heading under the Chinese Schedules
and the HS system because the "assemblies" are a creation of the measures not foreseen by the
schedules and the HS system. In most cases the part s that make up the "assemblies" after manufacture
would upon importation be classified under the releva nt headings for parts (most relevant four digit
headings are 87.08, 84.07, 84.08, 84.09, 84.83 and 85.11). However, heading 87.06 "chassis fitted
with engines" is relevant in many combinations foreseen by Article 21(2) because a "chassis fitted
with engines" is according to the explicit terms of the heading "a motor vehicle without bodies". In
other words, a motor vehicle without its body but c ontaining other parts already fitted and equipped is
for the purposes of the Chinese Schedules and the HS system a "chassis fitted with engines", not a
complete motor vehicle. A more detailed analys is has been provided under paragraph 255 to 260 of
the first written submission of the EC.

Article 21(3):

This paragraph foresees that any configuration of parts in a random order as long as the aggregate
price of the imported parts attains 60 % of the comp lete vehicle parts is classified as the complete
vehicle. The applicable headings are therefore th e headings of all the parts that make up a given
vehicle type. The most relevant are headings 87.08, 84.07, 84.08, 84.09, 84.83 and 85.11 at the four
digit level.

Response of the United States (WT/DS340)

617. Paragraph (1) of Article 21 of Decree 125 pr ovides that "imported automotive components
fulfill the characteristics of a whole vehicle . . . [w]hen completely knocked-downs (CKD) or
semi-knocked-downs (SKD) are imported to assemble vehicles." In this category, if the imported
articles were truly vehicle CKD or SKD kits, meaning that all of the essential parts and components of
the vehicle were included in the import shipment and the only difference between the CKD and SKD
designation was the state of disassembly, with CKD being completely disassembled and SKD being
only somewhat disassembled, and if only assembly operations were involved in producing a complete
vehicle, then the shipments could fall under the headings for motor vehicles, i.e., HS 8703 or
HS 8704.
618. Subparagraph (2)(a) of Article 21 of Decree 125 provides that "imported automotive
components fulfill the characteristics of a whole vehi cle . . . [w]hen the two main assemblies, i.e.,
vehicle body (including driver's cabin) and engine , are imported to assemble the vehicle." Under
longstanding classifications by Customs authorities around the world as well as the tariff classification
experts at the World Customs Organization, a vehicle body and an engine for a motor vehicle, even if
shipped together, would have to be separately cl assified. The vehicle body would be classified under
HTS 8707 and the engine would be classified under e ither HS 8407 (petrol) or HS 8408 (diesel). A
vehicle body and an engine inheren tly could never be classified together as a single article. Neither a
vehicle body nor an engine would ever be properly considered to have the "essential character" of a
motor vehicle, nor would the theoretical combined article of a vehicle body and an engine.
619. Subparagraph (2)(b) of Article 21 of Decree 125 provides that "imported automotive
components fulfill the characteristics of a whole vehicle . . . [w]hen either one of the two main
assemblies, i.e., vehicle body (including driver's cab in) and engine, as well as 3 or more than 3 other
assemblies (systems) are imported to assemble the vehicle." This subparagraph presents the same
situation as subparagraph (2)(a). Decree 125 defies the longstanding conventions and principles of

classifying imported articles in their condition at th e time of importation, as set forth in the General
Interpretive Rules and their explanatory notes. A ve hicle body or an engine combined with any 3 of
the other specified assemblies could never be prop erly classified as an article with the essential
character of a complete motor vehicle. For exampl e, a vehicle body with brakes, a steering system
and drive axle, but no engine simply is not a motor vehicle. It is an odd assortment of automotive
parts. The same holds true for any other combin ations envisioned by subparagraph (2)(b). Proper
classification of any combination of the imported assemblies would be according to the individual
assembly in its condition at the time of importation, with each assembly separately classified, even if
all assemblies were shipped together.
620. Subparagraph (2)(c) of Article 21 of Decree 125 provides that "imported automotive
components fulfill the characteristics of a whole vehi cle . . . [w]hen the two main assemblies, i.e.,
vehicle body (including driver's cabin) and engi ne not being imported, 5 or more than 5 other
assemblies (systems) are imported to assemble the vehicle." Classifying the specified assemblies
without a body or an engine as a complete motor ve hicle or more specifically as having the "essential
character" of a complete motor vehicle takes the we ll-established principles and conventions of tariff
classification even further afield. None of these assemblies, even if impossibly classified together as a
single article, would ever be considered to have the "essential character" of a complete motor vehicle
and, therefore, could never be classified as such.
621. Paragraph (3) of Article 21 of Decree 125 pr ovides that "imported automotive components
fulfill the characteristics of a whole vehicle . . . [w]hen the aggregate price of imported components
attains 60% or more of the complete vehicle price for the vehicle model in question." No imported
articles are ever properly classified according to th eir value. The General Interpretive Rules do not
provide for this way of classification. Classification addresses the physical qualities and sometimes
the function of the article without any regard to its va lue or its relative value with respect to the nature
or purpose of the finished good.
Response of Canada (WT/DS342)

622. Article 21(1) of Decree 125 considers that parts imported as CKDs and SKDs are Deemed
Whole Vehicles. As set out in answer to Question 33, if imported parts are imported in one shipment
and have the essential character of a whole vehicle th ey could appropriately be classified as complete
vehicles under the appropriate vehicle heading (87.01 to 87.05 inclusive). If the parts do not have the
essential character of a complete vehicle, each article of the importation would be classified separately
under the appropriate heading (e.g., 87.08, 87.06, 87.07, 84.07).
623. Article 21(2) of Decree 125 considers that parts in a vehicle are Deemed Whole Vehicles if a
certain number of Assemblies are Deemed Imported (an assessment made separately under Article 22,
based on three separate thresholds:
(a) Two Main Assemblies. These should be classified separately (i.e., the body under
heading 87.07 and the engine under heading 84.07);
(b) One Main Assembly and three other Assemblies . If the Main Assembly is the
engine, these combinations could at best c onstitute a chassis with engine of heading
87.06, and then only if the chassis was one of the other Assemblies. In all other
combinations, each article of the importation should be classified separately (i.e ., the
body under heading 87.07, the engine under heading 84.07, and the other assemblies
under heading 87.08); and

(c) Five or more of the other Assemblies . Regardless of the combinations, each article
should be classified separately under the appropriate subheading of heading 87.08.
624. Article 21(3) of Decree 125 considers that parts used in a vehicle are Deemed Whole
Vehicles if they constitute more than 60% of the valu e of all parts used in manufacturing the vehicle.
The value of imported content is properly used onl y for determining origin of imported products; not
for determining their tariff classification. As a result, the 60% by value threshold category is
erroneously applied to classification of parts, which in most cases should be classified under
heading 87.08.
129. ( All parties ) In light of the fact that imports from other WTO Members can only be
subject to ordinary customs duties and terms, conditions or qualifications as set forth in a
Member's Schedule under Article II:1(b), to what extent is Rule 2(a) of the General Rules for
the Interpretation of the HS relevant in interpreting a Member's Schedule?

Response of China

625. As China has explained in detail in response to other questions, the Appellate Body has
repeatedly affirmed the importance of the Harmonized System to the interpretation of WTO Members'
Schedules of Concessions. The Harmonized System, by its terms, includes the General Interpretative
Rules, including General Interpretative Rule 2(a). Moreover, as China has explained in response to
question 112, the Appellate Body has specifically recognized the relevance of interpretive decisions
adopted by the HS Committee and the WCO in eval uating the scope and app lication of the General
Interpretative Rules.
626. The Harmonized System is not a "term, conditio n, or qualification" to a Member's Schedule
of Concessions. Rather, as the Appellate Body recognized in EC – Computer Equipment and EC –
Chicken Cuts , the Harmonized System is the basis upon which Members have negotiated and
scheduled their tariff commitments. The Harm onized System therefore provides context under
Article 31(2)(a) of the Vienna Convention for the purpose of interpreting a Member's Schedule of
Concessions.
97 It would not be consistent with these findi ngs by the Appellate Body to conclude that
Members may interpret their Schedules of Con cessions in accordance with the rules of the
Harmonized System, including the General Interpretative Rules, only if they have scheduled a specific
"term, condition, or qualification" for this purpose.
Response of the European Communities (WT/DS339)

627. Rule 2(a) assists the Customs in instances where a given incomp lete or unfinished article as
presented to customs appears to have the essential characteristics of the complete or finished article.
This is different from examining the Members' schedules from a general point of view.
628. The European Communities also notes that Chin a's Schedules do not contain any restriction
on the use of parts in China.
Response of the United States (WT/DS340)

629. GIR 2(a) could be of some use in clarifying the treatment set out in China's schedule with
respect to a collection of unassembled parts as presented to China's customs officials at the border.

630. GIR 2(a), however, cannot be used to interpret the provisions of the GATT itself. Thus, GIR
2(a) cannot be instructive on what is, or is not, an "ordinary customs duty" for the purpose of GATT
Article II. Thus, if, as China contends, GIR 2(a) allowed for customs duties to be assessed on the use
of a part in manufacturing operations, and with th e rate of duty based on the local content of the
complete vehicle, the resulting charge could not be an ordinary customs duty under GATT Article II,
regardless of the content of GIR 2(a).
631. Likewise, GIR 2(a) cannot be used to impose a "term, condition, or qualification" on China's
tariff bindings set out in its schedule that would be inconsistent with GATT obligations. For example,
even if GIR 2(a) contained explicit local cont ent requirements (such as contained in China's
measures), this would not provide a defense to the breach of Article III and the TRIMs Agreement
resulting from the local content requirement.
Response of Canada (WT/DS342)

632. See Canada's response to Question 112. A Member is strictly bound by those ordinary
customs duties and terms, conditions or qualifications listed in its Schedule. Since there are no "terms,
conditions or qualifications" specifically set out in China's Schedule allowing the principle of Rule
2(a) to be applied more broadly to products in separate shipments and based upon their internal use in
China, China cannot supersede the cl ear tariff concessions applicable to, e.g., auto parts in its
Schedule.
130. ( All parties) If the measures at issue did not exist, how would the combinations of auto
parts under Article 21(2) of Decree 125 be classified under China's Schedule of Concessions
upon their importation into China? Please provide your answer based on specific tariff
headings under China's Schedule of Concessions.

Response of China

633. China interprets this question to ask how China would classify the combinations of auto parts
under Article 21(2) of Decree 125 if they were to enter China in a single shipment. The answer is that
China would classify these combinations as having the essential character of a motor vehicle under
GIR 2(a). The purpose of the challenged measures is to ensure that this classification result does not
change based solely on the manner in which the auto manufacturer structures its imports of parts and
components.
Response of the European Communities (WT/DS339)

634. Reference is generally made to the answer given to question 128.
635. Complete engines (the "engine assembly") are classified under headings 84.07 and 84.08 and
parts thereof under heading 84.09 at the four digit level.
636. Complete bodies (the "body assembly") are cla ssified under heading 87.07 and parts thereof
under heading 87.08 at the four digit level.
637. The other "assemblies" under Decree 125 do no t have a specific heading under the Chinese
Schedules and the HS system because the "assemblies" are a creation of the measures not foreseen by
the schedules and the HS system. In most cases the parts that make up the "assemblies" after
manufacture would upon importation be classified under the relevant headings for parts (most relevant
four digit headings are 87.08, 84.07, 84.08, 84.09, 84.83 and 85.11). However, heading 87.06 "chassis

fitted with engines" is relevant in many combina tions foreseen by Article 21(2) because a "chassis
fitted with engines" is according to the explicit terms of the heading "a motor vehicle without bodies".
In other words, a motor vehicle without its body but containing other parts already fitted and equipped
is for the purposes of the Chinese Sc hedules and the HS system a "chassis fitted with engines", not a
complete motor vehicle. A more detailed analysis has been provided under paragraphs 255 to 260 of
the first written submission of the EC.
Response of the United States (WT/DS340)

638. Please see the following table:
Description (per Decree 125)
Tariff Heading (per China's
Schedule of Concessions)
Duty Rate (per China's
Schedule of Concessions)
Engine Petrol Diesel 8407.31 - .338408.20.10 10%9%
Vehicle Body 8707.10 or .90 10%
Gear Box Assemblies 8708.40 10%
Drive Axle Assemblies 8708.50 10%
Drive Axle Assemblies
(non-drive axle)
8708.60.30 - .90 10%
Frame Assembly Not clear Not more than 10%
Steering System 8708.94 10%
Braking System 8708.31 or .39 10%
Passenger Vehicles 8703 25%

Response of Canada (WT/DS342)

639. See Canada's response to Question 128.
131. ( China) The European Communities states in paragraph 258 of its first written
submission that ""a chassis fitted with engin es", which is classified under the tariff heading
87.06, falls within the scope of Article 21(2)(b) and (c) of Decree 125..." Please comment on this
statement.

Response of China

640. The EC's "chassis fitted with engine" argume nt is premised on the assumption that the
Explanatory Note to heading 87.06 is binding as to what constitutes the essential character of a motor
vehicle. But as the Appellate Body has noted, the Explanatory Notes do not form part of the
Harmonized System and are not binding at all, le t alone as to what constitutes the essential character
of a motor vehicle.
98
641. It is interesting to note, in this regard, that the EC itself has classified as a complete motor
vehicle an incomplete and unassembled vehicle that was missing substantially more than the "tyres
and battery" referred to in the example provided in the Chapter Notes to Chapter 87. 99 In its first
written submission, the EC invoked the Chapter No tes to Chapter 87 – which form part of the
Harmonized System – to support its contention that there are only "very exceptional situations" in

98 EC – Chicken Cuts, at para. 214, n. 416.
99 CHI-14.

which incomplete vehicles are classified as motor vehicles, and yet its own classification practice is
not in accordance with this example.
100
132. ( European Communities ) Please comment in detail on China's argument in
paragraph 126 of China's first written submis sion that the European Communities' anti-
circumvention measures as embodied in EC Re gulations No. 384/96 are indistinguishable from
the challenged measures.

Response of the European Communities (WT/DS339)

642. The European Communities' or any other WTO Member's rules on AD circumvention are not
subject to the present Panel.
643. Without prejudice to its position that China's measures fall within the scope of Article III of
the GATT and the TRIMs Agreement , the European Communities considers that the AD
circumvention rules cannot be relied upon to estab lish a subsequent practice relevant to the
interpretation of China's obligations under Article II of the GATT and its schedule of concessions.
This would totally ignore that AD duties and cust oms duties follow a completely different logic and
are rooted in 2 different sets of WTO obligations.
644. AD duties are not Customs duties, or other du ties or charges falling within the scope of
Article II of the GATT. This is explicitly provided for in Article II:2 of the GATT and was confirmed
by the AB in Chile – Price Band System, which distinguished between Customs duties, other duties or
charges and AD duties (para. 276). As an excep tion to Article II of the GATT and to the MFN
principle, AD duties may be imposed after an investigation establishing that dumped imports are
causing injury. AD duties aim at re-establishing fair trade conditions between the dumped imports and
the domestic like products and protecting the domestic industry from the injury caused by the
dumping. They are subject to detailed obligati ons defined in Article VI of the GATT and the
Agreement on implementation of Article VI of the GATT 1994 ("Anti-Dumping Agreement").
645. Anti-Circumvention rules on AD measures find th eir legitimacy in Article VI of the GATT,
the Anti-Dumping Agreement and the Ministerial Declar ation on this issue. They enforce and relate
to a different set of rights and obligations, and are not relevant to the interpretation of the rights and
obligations of WTO Members under Article II GATT.
646. In contrast, customs duties are defined in the country's schedule of concessions. They are
levied on the basis of the classification of the pro duct in that schedule and the various interpretative
notes thereof. A country may also introduce reservations or qualifications in its schedule, but in the
absence of such reservations or qualifications, the purpose for which the merchandise is imported is
not relevant for the tariff classification.
647. The purpose of the rules set out in Art. 13(2) of the EC anti-dumping regulation 384/96 (as
amended by regulation 461/2004) is to act against shipments of parts which are either assembled in
the Community or in a 3rd country if these shipment s of parts replace the shipment of products which
had previously been found dumped and shipped in an assembled form. All this is linked and must
take place in the context of an AD measure on th e assembled product with a view to undermining the
remedial effect of these duties.

100 EC first written submission at para. 251.

648. The Chinese measures are totally different. The level of customs duty depends on whether the
parts end up in an assembled car with sufficient loca l content and/or whether they are used as a spare
part. China is not acting against imports of parts wh ich have previously been imported in the form of
assembled cars. The measures act against parts as such with a view to increasing local content and
developing a domestic industry for auto parts and complete vehicles.
649. EC's anti-circumvention measures do not change the customs classification. Applied to the
example of AD measures against bicycles from Chin a and the anti-circumvention measures against
imports of major bicycle parts, this would mean th at the imports of parts would be subject to an AD
duty for bicycles, but the customs duty will remain th e one applicable for bicycle parts. This is
explicitly stated in Article 13(5) of regulation 384/96.
650. The anti-circumvention duty is never applied on products leaving the assembly factory in the
EC. Rather, an investigation is carried out and if it is found that the imports of parts constitute
circumvention, the Antidumping Duty is extended to the parts.
133. ( All parties) In the parties' view, does the treatm ent accorded to the products at issue
under China's measures correspond to China's concessions for the tariff rates for these
products that the WTO Members negotiated at the time of China's accession to the WTO?

Response of China

651. Yes. China negotiated a Schedule of Concessions that contains a higher bound rate for motor
vehicles than the bound rate for parts and assemblie s of motor vehicles. The essence of the dispute
before the Panel is that each side believes it is at risk of being depr ived of the benefit of the tariff
concessions that it negotiated. The complainants be lieve that the difference in tariff rates between
motor vehicles and parts of motor vehicles allowe d their exporters to arbitrage the tariff rate
difference by importing parts and components in multip le shipments, even if China could properly
classify the imported parts and components as a motor vehicle if they were to enter China in a single
shipment. China, on the other hand, considers that the importation and assembly of parts and
components in multiple shipments deprives it of th e revenue and market access benefits that it
obtained when it negotiated a higher bound tariff rate for motor vehicles.
652. The question before the Panel is how to resolve these conflicting claims. China considers that
the rules of the Harmonized System, as interprete d by the HS Committee and the WCO, provide the
most relevant context for the resolution of this inte rpretive issue. Those rul es, as they existed at the
time of China's accession to the WTO, and as they exist today, have a specific rule for determining the
relationship between a tariff provision for a complete article (such as a motor vehicle) and a tariff rate
for parts of that article (such as auto parts and assembli es of auto parts). That rule is GIR 2(a). Long
before China's accession to the WTO, the WCO had interpreted GIR 2(a) to allow members of the
Harmonized System to apply its principles to the importation and assembly of parts and components
in multiple shipments. As members of the Harmoni zed System, the complainants were aware of this
interpretation, which, as China has noted previously , dates back to the adoption of GIR 2(a) in the
early 1960s. Moreover, this application of GIR 2( a) to multiple shipments is indistinguishable from
the manner in which the United States and the Eu ropean Communities, at least, have sought to
address the circumvention of anti-dumping duties that apply to complete articles, including prior to
China's accession to the WTO.
653. These were the circumstances surrounding China's accession to the WTO, and the negotiation
of the specific tariff provisions that are now the subj ect of this dispute. In China's view, the decision
of the WCO concerning GIR 2(a), and its general r ecognition that substance should prevail over form

in the administration of customs duties, establishes the baseline against which to evaluate the tariff
concessions that the parties negotiated concerning mo tor vehicles and parts of motor vehicles. If the
complainants had a different expectation – that Ch ina would not be allowed to apply GIR 2(a) as
interpreted by the WCO, or that China would be required to give effect to the form of a manufacturer's
import transactions over their substance – it was in cumbent upon the complainan ts to negotiate this
result. It is the complainants' interpretation of the term "motor vehicles" – not China's – that is
contrary to the rules and decisions of the WCO against which these tariff concessions were
negotiated.
654. To state the matter differently, there is an im portant question here concerning the burden of
proof. The Appellate Body has stated that "the party who asserts a fact, whether the claimant or the
respondent, is responsible for providing proof thereof."
101 China has provided evidence to support its
position that the Harmonized System permits China to interpret the term "motor vehicles" as it has
done in the challenged measures. On the other ha nd, the complainants' argument under Article II of
the GATT rests on the proposition that China is not allowed to interpret the term "motor vehicles" as
it has done in the challenged measures. The compla inants have provided no evidence to support this
fact.
Response of the European Communities (WT/DS339)

655. No. The European Communities has provide d the details how China breaches its
commitments in its first written submission rela ting to Article II of the GATT (paragraphs 237
to 281).
Response of the United States (WT/DS340)

656. The United States submits that China's measur es impose an internal charge, over and above
the 10 tariff rate for automotive parts negotiated at the time of China's accession to the WTO. The
United States thus views the additional charge as a breach of Article III:2, as opposed to Article II.
657. However, if the Panel were to determine th at China's measures imposed "ordinary customs
duties" within the meaning of Article II, then Chin a would not be providing the tariff rate negotiated
for parts.
658. In addition, the United States submits that China, in paragraph 93 of the working party report,
agreed to provide a 10 per cent rate of duty on CKDs and SKDs. Because China's measures impose a
25 per cent rate of duty on CKDs and SKDs, the United States does not consider China to be
providing the tariff rate negotiated at the time of accession for these items.
Response of Canada (WT/DS342)

659. No. Canada negotiated a tariff ra te of 10%, generally, for all imported auto parts, including
intermediate products. The measures deem auto parts to be whole vehicles based on their end-use and
subject them to a 25% tariff rate. This denies Cana da the tariff rate it negotiated for auto parts. In
respect of CKDs and SKDs, China is obligated to provi de Canada with a tariff rate of 10% as a result
of the commitment it made in paragraph 93 of the Working Party Report.
134. ( China) Does China consider that how imported products are going to be used can be
considered for the customs classification purpose ? If so, how do you reconcile your position

101 US – Wools Shirts and Blouses, at p. 14.

that the measures are "border" measures with the fact that a consideration of factors such as
how products are used in the domestic market is related to the events that take place in the
importing country's internal market after importation?

Response of China

660. China does not consider that the challenged measures base a tariff classification on "how
imported products are going to be used," or on "e vents that take place in the importing country's
internal market after importation." As China has sought to explain and document, any customs
procedure that seeks to address the importation and assembly of parts and components through
multiple shipments needs some process to determ ine whether different shipments of parts and
components are related to each other through their common assembly into a single finished article.
Any such process necessarily entails an examinat ion of the importer's practice or intention of
assembling multiple shipments of parts and components into a finished article.
661. There are different ways in which customs aut horities approach this determination of whether
multiple shipments of parts are related to each ot her through their common assembly into a single
finished article. At the first meeting of the Panel, Canada referred to this process as an "investigation"
in describing its treatment of imported furniture pa rts. The EC, in the context of its anti-dumping
measures, makes a presumption that all imported parts and components from the subject countries or
exporters will be assembled into the complete article, but grants "certificates of non-circumvention" to
importers who can demonstrate that they do not import and assemble parts and components above the
thresholds specified by the EC in its measure. Under this system, importers who can present a
"certificate of non-circumvention" are not assessed the applicable anti-dumping duties. The United
States, because it has a retrospective system of duty assessment, can suspend the customs liquidation
of entries and later determine, in the context of an administrative review, whether multiple shipments
of parts and components were actually assembled into the complete article.
662. Whatever one calls this process, and however it is structured, its purpose is to establish the
relationship among multiple shipments of parts and components for the purpose of assessing duties
that apply to the complete article. As described in response to previous questions, it is a form of
customs procedure under which the goods remain subject to customs control in order to complete the
customs formalities related to those imports. This type of customs procedure is provided for in the
Kyoto Convention, and gives effect to an application of GIR 2(a) that is consistent with the rules of
the Harmonized System. It is a border procedure.
663. To be clear, this type of procedure cannot be invoked for any purpose, and does not justify
tariff classification determinations that are impermissibly based on the end use of the product. For
example, a WTO Member could not defer the tariff classification of lumber to see whether it was used
to manufacture furniture or to manufacture toys, an d then base the tariff classification accordingly.
The type of customs procedure at issue in this di spute relates only to the importer's obligation to pay
the duty rate for the complete article when it im ports parts and components that have the essential
character of that article. It seeks to establish what was imported, not how it was used.
Comments by the United States on China's response to question 134
664. China's practice of determining the identity of an imported good based on its post importation
use is not a border measure. According to China, its process of "establish[ing] the relationship among
multiple shipments of parts and components for assessing duties that apply to the completed article" is
permissible because "[I]t seeks to establish what was imported, not how it was used." However, for
tariff classification purposes (and under GRI 2(a) specifically) the identity of the good that is imported

must be demonstrable by the good in its condition "a s presented" for entry into the customs territory,
that is, at the time of importation. Shipments of other parts and components with which the good will
be assembled in the importing country's internal market cannot be considered in the classification of
the good because there is no assembly of the good a nd the other parts and components at the time that
the good is imported.
665. Even though customs formalities may not be co mpleted until some time period after imported
goods have entered the country's customs territo ry, any domestic assembly, which transpires during
this interim period between importation and completi on of customs formalities, is not a basis for
classification under the Harmonized System.
666. China postulates that the United States has the authority to implement similar measures while
United States customs formalities are ongoing. Speci fically, China asserts that the United States
could conduct administrative reviews after the im portation of goods to determine "whether multiple
shipments of parts and components were actually asse mbled into the completed article." The United
States, howver, does not
 conduct such administrative reviews, for the simple reason that the United
States does not classify multiple shipments of diffe rent parts and components as a completed article
for the purpose of assessing duties that apply to the completed article.
135. ( China) In relation to Article II:1(b), first sentence, please elaborate on your position
that duties imposed under the measures are related to the importation of the merchandise into
China, as evidenced by the fact that the measures themselves do not impose any duty, fee or
charge, but rather serve to classify these merchandise under the correspondent tariff provisions.
(first written submission of China, para. 44).

Response of China

667. China has explained that Decree 125 is a cu stoms procedure to ensure the correct tariff
classification of multiple shipments of parts and co mponents that are related to each other through
their common assembly into a particular vehicle model. This is a procedure to apply the classification
rules of GIR 2(a) to multiple shipments of parts a nd components, consistent with the interpretation of
GIR 2(a) adopted by the WCO. Nothing in Decr ee 125 establishes or imposes any type of duty or
charge. Rather, as stated in Article 28 of Decr ee 125, the Customs General Administration makes
classification determinations and collect duties under this measure in accordan ce with the applicable
customs laws and regulations of China.
136. ( European Communities and the United States ) Please comment on the EC and the US
regulations allowing classifying multiple shipment s as a single entry as referred to by China in
paragraphs 157-159 of its first written submission.

Response of the European Communities (WT/DS339)

668. In the EC (and we understand also in the US) the customs authorities allow the importer of
multiple shipments to choose between the applicati on of ordinary tariff classification rules (each
shipments is classified alone at the time of impor tation as presented to customs) and special rules
designed to favor importers who prefer that the goods at issue should be considered and classified as
if they were presented to customs at the same time and place.

Response of the United States (WT/DS340)

669. Paragraph 157 of China's first written submissi on references 19 U.S.C. § 1484(j)(1) and the
publication in the Federal Register of the Final Rule for the regulation that implements the statute, 19
C.F.R. § 141.58, 71 Fed. Reg. 31, 921 (June 2, 2006). Under the limited circumstances set forth
therein, the United States permits the single en try of unassembled or disassembled entities imported
on multiple conveyances. As explained in the Fede ral Register publication, "[a]n unassembled or
disassembled entry consists of merchandise which is not capable of being transported on a single
conveyance, but which is purchased and invoiced as a si ngle classifiable entity. By necessity, due to
its size or nature, the entity is placed on multiple conveyances, which arrive at different times at the
same port of entry in the United States. The subj ect arriving portions are consigned to the same
person in the United States."
670. China interprets the United States law as permitting an importer to "import a vehicle in
unassembled or disassembled condition in multiple sh ipments, and still have the combined entries
classified as a complete vehicle, even if no one sh ipment would satisfy the essential character test for
the complete vehicle." At a prima facie level, an automobile imported in unassembled or
disassembled condition in multiple shipments does not meet the requirements for single entry
treatment under the United States regulation because an automobile is capable of being transported on
a single conveyance. Under the regulation, the si ze or nature must necess itate shipment in the
unassembled or disassembled condition. Contrast au tomobiles with fiber production plants, which
would likely be eligible for single entry treatment when imported on separate conveyances in
unassembled or dissembled condition because of their substantial size. Often times the components of
automobiles are sourced from many different c ountries, and such would disqualify them from
eligibility for single entry treatment. As stated in the Federal Register publication, it is the position of
the United States that "the legislation [19 U.S.C. § 1484(j)(1) was intended to apply to the
components of articles with a single point of origin which are shipped from the same port of export at
approximately the same time."
671. China interprets 19 C.F.R. § 141.58 as being "necessarily based on an understanding of the
'condition as imported' rule that looks beyond the cont ents of a single import entry, and that rests
instead on the stated intention of the importer to assemble the separate sh ipments into a complete
article." First, as cited in the Federal Register publication, the United States does not believe that
single entry treatment for unassembled or di sassembled entities imported on multiple conveyances
"should act as a means to control an importer's i nventory or manufacturing processes." Second, the
"stated intention of the manufacturer to assemble th e separate shipments into a complete article" must
be manifest from the documents presented at the time of entry. The Federal Register publication
notes that "[w]hen making a determination as to whethe r to approve or deny a particular application,
the port director must rely on the information that is supplied on the application." The decision to
grant single entry treatment and classify unassembled or disassembled merchandise imported on
multiple conveyances is made on the basis of the information available at the time of importation. We
also note that all of the multiple conveyances intended to qualify fo r single entry treatment must be
imported within a maximum of 25 days of each other.
672. Paragraph 158 asserts "it was the practice of the US customs [sic] authorities to combine 'split
shipments' for tariff classification purposes." In support of this assertion, China relies upon the
decision of the Court of International Trade's (CIT ) decision in Zomax Optical Media, Inc. v. United
States, 366 F. Supp. 2d 1326 (2005), wherein China alleges that the CIT "has observed that this
practice represented a departure from the prior pract ice of basing tariff classification determinations
strictly on the condition of merchandise 'as imported.'" The split shipments and practice referred to by
the CIT in that case are codified at 19 U.S.C. § 1484(j)(2), which provides for single entry treatment

of merchandise that is purchased and invoiced as a single entity but …is shipped in separate
shipments due to the inability of the carrier to in clude all of the merchandise in a single shipment (at
the instruction of the carrier)." See 19 C.F.R. § 141.57.
673. This provision covers "split shipments," which "c onsist [] of merchandise that is capable of
being transported on a single conveyance, and that is delivered to and accepted by a carrier in the
exporting country as one shipment under one bill of la ding or waybill, and is thus intended by the
importer to arrive as a single shipment. However, the shipment is thereafter divided by the carrier into
different parts which arrive in the United States at different times, often days apart." 68 Fed. Reg.
8713 (Feb. 25, 2003). Single entry treatment for sp lit shipments is also limited to very narrow
circumstances, is at the election of the importer, and certification that the entry was split at the
election of the importer must be made when the goods are imported. 19 C.F.R. § 141.57.
137. ( All parties ) Please clarify whether, and if so, how, a new tariff line can be de facto
created.

Response of China

674. China does not consider that a Member can create a new tariff line " de facto". The process of
creating a new tariff line involves amending the Memb er's tariff schedule to include the new tariff
line. As it pertains to paragraph 93 of the Work ing Party Report, the relevant consideration is that
China is allowed to classify CKD/SKD kits in acco rdance with GIR 2(a) and the customs practices of
other WTO Members, unless and until it decides to do otherwise through the creation of a new tariff
line for CKD/SKD kits.
Response of the European Communities (WT/DS339)

675. A tariff commitment can be created when a member, which committed itself to provide
certain tariff treatment if it creates a tariff line for a specific good in effect does so by enacting a
measure that pronounces how that good is to be treat ed. The European Communities also refers to the
more detailed reply provided by Canada.
Response of the United States (WT/DS340)

676. The United States understands this question to refer to China's obligations under paragraph 93
of the Working Party report, and to China's defense that it did not breach those obligations because
China did not create a new tariff line for CKDs/SKDs. The United States submits that paragraph 93,
in context, shows that Members were concerned with tariff treatment
 of CKDs/SKDs, and that those
Members wanted to ensure that Ch ina did not change its classification policies or practices so as to
apply a whole-vehicle rate to those items. Although China did not create a de jure new tariff line,
China achieved the same result by specifying in Decree 125 that CKDs/SKDs would be deemed
whole vehicles, and assessed at the whole-vehicle rate. Thus, China adopted a measure – whether
labeled a de facto tariff line or anything else – that is cont rary to the obligations China assumed with
respect to the tariff treatment of CKDs/SKDs.
Response of Canada (WT/DS342)

677. See Canada's answer to Question 61(b).

138. ( All parties ) The Harmonized System Committee Decision on the interpretation of
General Interpretative Rule 2(a) (Exhibit CHI-29) refers to the questions of "split
consignments" and "the classification of good s assembled from elements originating in or
arriving from different country" in paragraph 10. Please explain differences between these two
situations.

Response of China

678. In relevant part, a "consignment" is generally understood to mean a set of goods handed over
to the custody of a transport carrier for delivery, whether those goods are packed in one container or
in multiple containers. A consignment is "split" when the carrier break s the consignment into
multiple modes or stages of delivery (e.g., it loads the containers making up the consignment onto two
different vessels). There are a variety of reasons w hy this could occur, such as the need to balance
loads (a consideration that is partic ularly relevant in air transport) or an opportunity to take advantage
of costs savings in shipment.
679. The classification of "goods assembled from elements originating in or arriving from different
countries" refers to the classification of goods assembled from imported parts and components (or
"elements") that arrive in the cust oms territory in multiple shipments.
102 This circumstance is, in the
context, distinguished from a "split consignment," in that the imported parts and components were not
necessarily part of a single consignment.
Response of the European Communities (WT/DS339)

680. These are inter-related issues that concern trade fa cilitation. In the context of some very large
or complex machinery that are difficult to trans port in one single consignment the importer may wish
to declare the product as a single product irrespective of the fact that the elements of the product are
split into different consignments and may not be presented to customs precisely at the same time. In
some instances an element of the product may need to be transported from two or more countries or
may originate from two countries. The classification of split consignments as the complete product
even when some elements arrive from different countries is an option for the importer.
Response of the United States (WT/DS340)

681. The context of the decision identified in pa ragraph 10 of the Harmonized System Committee
Decision on the Interpretation of General Interpreta tive Rule 2(a) (Exhibit CHI-29) does not include a
definition of "split consignments" or "the classifi cation of goods assembled from elements originating
in or arriving from different countries."
682. US Customs authorities have not formally defi ned "split consignments". A consignment,
generally speaking, is a shipment of goods that is imported by or for a consignee who will sell or
deliver the goods to or for benefit of a consignor after the importation of the goods into the United

102 As China noted above, the reference to "different countries" cannot, in the context, mean that the
decision of the HS Committee applies only in the case of goods assembled from parts and components that
arrive from more than one exporting country. The numb er and identity of the exporting country or countries
would only be relevant, if at all, for the purpose of a pplying Rules of Origin – a matter that is not within the
scope of GIR 2(a). Moreover, there is no reason why the classification of goods assembled from parts and
components that arrive from a single exporting country should be any different than the classification of goods
assembled from parts and components that arrive from more than one exporting country.

States. A consignment may also refer to a ship ment of goods in the custody of a shipper and
transported on behalf of another party.
683. Presumably, "the classification of goods assembled from elements originating in or arriving
from different countries" refers to the determinati on of the country of origin of imported goods when
such goods consist of parts or components that originated in more than one country."
Response of Canada (WT/DS342)

684. As discussed in response to Question 112, any di scretion that might be afforded to Members
on how to classify split shipments must naturally be limited to application in a manner that does not
violate their tariff commitments. It is not uncommon in customs practice to allow an importer, at its
discretion, to seek to have split shipments classified toge ther. This could include situations where the
elements for constitution into some larger product (such as in the case of heavy or complex equipment
shipped only rarely) originate in different countries.
Comments by the United States on China's response to question 138
685. The United States does not agree with China's de finition of "goods assembled from elements
originating in or arriving from different count ries" in the context of the Harmonized System
Committee decision on GIR 2(a) contained in Exhibit CHI-29. According to China, this phrase means
"the classification of goods assembled from imported parts and components (or 'elements) that arrive
in the customs territory in multiple shipments." China's definition is mere conjecture given that
decision identified in paragraph 10 does not include a definition of this phrase and China has not
identified any other documents promulgated by the Committee which would support its interpretation.
686. China's interpretation also disregards the Comm ittee's reference to "different countries" and
claims that this reference "cannot mean that the decision of the HS Committee applies only in the case
of goods assembled from more than one exporting count ry" because this issue would be relevant only
in the context of the application of the Rules of Orig in. We agree with China that the Rules of Origin
are beyond the scope of GIR 2(a). Consistent w ith this position, the HS Committeee's decision in
paragraph 10 is an indication that matters involving goods of mixed origin are beyond the scope of
GIR 2(a).
687. Finally, the decision of the Harmonized System Committee cannot be used by China as a tool
to abrogate its obligation to comply with the GIRs under the HS Convention. China must still classify
goods as presented, using the entire nomenclature, rather than selectively applying the nomenclature
(headings of the HS) to goods (auto parts) based on a condition that is not existent (assembly into
motor vehicle) until after the goods are released into the domestic market.
139. ( Complainants) The complainants have expressed a view during the first substantive
meeting that the General Interpretative Rule 2(a) is irrelevant to Article II of the GATT 1994.
Could you please elaborate on your position.

Response of the European Communities (WT/DS339)

688. Rule 2(a) is not relevant in interpreting a Member's Schedule generally unless one assumes a
very specific product that is presented to customs at th e same time. It is a rule that assists the Customs
in instances where a given incomplete or unfinished article as presented to customs appears to have
the essential characteristics of the complete or finished article. See also the reply to question 115.

Response of the United States (WT/DS340)

689. Please see the United States response to Question 129.
Response of Canada (WT/DS342)

690. Canada agrees that Rule 2(a) is relevant as an element of the Harmonized System, used so as
to interpret Members' scheduled commitments. Howeve r, when applied to the instant case, Rule 2(a)
is irrelevant to China's tariff commitments for auto parts. Generally, Rule 2(a) is not relevant unless
one is considering incomplete or unfinished articles as presented to customs officials that may have
the essential characteristics of a finished article. Ru le 2(a) cannot be used independently to trump
clear obligations to provide a specific duty rate, if a Member later wishes to alter its classification for
that product. Rule 2(a) does not address, nor can it alter, tariff commitments mutually agreed between
Members.
691. If a Member wishes to renegotiate its tariff comm itment because it believes, later in time, the
common intention reflected an erroneous classi fication, it may do so as provided for under
Article XXVIII of GATT 1994.
140. ( Complainants) China has referenced various antidumping anti-circumvention decisions
as support for its contention that Members are p ermitted to treat "parts" of products the same
as the "whole" to prevent circumvention of its appropriately applied duties. The complaining
parties have all said that antidumping practi ce is not relevant to the dispute. Can the
complaining parties please give specific reasons why they believe antidumping anti-
circumvention practice is distinguishable from the measures concerned?

Response of the European Communities (WT/DS339)

692. See reply to question 132.
Response of the United States (WT/DS340)

693. For several reasons, China cannot justify its measures by invoking the practices by which
some Members impose anti-dumping duties when they are concerned about circumvention.
694. First, and most fundamentally, China's GATT Article II obligations, not obligations under
GATT Article VI, are at issue in this dispute. In other words, anti-dumping duties and the
circumvention of such duties are governed by the rules of GATT Article VI and the Anti-Dumping
Agreement, not GATT Article II. In addition, Article VI anti-dumping measures are authorized only
in certain circumstances, i.e., where the investig ating Member makes findings of dumping, injury and
causal link (as explained above in response to question 67).
695. Second, under GATT Article VI and the Anti-Dumping Agreement, the investigating Member
is not required to impose anti-dumping duties on the basis of tariff lines and, in fact, investigating
Members rarely do it. Rather, the anti-dumping dut ies are applied to imports of the products under
investigation, as defined in the scope of the pro ducts covered by the anti-dumping order. That
product coverage can be defined in numerous ways. It can be defined to apply to some but not all
products that fall under a particular tariff line or to products falling under or within a variety of tariff
lines. In addition, the product coverage can apply to finished products or to parts or both. That is
what the rules of GATT Article VI and the Anti-Du mping Agreement allow. The only requirements
are those set out in the Anti-Dumping Agreement, such as findings of dumping, injury and causal link.

Thus, in the anti-dumping context, unlike the GATT Article II context, tariff lines and how tariff
concessions are set forth in a Member's Schedule are not relevant.
696. Third, while the WTO Agreement does not define circumvention, Members have traditionally
recognized two patterns of trade which they have cons idered to be circumvention, both of which arise
in the context of trade remedies applied under Ar ticle VI of GATT 1994, i.e., anti-dumping measures
and countervailing duty measures. The first type of trade pattern involves marginal alterations to the
product itself, and the second involves marginal altera tions in the patterns of shipment and assembly.
Most Members recognize that circumvention takes place when such marginal modifications or
alterations of the physical characteristics, production or shipment of merchandise otherwise subject to
an anti dumping or countervailing duty measure ar e done in a manner which undermines the purpose
and effectiveness of trade remedies provided for under the WTO Agreement. In addition, the concept
of circumvention in the antidumping context has also been recognized in a Ministerial Decision, i.e.,
the Ministerial Decision on Anti-Circumvention , adopted by Members at Marrakesh and forming an
integral part of the Final Act Embodying the Results of the Uruguay Round Multilateral Trade
Negotiations. The Decision acknowledged the problem of circumvention in the trade remedies
context and recognized the desirability of applying " uniform rules in this area as soon as possible" to
prevent the evasion of anti dumping and counterva iling measures through circumvention. The
Decision confirms that the topic of circumvention fo rmed part of the negotiations which preceded the
Anti-Dumping Agreement and referred this matter to the Committee on Anti-Dumping Practices for
resolution. To fulfil this mandate, the Committee on Anti-Dumping Practices established the Informal
Group on Anti Circumvention to examine and resolve which rules should apply uniformly to address
the problem of circumvention. In contrast, the United States is not aware of any generally held
concept of circumvention under GATT Article II.
697. Fourth, when anti-dumping duties are imposed in the circumvention context, they are not
applied in the way that China seeks to apply its GATT Article II "duties" under the measures at issue.
The investigating Member does not impose the same anti-dumping duties on the products governed
by a circumvention ruling as it does on the products that were clearly within the scope of the
anti-dumping order from the outset. Indeed, there is not one uniform amount of duty imposed on any
of the products within the scope of the anti-dumping order (at least under the US system). Rather, the
anti-dumping duties are assessed based on the amount of dumping found for particular transactions
involving particular products.
698. In sum, China's analogy to Members' anti-dumpi ng practices is irrelevant in the absence of
any proceeding initiated by China under the ru les of GATT Article VI and the Anti-Dumping
Agreement. Simply put, the rules governing an ti-dumping are different from the GATT Article II
rules, and therefore they have no relevance to China's measures.
Response of Canada (WT/DS342)

699. There exists no generally recognized WTO b asis for the application of internal "anti-
circumvention" measures related to tariffs. Anti- circumvention of anti-dumping duties is legally
recognized. Canada and many other WTO Members onl y use the notion of "anti-circumvention" in
application to anti-dumping duties. No parallel concept applies in respect of tariff concessions.
700. There is a fundamental difference between an ordinary customs duty and an anti-dumping
duty. An anti-dumping duty is applied to remedy a situation where imports from another Member are
being dumped in a Member's internal market and are causing injury to domestic producers of those
like products. In contrast, an ordinary customs duty does not correct a situation of injury, nor does it
relate to activity within the inte rnal marketplace. Instead, an ordinary customs duty is in respect of,

and solely relates to, entry of a product in th e "importation" phase and is not applied with an
underlying notion to correct "wrongdoing" (i.e ., injury). This lack of "wrongdoing" and the need to
"correct" such actions is the reason that the con cept of anti-circumvention measures does not apply to
valid and legitimate customs duties, and is only spoken of in terms of anti-dumping duties, which by
their nature are designed to combat actions al ready found to be illegal under a Member's domestic
law. There is also a separate regime govern ing application of anti-dumping duties under the AD
Agreement. In fact, as set out in answer to Question 96(b), anti-dumping duties are measures that do
not qualify as either "ordinary customs duties" or "other duties or "charges". Indeed, there is a
separate agreement for anti-dumping duties that gove rns their use, and they are not covered under
Article II of the GATT.
701. Customs tariffs are applied for the purpose of affording domestic producers a measure of
protection from foreign import competition (although in some countries, particularly developing, they
can also represent an important source of revenue). In an effort to ensure pr edictability as to tariff
classification and liability, the Harmonized System bases the tariff classification of goods on their
physical description at the time of their importati on and admits of only one heading (or subheading)
for each product. To countenance China's attempt to increase the tariff on auto parts under the guise of
enforcing the customs duty on automobiles instead of renegotiating their tariff concession on this item
under the relevant provisions of the WTO would undermine the predictability and value of WTO tariff
concessions made by Members on parts, more broadly.
702. By contrast, anti-dumping duties are special and generally temporary measures that are
intended to address the injurious effects on a domest ic industry of unfairly traded goods from one or
more sources. Such duties, which are based on fi ndings resulting from investigations conducted in
accordance with the AD Agreement that unfairly traded specified goods from specified sources are
causing or threatening injury to the domestic industry, are remedial in nature.
141. ( Complainants) Do the complainants have any specific procedures and criteria for
determining whether an antidumping order is be ing circumvented? Please explain them with
citations to the relevant legislation or regulations.

Response of the European Communities (WT/DS339)

703. Article 13 of regulation 384/96 as amended by regulation 461/2004 on protection against
dumped imports from countries not members of the European Community, which reads as follows:
"Circumvention

1. Anti-dumping duties imposed pursuant to this Regulation may be extended to imports from
third countries, of the like product, whether sli ghtly modified or not; or to imports of the
slightly modified like product from the country subject to measures; or parts thereof, when
circumvention of the measures in force is taking place. Anti-dumping duties not exceeding
the residual anti-dumping duty imposed in accordan ce with Article 9(5) of this Regulation
may be extended to imports from companies benefiting from individual duties in the countries
subject to measures when circumvention of the measures in force is taking place.
Circumvention shall be defined as a change in the pattern of trade between third countries and
the Community or between individual companies in the country subject to measures and the
Community, which stems from a practice, process or work for which there is insufficient due
cause or economic justification other than the imposition of the duty, and where there is
evidence of injury or that the remedial effects of the duty are being undermined in terms of
the prices and/or quantities of the like product, and where there is evidence of dumping in

relation to the normal values previously estab lished for the like product, if necessary in
accordance with the provisions of Article 2.

The practice, process or work referred to in paragraph 1 includes, inter alia, the slight
modification of the product concerned to make it fall under customs codes which are
normally not subject to the measures, provide d that the modification does not alter its
essential characteristics; the consignment of the product subject to measures via third
countries; the reorganisation by exporters or pr oducers of their patterns and channels of sales
in the country subject to measures in order to eventually have their products exported to the
Community through producers benefiting from an individual duty rate lower than that
applicable to the products of the manufacturers; and, in the circumstances indicated below
under Article 13(2), the assembly of parts by an assembly operation in the Community or a
third country.

2. An assembly operation in the Community or a third country shall be considered to
circumvent the measures in force where:

(a) the operation started or substa ntially increased since, or just prior to, the initiation of the
anti-dumping investigation and the parts concerne d are from the country subject to measures;
and

(b) the parts constitute 60 % or more of the total value of the parts of the assembled product,
except that in no case shall circumvention be co nsidered to be taking place where the value
added to the parts brought in, during the assembly or completion operation, is greater than
25 % of the manufacturing cost, and

(c) the remedial effects of the duty are being undermined in terms of the prices and/or
quantities of the assembled like product and there is evidence of dumping in relation to the
normal values previously established for the like or similar products.

3. Investigations shall be initiated pursuant to this Article on the initiative of the Commission
or at the request of a Member State or any inte rested party on the basis of sufficient evidence
regarding the factors set out in paragraph 1. In itiations shall be made, after consultation of the
Advisory Committee, by Commission Regulatio n which may also instruct the customs
authorities to make imports subject to registration in accordance with Article 14(5) or to
request guarantees. Investigations shall be ca rried out by the Commission, which may be
assisted by customs authorities and shall be conc luded within nine months. When the facts as
finally ascertained justify the extension of measu res, this shall be done by the Council, acting
on a proposal submitted by the Commission, after consultation of the Advisory Committee.
The proposal shall be adopted by the Council unless it decides by a simple majority to reject
the proposal, within a period of one month after its submission by the Commission. The
extension shall take effect from the date on which registration was imposed pursuant to
Article 14(5) or on which guarantees were request ed. The relevant procedural provisions of
this Regulation with regard to initiations a nd the conduct of inves tigations shall apply
pursuant to this Article.

4. Imports shall not be subject to registrati on pursuant to Article 14(5) or measures where
they are traded by companies which benefit from exemptions. Requests for exemptions duly
supported by evidence shall be submitted with in the time limits established in the
Commission Regulation initiating the investigation. Where the circumventing practice,
process or work takes place outside the Commun ity, exemptions may be granted to producers

of the product concerned that can show that they are not related to any producer subject to the
measures and that are found not to be engage d in circumvention practices as defined in
Article 13(1) and 13(2). Where the circumventing practice, process or work takes place inside
the Community, exemptions may be granted to importers that can show that they are not
related to producers subject to the measures.

These exemptions are granted by decision of the Commission after consultation of the
Advisory Committee or decision of the Council imposing measures and shall remain valid for
the period and under the conditions set down therein.

Provided that the conditions set in Article 11(4) are met, exemptions may also be granted
after the conclusion of the investigation leading to the extension of the measures.

Provided that at least one year has lapsed from the extension of the measures, and in case the
number of parties requesting or potentially re questing an exemption is significant, the
Commission may decide to initiate a review of the extension of the measures. Any such
review shall be conducted in accordance with the provisions of Article 11(5) as applicable to
reviews pursuant to Article 11(3).

5. Nothing in this Article shall preclude the normal application of the provisions in force
concerning customs duties."

704. For explanation, reference is made to the reply given to question 132.
Response of the United States (WT/DS340)

705. The United States has had a statutory provisi on addressing circumvention since 1988. See
19 U.S.C. 1677j. Under this provision, the US Depa rtment of Commerce is authorized to take action
to prevent or address attempts to circumvent an outstanding antidumping or countervailing duty order.
The statute addresses four particular types of circumvention: (1) assembly of merchandise in the
United States, (2) assembly of merchandise in a thir d country, (3) minor alterations of merchandise,
and (4) later-developed merchandise. The Depart ment of Commerce has promulgated implementing
regulations, found at 19 C.F.R. 351.225
Response of Canada (WT/DS342)

706. Canada's anti-dumping legislation, the Special Import Measures Act , contains no specific
criteria for determining whether an anti-dumping orde r is being circumvented, nor does it contain any
remedy to address possible instances of circumvention.
103 If the authorities identify a practice that
constitutes a possible fraud or other customs violati on, Canada will resort to the usual civil and
criminal mechanisms for dealing with such matters. If there is a perceived evasion of an anti-dumping
order that involves the importation of goods that are not within the scope of the anti-dumping order, a
new anti-dumping investigation is required to est ablish dumping, causality and injury to domestic
producers of like goods. This would be the only av ailable remedy by which to address instances of
possible circumvention.

103 Special Import Measures Act, R.S. 1985, c. S-15 (Exhibit CDA-9); online at:
http://lois.justice.gc.ca/en/.

142. ( Complainants) Do the complainants have any specific procedures and criteria for
determining whether an ordinary customs duty is being circumvented? Please explain them
with citations to the relevant legislation or regulations.

Response of the European Communities (WT/DS339)

707. No. In EC Customs law the concept of "circu mventing a customs duty" does not exist. There
are situations in which operators could try to a void paying the ordinary customs duties such as for
instance falsely declaring that the goods they are importing come from a country that has a
preferential trade agreement with the EC and theref ore such goods are subject to 0% custom duty.
Such false declaration can give rise to sanctions a nd penalties that are however applied at the national
level in the EC and they are more related to fraud than to circumvention.
Response of the United States (WT/DS340)

708. Importers may try to avoid the payment of the proper amount of ordinary customs duties in
any number of ways, such as the undervaluation of the goods, the fraudulent certification of eligibility
for duty-free treatment under a free trade agreem ent, or the misclassification of goods under an
incorrect tariff heading with a lower rate of duty.
709. There is no legislation or regulation in which the United States sets forth specific criteria and
procedures for determining whether an importer is avoiding payment of the correct amount of
ordinary customs duty. Where there is a suspicion that an importer is attempting to avoid the payment
of ordinary customs duties owing on imported merchandise, the United States may initiate an audit of
its records or initiate a criminal investigation. Depending on the outcome, the United States may then
impose penalties or file criminal charges against the importer.
Response of Canada (WT/DS342)

710. Canada has no procedures for determining wh ether an ordinary customs duty is being
"circumvented". Other than the specific guidance re lating to furniture purchased as one unit at the
retail level and shipped separately to which China has already referred, there are no situations where
attempts to "evade" customs duties by separate ship ments of parts result in those separate shipments
being treated separately for purposes of increasing du ty beyond the applicable tariff commitments in
Canada's Schedule. There are no instances where activities taking place after prestentation at the
border are taken into account in increasing duty beyond the applicable tariff commitments in Canada's
Schedule.
143. ( United States) Please comment on China's reference to Temporary Importation under
Bond ("TIB") in paragraphs 32-35 of its oral stat ement. Could you also please explain the TIB
process in the United States with reference to specific legislation, regulations, and/or Customs
procedures.

Response of the United States (WT/DS340)

711. China's statement that a good entered under a TIB entry becomes liable for duty if the
importer fails to export or destroy the good within the TIB period is not accurate. The provision that
appears to be the subject of the statement is s ubheading 9813.00.05, HTSUS. The TIB period is set
by US Note 1(a) of subchapter XIII, Chapter 98, HTSUS, and is one year, although that period can be
extended for up to three years from importation. Th e procedure for extension is set by 19 C.F.R.
§ 10.37. If an importer fails to timely export or destroy the article, an importer becomes liable for

liquidated damages under the bond contract, but the importer would not incur any liability for duty.
The goods do not become liable for duty as a result of a failure to export or destroy the goods.
712. The last sentence in comment 33 that if the importer does not alter or process the good within
one year, the importer will become liable for duty is not accurate. So long as there is no evidence that
the importer negligently or fraudulently made th e TIB entry, the importer would not incur any
liability, even under the bond contract, if the good w as timely exported or destroyed. If the importer
intended to alter or process the goo d but was unable to do so, the fa ilure to execute that on intent
would not breach the importer's bond obligation or eliminate the importer's entitlement to duty free
entry.
144. ( European Communities) Please elaborate on your statement in paragraph 247 of your
first written submission that "[a] part of a whole vehicle has no use as such and its only function
is to be fitted together with other parts in order to build a whole vehicle." Does this statement
extend to auto parts used as repair parts? If this statement were to be accepted, does this mean
that it can be assumed that all imported part s have only one purpose – i.e. to be used for
assembling a whole vehicles?

Response of the European Communities (WT/DS339)

713. This statement extends also to spare parts i.e. the word "build" should be understood as
meaning "be part of". It is a general considera tion on the nature of automotive parts that have no
function without being a part of a complete vehicle.
145. ( Complainants) China states in paragraph 82 of its first written submission that the very
nature of General Interpretative Rule 2(a) is to establish that there is never a "clear separation"
between a complete article and the parts and components of that article. Do the complainants
agree with this statement? If not, why?

Response of the European Communities (WT/DS339)

714. As already touched upon in replies to questions 129 and 139 Rule 2(a) is not relevant in
interpreting a Member's Schedule generally. It is a rule that assists the Cust oms in instances where a
given incomplete or unfinished article as presen ted to customs appears to have the essential
characteristics of the complete or finished article.
715. China is attempting to use rule 2(a) for the purposes of blurring the clear basic distinction
between complete motor vehicles and part thereof at the level of China's schedules. Rule 2 (a)
operates at a different level namely as tool for assessing situations in casu.
Response of the United States (WT/DS340)

716. The United States does not agree with the statem ent in paragraph 82 because it is contrary to
the terms of General Interpretative Rule 2(a) and the structure of the Harmonized System. The
Harmonized System is made up of 96 chapters group ed into 21 sections consisting of approximately
5,000 article descriptions in the headings and subh eadings. The Harmonized System is divided into
categories or product headings beginning with crude and natural products and continuing in further
degrees of complexity through advanced manufactu red goods. General Interpretative Rule 2(a)
requires that customs officials make a determina tion as to whether components entered together
impart the essential character of a complete or fini shed article. If not, then the components are to be
individually classified. This view is supported by the structure of the Harmonized System itself by

specifically naming certain parts in their own headi ngs (e.g., spark-ignition reciprocating or rotary
internal combustion piston engines of heading 84. 07, transmission shafts of heading 84.83, chassis
fitted with engines of heading 87.06, bodies (including cabs) of heading 87.07) or the creation of parts
headings (e.g., heading 87.08 which provides fo r parts and accessories of the motor vehicles of
headings 87.01 to 87.05). To classi fy all parts eventually incorporat ed into complete motor vehicles
as motor vehicles would empty many headings and subheadings of the goods specified therein.
Response of Canada (WT/DS342)

717. As discussed in response to Questions 112, 129 and 139, there are limite d circumstances, as
set out in Rule 2(a),where the determination of th e "essential character" of parts contained in a single
shipment requires some additional analysis. However, Canada disagrees that there is never a clear
separation between a complete article and the parts that may, at some point, make up that article.
718. Further, Canada does not agree with the thrust of China's argument that the lack of a clear
separation allows China unfettered discretion to deem parts as whole vehicles. China ignores the
requirement in Rule 1 first to classify auto parts in their appropriate category, including intermediate
categories. See also Canada's response to Question 113. China neglects to mention that Rule 2(a) is
only used if Rule 1 is not applicable. Parts presen ted at the border as parts should be classified under
the appropriate parts heading.
D. A
RTICLE III OF THE GATT 1994
146. ( China) If the Panel were to consider the measures at issue as "internal measures", does
China concede to the specific arguments advanced by the complainants in relation to their
claims under Articles III:2, III:4 and III:5 GATT and the TRIMs Agreement?

Response of China

719. For the reasons that China has explained, Chin a does not consider that the measures at issue
can be characterized as internal measures within the scope of Article III of the GATT and the TRIMs
Agreement. If the Panel were to find otherwise, China submits that, at a minimum, the Panel would
need to evaluate carefully whethe r there are specific aspects or elem ents of the measures that fall
within the scope of Article II. As discussed in response to question 101, different rules or norms
within the same measure may relate to different righ ts or obligations of a Member, and can be subject
to different WTO disciplines. If the Panel were to consider that certain aspects or elements of the
measures are subject to the disciplines of Article III and the TRIMs Agreement, China considers that
it would be important, from the standpoint of making recommendations to the DSB, for the Panel to
identify those specific aspects or elements.
147. ( China) China states in paragraph 39 of its oral statement that "[e]ven if the
complainants were able to demonstrate that the challenged measures result in the imposition of
excess customs duties when applied to a specifi c combination of parts and components, this
would not mean that the measures result in the imposition of excess customs duties in all cases"
(emphasis added). Please clarify what "in all cases" means.

Response of China

720. There is an important distinction in this dispute between the validity of the challenged
measures per se and the validity of the challenged measures as applied to the facts of specific cases.
China has demonstrated that it is consistent with GIR 2(a), and consistent with the practices of other

WTO Members under like circumstances, to classify multiple shipments of parts and components on
the basis of the importer's demonstrated practice of assembling those parts and components into the
complete article. As China has explained in r esponse to previous questions, this application of
GIR 2(a) is constrained by the lim its of GIR 2(a) itself, including the essential character test and the
types of assembly operations detailed in Explanatory Note VII to GIR 2(a).
721. As China understands the complainants' position, it is their view that there is no set of facts to
which China could apply the challenged measures that would result in the correct interpretation and
application of China's tariff provisions for motor vehi cles. China does not consider that this view can
possibly be correct. Because it helps to illustrate th e extreme and absolute character of their position,
let us consider an extreme example. Suppose that an auto manufacturer in China imports 100 per cent
of the parts necessary to assemble a particular vehicle model. Further suppose that the auto
manufacturer imports the parts and components from a single corporate affiliate located in a single
country, and that each shipment of parts and components is the subject of a single invoice between the
manufacturer and its affiliate. Now suppose that th e auto manufacturer directs its logistics company
to break each consignment of parts and components in to five separate shipments, and to arrange the
shipments so that they arrive at the same port, but on different days. The manufacturer, as the
importer of record, declares each shipment as "par ts," and proceeds to assemble them into motor
vehicles.
722. Under the complainants' apparent position, the challenged measures would result in an
incorrect tariff classification even as applied to th ese facts. China considers that this extreme
position: (1) is inconsistent with the purpose and in tent of GIR 2(a); (2) is inconsistent with the
decision of the WCO that the application of GIR 2(a) to this circumstance is a matter to be addressed
under national laws and regulations; (3) is inconsistent with how other WTO Members, including the
complainants, have addressed this ty pe of problem in customs administration; (4) is inconsistent with
accepted customs practices as they existed at the ti me of China's accession to the WTO; and, most
importantly, (5) is utterly contrary to the object and purpose of the GATT 1994, as reflected in
Article II, to preserve the value of reciprocal and mutually advantageous tariff concessions.
723. Thus, when China states that the complainants have not demonstrated that the challenged
measures result in the imposition of excess customs duties in all cases, what China means is that the
complainants need to distinguish between the measures per se and the determinations of duty liability
that result when the measures are applied to specific sets of facts. The EC has suggested, for example,
that it does not agree with where China has drawn the line for purpo ses of the essential character test
under GIR 2(a). Canada, for its part, has suggested that the design of the challenged measures is not
entirely consistent with its "snaps hot" theory of how GIR 2(a) can be applied to multiple shipments,
although it did not detail the specific points of divergence during the first meeting of the Panel. The
parties may have these and other disagreements about how the challenged measures operate in
specific cases, but the existen ce of these disagreements cannot support the conclusion that the
measures are inconsistent with China's Article II commitments in all cases to which they might be
applied.
148. ( China) If the Panel were to consider that the measures at issue are "internal measures",
how would China reconcile the minimum 41% domestic-value requirement in Article 21(3) of
Decree 125 with Article III:4 GATT or Article 2 TRIMs, in conjunction with paragraph 1(a) of
the Illustrative List?

Response of China

724. As discussed in response to question 146, Chin a does not consider that the measures at issue
are subject to the disciplines of Article III of the GATT or the TRIMs Agreement.
149. ( Canada and the United States ) The Panel notes that the European Communities has
submitted an alternative claim under Article III: 2 GATT, second sentence, in the case the Panel
was to consider that the measures at issue do not violate Article III:2, first sentence GATT.
Canada has explicitly reserved itsel f the right to return to this issue in its rebuttal submission.
Could Canada and the United States please clarify their positions on this issue?

Response of the United States (WT/DS340)

725. The United States, like Canada, intends to address this matter further in its rebuttal
submission, including in particular China's argument that GIR 2(a) presents a defense to China's
breaches of Article II with respect to any char ges imposed under China's measures that might be
considered "ordinary customs duties" under Article II.
Response of Canada (WT/DS342)

726. As Canada set out in paragra phs 90 and 91 of its first writte n submission, Canada believes
that it is clear that the imported and domestic auto parts are "like" products. Canada has heard nothing
to suggest that China disagrees with this conclusion. It is therefore not necessary to consider an
argument under Article III:2, second sentence. If, ho wever, China seeks to challenge the question of
"likeness" under Article III:2, first sentence, Canada has reserved the right to argue in the alternative
that even if the measures do not apply to "like" produ cts in violation of the first sentence, they violate
the second sentence.
150. ( Complainants) In respect of imported products to be compared to like domestic
products in the context of Article III of the GATT 1994,

(a) Is it the complainants' view that the impo rted products that should be compared to
domestic products under Article III:2 GATT are "all imported auto parts" and not "imported
auto parts characterized as complete vehicles"?;

Response of the European Communities (WT/DS339)

727. Article III:2 GATT requires a comparison between imported and domestic products that are
"like". The European Communities set out in its first written submission that imported and domestic
auto parts are "like products" within the meani ng of Article III:2 GATT since the only distinction
made in the measures is on the basis of the origin of the auto parts (EC's first written submission,
paras 164 to 167). Consequently, all imported auto part s are "like" domestic auto parts. In the view
of the European Communities, the imported products that should be compared to domestic products
under Article III:2 GATT are therefore "all imported auto parts".
Response of the United States (WT/DS340)

728. With respect to subquestion (a), yes, the Un ited States considers the proper comparison as
between "all imported auto parts" and domestic parts.

Response of Canada (WT/DS342)
729. Yes, Canada considers that all imported auto parts are the proper comparator, since the
measures distinguish on the basis of origin betw een imported and like domestic auto parts. All
imported auto parts are subject to the administra tive requirements of the measures, and even the
potential for a charge on imported parts affects the competitive relationship between imported parts
and the "like" domestic product, Chinese auto parts.
(b) Please clarify what imported products a re taxed "in excess of" domestic auto parts
within the meaning of Article III:2, first sentence; and

Response of the European Communities (WT/DS339)

730. In its first written submission, the European Communities compared the internal taxation of
imported and domestic auto parts a nd found that imported auto parts can be subject to the charges
pursuant to Article 28 of Decree 125 whereas this is not the case for domestic auto parts (see first
written submission of the European Communities, pa ragraphs 57 to 58 and 1 68 to 170). Thus, all
imported auto parts can be subject to internal ch arges "in excess of those applied (…) to like domestic
products". According to Article 28 of Decree 125, these charges are actually imposed, on those
imported auto parts that were assembled and manufact ured into vehicles with an insufficient level of
local content.
Response of the United States (WT/DS340)

731. With respect to subquestion (b), the excess of charges on imported parts as compared to
domestic parts, as prohibited by Article III:2, occu rs whenever China characterizes an imported part
as a having the essential characteristic of a complete vehicle.
Response of Canada (WT/DS342)

732. Under Article 28 of Decree 125, all imported auto parts may be the subject of internal
taxation that is not applied to like domestic au to parts, as described in Canada's first written
submission. All imported auto parts may therefore be subject to taxes in excess of those applied to
domestic auto parts, specifically because those imported parts are used in vehicles that do not have the
requisite levels of domestic content.
(c) Is the complainants' position on this issue the same with respect to their claims under
Article III:4?

Response of the European Communities (WT/DS339)

733. With respect to its claim unde r Article III:4, the European Communities equally considers
that the imported products to be compared with domestic products are "all imported auto parts".
734. Concerning the second aspect of the issue, the European Communities is of the position that
all imported auto parts are "accorded treatment (… ) less favourable" than that accorded to like
domestic auto parts in respect of internal regulation within the meaning of Article III:4. As set out in
the EC first written submission, the measures negati vely modify the conditions of competition for all
imported automotive parts since all imported auto parts may be subject to the internal charges
pursuant to Article 28 of Decree 125 and because all imported auto parts are subject to stringent

administrative procedures (see first written submission of the European Communities, paras 153 to
158).
Response of the United States (WT/DS340)

735. The comparison is the same: that is, under Article III:4, the United States considers the proper
comparison as between "all imported auto parts" and domestic parts. The scope of the auto parts
subject to the breach, however, is wider under Article III:4. That is, China's measures adversely affect
the internal sale, purchase and use of all
 imported parts, regardless of whether those parts are treated
as whole vehicles. This is true for two reasons: first, ever y imported part used by a manufacturer will
bring the manufacturer closer to the thresholds (and thus to the additional charges), regardless of
whether in any particular instance the thresholds are exceeded. Thus, the measures create a strong
disincentive to the use of imported parts. Se cond, so long as a vehicle manufactured in China
contains a single imported part, the manufacturer of that vehicle is faced with all of the administrative
burdens inherent in China's measures. A manufactur er can only avoid those burdens by solely using
domestic parts.
Response of Canada (WT/DS342)

736. Yes, with respect to the "likeness" question. In respect of part (b) of the question, the
appropriate criterion by which to judge under Article III:4 is whether the charges "adversely modify
the conditions of competition". The same crite rion applies when assessing the administrative
requirements applicable to vehicle manufacturers that use imported parts.
151. ( Complainants) If the Panel were to find that the disputed "charge" is in violation of
Article III:2 GATT, would the complainants consid er it necessary for the Panel to also examine
their claims relating to "the charge" under Article III:4 GATT? Or in the alternative, if the
Panel were to find that "the challenged meas ures in their entirety" are inconsistent with
Article III:4 GATT, would the complainants consid er it necessary for the Panel to also examine
"the charge" under Article III:2 GATT?

Response of the European Communities (WT/DS339)

737. In the view of the European Communities, the Chinese measures in their entirety are
inconsistent with Article III:2 and Article III:4 GATT. If the Panel finds that the internal charges to
which imported auto parts can be subject are inc onsistent with Article III:2 GATT, it would not be
necessary – albeit possible - to also find that this asp ect of the Measure, i.e. the internal charges, are
also inconsistent with Article III:4 GATT. In th is scenario, the Panel would however still need to
examine whether the other aspects of the measures, in particular the internal administrative burden on
vehicle manufacturers using imported parts, violate Article III:4 GATT.
738. Were the Panel to find that the measures "in th eir entirety", i.e. the internal charges and the
internal administrative burden, both violate Article III:4 GATT, it would for the Panel to consider
whether it wishes to examine the charges also under Article III:2 GATT.
Response of the United States (WT/DS340)

739. The United States considers the most essential claims in this dispute as the breach of
Article III:4 and/or the TRIMs Agreement, be cause China's measures impose a local content
requirement that discriminates against all imported parts as well as administrative burdens that
discourage the use of imported auto parts, and Artic le III:2, because China imposes an internal charge

on certain imported parts in excess of any charges with no comparable charge on like domestic parts.
With respect to other claims, the United States understands that questions of judicial economy are to
be decided at the discretion of the panel, so long as the all findings are made that are necessary for the
resolution of the dispute.
Response of Canada (WT/DS342)

740. See Canada's response to Question 85. The char ges that would be the subject of analysis
under Article III:2 are related to the overall burden imposed by the measures that should properly be
examined under Article III:4, even if a violation of Article III:2 is found. Since the actual nature of
the national treatment violation under the measur es varies depending on whether one considers the
differential charges, the overall legislative regime that gives rise to those charges, or the
administrative requirements that are related to, but ultimately distinct from, the charges themselves,
one may consider independent violations under both Articles III:2 and III:4.
152. ( Complainants) What is the view of the complainants on the relationship between
Article III:5 and Article III:4 GATT? Woul d a finding under Article III:4 render unnecessary
a finding under Article III:5? Or, alternativel y, would a finding under Article III:5 render
unnecessary a finding under Article III:4?

Response of the European Communities (WT/DS339)

741. The panel in US – Tobacco stated that "both Article III:5 and Article III:4 deal with internal
regulations, but that Article III:5 is the more specific of the two provisions ".
104 Therefore, the
European Communities considers that a finding of inconsistency with the general provision of
Article III:4 would not render unnecessary a finding under the more specific provision of Article III:5
since the latter provision contains criteria that are not contained in Article III:4.
742. Alternatively, a finding of inconsistency with the specific provision under Article III:5 would
necessarily indicate that the measures are also inconsistent with Article III:4. Any internal quantitative
regulation that requires specific proportions of a product to be supplied from domestic sources (within
the meaning of Article III:5) discriminates merely on the basis of the origin of these products and,
thus, necessarily treats imported products less fa vourably than like domestic products (within the
meaning of Article III:4).
743. However, other aspects of the measures in partic ular the administrative burden of the general
system of registration, controls etc. would still need to be examined under Article III:4.
Response of the United States (WT/DS340)

744. Article III:4 and Article III:5 have different elemen ts. In the circumstances of this dispute,
however, the United States understands that a breach of Article III:4 would also indicate a breach of
Article III:5, and vice versa . Aside from this, the United States again notes its understanding that
questions of judicial economy are generally left to the discretion of the panel.

104 GATT Panel Report in US – Tobacco, at para 72.

Response of Canada (WT/DS342)

745. As the panel in US – Tobacco noted, both Article III:5 and Artic le III:4 deal with internal
regulations but Article III:5 is the more specific of the two provisions.
105 An internal quantitative
regulation found to be inconsistent with the first sen tence of Article III:5 would also be inconsistent
with Article III:4. That is, a regulation constraini ng the use of foreign inputs in order to give
preference to domestic inputs would discriminate solely on the basis of origin and be inconsistent with
Article III:4.
746. However, while the various elements of Article III are necessarily related by the principle,
expressed in Article III:1, that internal measures s hould not be applied so as to afford protection to
domestic production, Articles III:4 and III:5 are lega lly distinct expressions of that principle.
Article III:5 contains criteria that are distinct from those found in Article III:4, despite the fact that the
same measure may be the subject of the same broad review under both provisions. Not all aspects of a
measure that may violate Article III:4, such as otherwise-inconsistent administrative requirements that
discriminate against imported goods, would necessarily be covered by Article III:5. A finding solely
under Article III:5 may leave certain aspects of a measure's consistency with Article III:4
unaddressed. Similarly, a finding solely under Article III:4 would not necessarily address criteria in
Article III:5 that are absent from Article III:4.
153. ( Canada and the United States ) On the basis of the Appellate Body statement in
Bananas III (paras. 202-204). that the agreement which is more specific to the claim before the
Panel should be considered first, the European Communities has presented its legal arguments
under Article 2 TRIMs first and then its arguments under Article III of the GATT 1994. What
is the position of Canada and the United States in relation to the European Communities'
approach?

Response of the United States (WT/DS340)

747. The United States considers that Article III:4 and TRIMs Article 2 are closely related, and in
these circumstances, the United States considers that th e order of analysis is within the discretion of
the Panel.
Response of Canada (WT/DS342)

748. Canada does not take issue with the European Communities' approach. We note that the
measures are not only in the nature of investment measures, but also measures that affect trade in
goods. This, together with the fact that a TRIM is de fined in part with reference to Article III, caused
Canada to adopt the approach taken in India – Autos and deal first with Article III.
E. C
HINA'S ACCESSION PROTOCOL
154. ( All parties ) Could the parties confirm that the commitments found in China's
Accession Protocol, including the specific commitments referred to in paragraph 342 of the
Working Party Report, are legally binding upon China and enforceable in WTO dispute
settlement proceedings?

105GATT Panel Report US –Tobacco, DS44/R – BISD 41S/131, adopted 4 October 1994 at para 72.

Response of China

749. China addressed this issue in paragraphs 187 to 189 of its first written submission. In sum,
China considers that the specific provisions of a working party report that are incorporated by
reference into a protocol of accession, and from the protocol of accession into the WTO Agreement,
are akin to a Member's Schedule of Concessions from the standpoint of its rights and obligations, and
for purposes of interpretation under the Vienna Convention. As China noted in paragraph 189 of its
first written submission, China consider that its is appropriate for dispute settlement panels to take
into account the context of a commitment made in a working party report, and to exercise special care
in interpreting these commitments.
Response of the European Communities (WT/DS339)

750. The European Communities confirms that the commitments found in China's Accession
Protocol, including the specific commitments referr ed to in paragraph 342 of the Working Party
Report, are legally binding upon China and enforceable in WTO dispute settlement proceedings.
751. The legally binding nature of these commitments follows from Part I, paragraph 1.2 of the
Accession Protocol which provides that " [t]his Protocol, which shall include the commitments
referred to in paragraph 342 of the Working Party Report, shall be an integral part of the WTO
Agreement". Being an integral part of the WTO Agreem ent which is one of the "covered agreements"
listed in Appendix 1 to the DSU, the aforementioned commitments are also enforceable in WTO
dispute settlement proceedings.
Response of the United States (WT/DS340)

752. As set out in the first US submission, the United States believes that commitments in
paragraph 342 of the Working Party Report are legally binding upon China.
Response of Canada (WT/DS342)

753. Canada confirms that the commitments in China's Accession Protocol , including those
referred to in paragraph 342 of the Working Pa rty Report, are legally binding upon China and
enforceable in WTO dispute settlement proceedings, as set out in paragraphs 75 to 77 of Canada's first
written submission.
F. SCM
 AGREEMENT
155. ( Canada) Could Canada please confirm that it is not pursuing any claim under the
SCM Agreement.

Response of Canada (WT/DS342)

754. Canada confirms that it is not pursuing any claim under the SCM Agreement.
156. ( United States ) Could the United Sates clarify whether its claims under the SCM
Agreement are in the alternative to its claims under Articles II and III GATT as well as those
under the TRIMs Agreement.

Response of the United States (WT/DS340)

755. The US claims under the SCM Agreement are not st ated in the alternative – that is, they do
not depend on whether or not China's charges are in ternal taxes or "ordinary customs duties." As
noted above, however, questions of judicial economy ar e generally left to the discretion of the panel,
so long as the findings resolve the issues in dispute.
157. ( Complainants) With respect to "revenue foregone" under Article 1.1(a)(1)(ii) of the
SCM Agreement, could the complainants please clarify the following:

(a) What is the specific factual basis for your argument that the default rate of import
duties and charges that would apply to imported parts and components would be 25 per cent,
and that the lower rate of 10 per cent would on ly be available upon demonstration that local
content requirements were met?;

Response of the European Communities (WT/DS339)

756. The European Communities has not argued that 25 % would be "the default rate" of charges
applied to imported auto parts and that the 10% rate would "only be available upon demonstration that
local content requirements were met".
757. In its first written submission, the European Communities set out, following the Appellate
Body Report in US – FSC, that in order to determine whether "government revenue that is otherwise
due is foregone or not collected" it is necessary to compare the revenues due under the contested
measure and the revenues that would have been raised otherwise taking into account a normative
benchmark governing such comparison.
106
758. Under the contested Chinese measures, imported auto parts that satisfy the local content
requirements of Article 21 of Decree 125 are charged at a rate of generally 10%. This rate of 10%
does not depend on any "demonstration", as the Pane l's question suggests, but is available for
imported parts "that have been verified as not being Deemed Vehicles " (see Article 28 of
Decree 125). In order to determine the revenue "otherwise due", the European Communities had
recourse to the normative benchmark provided by the Chinese treatment of imported auto parts that do
not satisfy the local content requirements of Article 21 of Decree 125 and which are charged at a rate
of typically 25%. This rate of 25% is no "defau lt rate", as the Panel's question implies, but is
available for imported parts "that have been verifi ed by the Center as Deemed Whole Vehicles" and
that are charged "according to the duty rate for whol e vehicles" (see Article 28 of Decree). As this
25% rate is explicitly foreseen for certain imported auto parts in the Chinese measures, it is, in the
words of US - FSC, no "entitlement in the abstract" but a "definitive, normative benchmark". By
charging imported auto parts that satisfy the local content requirements "only" with a 10% rate, China
has, in the words of US – FSC, "given up an entitlement to raise re venue that it could 'otherwise' have
raised"107
Response of the United States (WT/DS340)

759. The "normative benchmark" concept described by the Appellate Body in US - FSC
(Article 21.5 - EC) does not require reference to a default ra te, as implied in the above question, when
determining whether revenue has been foregone. The Appellate Body stated that Article 1.1(a)(1)(ii)

106 European Communities' first written submission, paras 285 to 288.
107 Appellate Body Report in US – FSC, at para. 90.

of the SCM Agreement does not require panels to identify a "general" rule of taxation and
"exceptions" to that "general" rule. Rather, panels should compare the domestic fiscal treatment of
"legitimately comparable income" to ascertain whether the measure under consideration involves the
foregoing of revenue that is "otherwise due." Th e Appellate Body further considered that the
comparison ought to be made with respect to taxpayers in "comparable situations."
760. In this dispute, taxpayers in comparable s ituations pay different amounts of money to the
Chinese government, depending on whether or not they source a sufficient amount of goods locally.
That is, automobile manufacturers that use imported parts in quantities that exceed certain thresholds
when assembling complete vehicles pay a combinati on of import duties and internal charges to the
Chinese government equal to 25 per cent of the value of all imported parts used in the assembly of a
complete vehicle. Specifically, these automobile manufacturers pay import duties equal to 10 per cent
of the value of all imported parts used in the asse mbly of a complete vehicle and internal charges
equal to 15 per cent of the value of all imported parts used in the assembly of a complete vehicle. In
contrast, automobile manufacturers that use suffi cient quantities of domestic parts when assembling
complete vehicles pay import duties equal to 10 per cent of the value of all imported parts used in the
assembly of a complete vehicle and no internal charg es. As a result, automobile manufacturers that
use imported parts in quantities that exceed certain thresholds when assembling complete vehicles pay
internal charges that the Chinese government entirely foregoes in the case of automobile
manufacturers that use sufficient quantities of domestic parts when assembling complete vehicles.
761. According to China, the measures at issue onl y impose payment requirements in the form of
import duties, not internal charges. However, ev en if all of the payments due to the Chinese
government are classified as import duties, it is still clear that the Chinese government foregoes
revenue. Specifically, automobile manufacturers th at use imported parts in quantities that exceed
certain thresholds when assembling complete vehicles pay 25 per cent duties on all imported parts
used in the assembly of a complete vehicle, wh ile the Chinese government foregoes revenue by only
requiring payment of 10 per cent import duties on all imported parts used in the assembly of a
complete vehicle in the case of automobile manuf acturers that use suffici ent quantities of domestic
parts when assembling complete vehicles. The amo unt of the revenue foregon e equals the difference
between the 25 per cent import duties and the 10 per cent import duties.
762. From a practical standpoint, there are situations where it may make sense to talk in terms of a
"default rate," and there are situations where it will not . The concept of a default rate implies that it is
the rate that is normally applied or applied in most situations. In the case of measures like those at
issue in this dispute, the rate normally applie d will likely change as business practices change in
response to those measures, so that it does not make sense to talk in terms of a default rate. For
example, when measures like those at issue in this dispute are first enforced, the rate normally applied
will likely be the higher payment rate - in the case of China's measures, this default rate would be the
combination of import duties and internal charges payable to the Chinese government in an amount
equal to 25 per cent of the value of all imported parts used in the assembly of a complete vehicle. The
reason for this situation is obvious. The purpose of measures like those at issue in this dispute is to
change how business is normally conducted and to create an incentive for manufacturers to begin
sourcing more parts locally rather than importing them. Over time, unless the measures are
withdrawn, manufacturers will change their business pr actices and source more parts locally in order
to avoid the higher payment rate and remain competi tive. As this change in business practices takes
place, the rate normally applied under the measures will change as well. Manufacturers will normally
pay the lower payment rate because they have res ponded to the incentive to source more parts locally
- in the case of China's measures, this new default rate would be the payment of import duties to the
Chinese government in an amount equal to 10 per cent of the value of all imported parts used in the
assembly of a complete vehicle, with no internal charges.

(b) Is it relevant to the Panel's analysis of th e question of the "normative benchmark" in the
context of the claims under the SCM Agreement th at the bonding rate on imported parts and
components is, according to the parties' oral arguments, 10 per cent?;

Response of the European Communities (WT/DS339)

763. No, the question of the bonding rate is not rele vant for the "normative benchmark" indicating
whether revenue is foregone within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement. As
set out in response to the previous sub-question, the normative benchmark provided by the Chinese
measures is the treatment of imported auto parts th at do not satisfy the local content requirements of
Article 21 of Decree 125. Pursuant to Article 28 of Decree 125, charges "according to the duty rate
for whole vehicles" (i.e. 25%) are imposed on such parts, after their manufacture, if they were verified
as "Deemed Whole Vehicles". The bonding rate does not have any impact on this normative
benchmark.
Response of the United States (WT/DS340)

764. The 10 per cent bonding rate on imported part s is not relevant, regardless of whether the
domestic fiscal treatment at issue is considered to be a combination of import duties and internal
charges (in the complainants' view) or only import duties (in China's view). As explained above, the
Appellate Body has stated that Article 1.1(a)(1)(ii) of the SCM Agreement does not require panels to
identify a "general" rule of taxation and "exceptions" to that "general" rule, but rather allows panels to
compare the domestic fiscal treatment of "legitimatel y comparable income," with respect to taxpayers
in "comparable situations," to ascertain whet her the measure under consideration involves the
foregoing of revenue that is "otherwise due". In other words, it is not necessary to identify a default
rate, which this question implies could be the bonding rate.
765. Furthermore, in the complainants' view, th e import duties imposed under China's measures
total 10 per cent of the value of all imported part s used in the assembly of a complete vehicle,
regardless of the local content used by an automobile manufac turer when assembling a complete
vehicle in China. As explained above, automobile manufacturers that use imported parts in quantities
that exceed certain thresholds when assembling complete vehicles pay import duties equal to 10 per
cent of the value of all imported parts used in th e assembly of a complete vehicle, plus internal
charges equal to 15 per cent of the value of all im ported parts used in the assembly of a complete
vehicle. Automobile manufacturers that use suffi cient quantities of domestic parts when assembling
complete vehicles similarly pay import duties equal to 10 per cent of the value of all imported parts
used in the assembly of a complete vehicle; the difference is that they do not pay any internal charges.
(c) What is the legal test to be applied to determine the normative benchmark in a subsidy
claim in which the alleged financial contribution takes the form of revenue foregone in the sense
of SCM Article 1.1(a)(1)(ii)?; and

Response of the European Communities (WT/DS339)

766. The Appellate Body in US – FSC interpreted Article 1.1(a)(1)(ii) of the SCM Agreement in
the following way:
"In our view, the " foregoing " of revenue " otherwise due" implies that less revenue
has been raised by the government than would have been raised in a different
situation, or, that is, "otherwise". Moreove r, the word "foregone" suggests that the
government has given up an entitlement to raise revenue that it could "otherwise"

have raised. This cannot, however, be an entitlement in the abstract, because
governments, in theory, could tax all revenues. There must, therefore, be some
defined, normative benchmark against whic h a comparison can be made between the
revenue actually raised and the revenue that would have been raised "otherwise". We,
therefore, agree with the Panel that the term "otherwise due" implies some kind of
comparison between the revenues due under the contested measure and revenues that
would be due in some other situation. We also agree with the Panel that the basis of
comparison must be the tax rules applied by the Member in question
."108
767. On the basis of this test, the European Co mmunities considers that the revenues actually
raised need to be compared not with "an entitle ment in the abstract" but with "some defined,
normative benchmark" as already existing in the legal system of the Member in question.
768. In the present case, China's treatment of importe d auto parts that do not satisfy the local
content requirements of Article 21 of Decree 125 prov ides such a benchmark. It is not "an entitlement
in the abstract", but a pre-existing "defined" rule in the Chinese legal system.
Response of the United States (WT/DS340)

769. Please see the response to subquestion (a) above.
(d) In your oral statements, in the context of other claims, you have characterized the
measures in question as involving the additional "charge" of 15 per cent on imported auto parts
only when those parts are treated as whole vehi cles. For example, the United States argued
that:

"the additional charge only applies if domestically-produced autos include an
amount ... of imported auto parts that exceeds specified thresholds" (US oral
statement, paragraph 3, emphasis added); and "the measures ... require that a
specified amount or proportion of an automobile be supplied from domestic
sources or else a penalty in the form of an additional charge is assessed" (US
oral statement, paragraph 18, emphasis added).
Response of the European Communities (WT/DS339)

770. Question 158 (the European Communities unders tands that the question that begins under
question 157 (d) is put to it under question 158)
Response of the United States (WT/DS340)

771. Please see the response to subquestion (a) above.
158. ( European Communities) The European Communities argued that:

"Only the [imported parts] that will be used in complete vehicles that do NOT
attain the necessary domestic content will be subject to the higher duty on
complete vehicles" (EC oral statement, paragraph 55, italic emphasis added);
and " ...[China] will ... verify whether the [parts] will be used in a complete
vehicle or not and whether the complete vehicle will contain sufficient local

108 Appellate Body Report in US – FSC, at para. 90.

content before deciding whether to apply an additional charge on the products
after they have already been manufact ured in China" (EC oral statement,
paragraph 57, emphasis added).
 How can these arguments be reconciled with your position that the 25 per cent rate is
the "normative benchmark" or default rate that would apply to all
 imported auto parts unless
there is a demonstration that local content requirements are fulfilled?

Response of the European Communities (WT/DS339)

Question 158 (the European Communities unders tands that the question that begins under
question 157 (d) is put to it under question 158)

772. In the view of the European Communities, there is no contradiction between these quotes
from the EC oral statement and its position that China foregoes revenue "otherwise due" when it
charges imported auto parts that satisfy local cont ent requirements at a rate of (only) 10% whereas it
charges imported auto parts that do not satisfy local content requirements at a rate of 25%.
773. As set out in response to the previous s ub-questions, the European Communities has not
argued that the 25% rate is a "default rate" a pplying to "all imported parts unless there is a
demonstration that local content requirements are fulfilled" and does not consider this to be part of the
relevant legal test in order to determine the "nor mative benchmark" under Article 1.1(a)(1)(ii) of the
SCM Agreement.
159. ( China) With respect to "revenue foregone" under Article 1.1(a)(1)(ii) of the SCM
Agreement, could China please:
(a) Clarify the specific factual basis for its argu ment that the 10 per cent rate and the 25 per
cent rate of import duties and charges have sep arate and independent scopes of application and
operation, such that the 25 per cent is not the default rate, as alleged by the complaining parties;
and
(b) Indicate what would be the appropriate normative benchmark in its view.

Response of China

774. The Appellate Body has stated that "the term 'otherwise due' implies some kind of
comparison between the revenues due under the contest ed measure and revenues that would be due in
some other situation."
109 The "basis of comparison must be the tax rules applied by the Member in
question. … What is 'otherwise due', therefore, depends on the rules of taxation that each Member, by
its own choice, establishes for itself." 110 The Appellate Body has further observed that "the
comparison under Article 1.1(a)(1)(ii) of the SCM Agreement must necessarily be between the rules of
taxation contained in the contested measure and othe r rules of taxation of the Member in question." 111
In making these comparisons, "panels must obviously ensure that they identify and examine fiscal
situations which it is legitimate to compare."
112
775. Decree 125 concerns the obligation of auto manuf acturers to pay the applicable duty rates for
motor vehicles when they import parts and component s of motor vehicles that, in their entirety, have

109 US – FSC, at para. 90.
110 US – FSC, at para. 90.
111 US – FSC (Article 21.5 – EC), at para. 89.
112 US – FSC (Article 21.5 – EC), at para. 90.

the essential character of a motor vehicle under GI R 2(a). These are the "revenues due under the
contested measure." When auto manufacturers import auto parts and components that do not have the
essential character of a motor vehicle, China classifies these imports under the applicable headings for
parts, also in accordance with the rules of the Harm onized System. These are not the same "fiscal
situations" for purposes of making a proper comparison. The application of GIR 2(a) to imported
parts (whether one shipment of parts or multiple ship ments of parts) leads to a different classification
depending on whether the parts have the essential character of the complete article.
776. It is therefore not the case, as the US and EC argument necessarily presumes, that the
benchmark rate of taxation is the duty rate that applies to motor vehicles. The benchmark rate of
taxation depends on what is imported – parts that have the essential character of the complete article,
or parts that do not have the essential character of the complete article. China therefore does not
"forego revenue" when it applies the applicable duty rates for parts to imports of parts that do not have
the essential character of a motor vehicle. This is, as China has explained, the "independent scope and
effect of China's separate tariff provisions for auto parts and components."
113
Comments by the United States on China's response to question 159
777. In its response to question 159, China does not di spute the basic formulation laid down by the
Appellate Body in US - FSC (Article 21.5 – EC) that the term "otherwise due" in the context of
Article 1.1(a)(1)(ii) of the Agreement on Subsidi es and Countervailing measures (SCM Agreement)
"implies some kind of comparison between the revenues due under the contested measure and
revenues that would be due in some other situation. " China also does not seem to directly dispute the
US position set forth in response to question 157, to the extent that the United States argues that (1) a
government foregoes revenue when it imposes a 10 per cent internal charge on an imported part if it is
used in the assembly of a vehicle with insufficient local content but imposes no internal charge on that
same imported part if it is used in the assembl y of a vehicle with sufficient local content or,
alternatively, that (2) a government forego es revenue when it imposes 25 per cent duties on an
imported part if it is used in the assembly of a ve hicle with insufficient local content but imposes only
10 per cent duties on that same imported part if it is used in the assembly of a vehicle with sufficient
local content. Instead, China argues that neither of these scenar ios accurately portrays how the
measures at issue in this dispute operate. Acco rding to China, the measures at issue are border
measures that simply apply the duty rates set fort h in China's Schedule of Concessions. In other
words, China insists that its measures properly classify imported parts as motor vehicles (and apply
25 per cent duties) if they will be assembled into a vehicle with insufficient local content within one
year, and its measures properly classify imported part s as parts (and apply 10 per cent duties) if they
will be assembled into a vehicle with sufficient local content.
778. The United States, of course, disagrees with China's view that the measures at issue are border
measures that properly apply China's Schedule of Concessions. But the United States would agree in
general that in the case of true border measures properly applying a Member's Schedule there may
well be no "revenue foregone" within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.
779. But since China's measures are in ternal measures or border measures that misclassify parts as
motor vehicles for tariff purposes, the Chinese gove rnment foregoes revenue under the measures at
issue, as the United States describes above and explains more fully in response to question 157(a).

113 China first written submission at para. 177.

G. A
RTICLE XX(D) GATT
160. ( China) China submits in paragrah 211 of its first written submission that the example
of [ ] "illustrates both the importance of the in terests furthered by the challenged measures as
well as the contribution that these measures make towards the realization of those interests."
China further submits in paragraph 21 of its first written submission that the example provided
by [ ] is "not an isolated incident". Could China please provide the Panel with further specific
examples.

Response of China

780. The following table provides several more exampl es of motor vehicles that are assembled in
China from imported parts and components that have the essential character of a motor vehicle, and
that are imported into China in multiple shipments:
Assembly [ ] [ ] [ ]) [ ])
Body X X X X
Engine X X X X
Transmission X X X X
Driving Axle X X X X
Driven Axle X X
Frame X X X
Steering System X X X
Braking System X X

781. The example of the [ ] is particularly interesting, as it highlights the nature of the tariff
classification issue that China sought to resolve through Decree 125. In 2003, [ ] produced the [ ]
almost entirely from imported CKD kits. Beginning in 2004, however, [ ]'s importation of CKD kits
for the [ ] dropped dramatically, while its importati on of auto parts surged. By 2005, [ ] produced
38,600 [ ], and imported only 24 CKD kits in that year. As verified under the provisions of
Decree 125, [ ] continues to import seven out of th e eight major assemblies for the production of the
[ ]. Thus, [ ] has gone from the importation of CKD kits – classified as motor vehicles under GIR 2(a)
– to the importation of parts and components that, in their entirety, have the essential character of a
motor vehicle. In essence, nothing has changed except the manner in which it structures its imports.
161. ( China) Could China please clarify whether the alleged customs circumvention is also
related to the importation of CKD/SKD kits? If so, could China please reconcile its response
with the statement in paragraph 39 of China's first written submission that "major car
manufacturers have imported CKD/SKD into China and declared these imports as complete
vehicles, both before and after the challenged measure took effect" (emphasis added).

Response of China

782. As China has explained, there is no tariff cl assification issue associated with CKD/SKD kits,
as China classifies CKD/SKD kits as motor vehicles in accordance with GIR 2(a). China's point in
paragraph 39 of its first written submission was simp ly that this classification of CKD/SKD kits has
never been contested by importers of CKD/SKD kits into China.

Comments by the United States on China's response to question 161
783. The United States disagrees with China's statemen t in response to this question that China's
classification of CKD and SKD kits as motor vehicles "has never been contested by importers." As
the United States explained above under question 2, from 1992 until China began to implement the
measures at issue, China normally did not apply th e motor vehicle tariff rates to CKDs and SKDs.
Instead, the applicable rate for CKDs and SKDs (and parts) was negotiate d between an individual
auto manufacturer and the Chinese authorities. The ke y factors in this negotiation were the amount of
the auto manufacturer's investment in China and th e extent to which the auto manufacturer used local
content in the assembly of its vehicles, both at the time of the negotiation and under the auto
manufacturer's future plans. Normally, an auto ma nufacturer with a larger amount of investment and
a larger percentage of local conten t would be able to negotiate a lowe r tariff rate than would an auto
manufacturer with a smaller amount of investment and a smaller percentage of local content.
Particularly for the auto manufacturers that th e Chinese authorities viewed as committed to China
based on these factors, the negotiated tariff rates fo r CKDs and SKDs (and part s) were substantially
below the tariff rates for motor vehicles. But, fo r an auto manufacturer that the Chinese authorities
viewed as insufficiently committed to China, as may have been the case for one manufacturer,
114 it is
very possible that the Chinese authorities would insist on applying higher tariff rates.
162 ( China) Concerning the trade effect of the measure, China, in paragraph 213, refers to
an observation that several of the world's largest auto manufacturers and auto parts suppliers
have noted that the challenged measures have had no impact on trade and investment as
provided in Exhibit CHI-33 (Fan Yan, Big car parts makers unfazed by China tax row ). Please
comment on the indication in the same source that the policy might block small European auto
part suppliers as well as hurt car makers of luxury brands such as BMW and DaimlerChrysler
AG's Mercedez-Benz.

Response of China

784. China is unaware of any basis for the asserti on that the challenged measures could affect
smaller European auto parts suppliers. As for ma kers of luxury brands such as BMW and Mercedes-
Benz, the article explains the reason why they coul d be relatively more affected by the challenged
measures. Quoting a securities analyst, the article explains that these companies import parts and
components that "make up as much as 90 per cent of locally assembled vehicles."
115 To the extent
that these companies import these levels of parts and components in multiple shipments and assemble
the parts and components into specific vehicle m odels, the effect of Decree 125 is that these
companies now have to pay the applicable duty rates for motor vehicles. That is precisely the tariff
classification issue that the challenged measures seek to resolve, by ensuring that the substance of the
auto manufacturer's import transactions prevail over their form.
H. ARTICLE XXIII:1(B) GATT
163. ( Canada) In paragraph 159 of its first written submission, Canada requests the Panel to
find that the measures at issue nullify or impa ir benefits, as understood under GATT Article
XXIII:1(b), accruing to Canada in respect of CKD and SKD . Could Canada please confirm that
its claim under Article XXIII:1(b) GATT is limited to CKD and SKD kits?

114 See China's first written submission, pages 15-16.
115 CHI-33.

Response of Canada (WT/DS342)

785. Canada confirms that this claim is limited to CKD and SKD kits.
I. O
THER CLAIMS
164. ( United States ) In its request for the establishment of the Panel, the United States
submitted that the measures at issue were inconsistent with inter alia Article 2 TRIMs in
conjunction with paragraph 2(a) of the Illustrative List. Could the United States confirm that it
is not pursuing an additional claim under Article 2 TRIMs in conjunction with paragraph 2(a)
of the Illustrative List.

Response of the United States (WT/DS340)

786. Please see the following response to Question 165.
165. ( United States ) In its request for the establishment of the Panel, the United States
submitted that the measures at issue were inconsistent with inter alia Article XI:1 GATT.
Could the United States please confirm that it is not pursuing a claim under Article XI:1 GATT.

Response of the United States (WT/DS340)

787. The United States included claims under Article XI of the GATT 1994 and paragraph 2(a) of
the TRIMs Agreement Illustrative Li st in the event that China trie d to buttress its argument that its
charges were "ordinary customs duties" by claiming that China's measures actually prohibit
 the import
of auto parts until after the parts were used in the manufacture of a complete vehicle. In that case,
China's measures would indeed r esult in breaches of the two above-cited provisions. Given that
China is not pursuing such an argument, and on th e condition that China does not in the future pursue
such an argument, the United States likewise is not pursuing its claims under these two provisions.
788. It is worth noting, however, that the existen ce of an Article XI obligation means that China
necessarily must agree that the auto parts at issue in this dispute are in fact "imported" when the parts
are presented at the border. Otherwise, as noted, if China's measures forbid the importation of auto
parts until after those parts were assembled into complete vehicles, China's measures would result in a
breach of Article XI of the GATT 1994.
166. ( European Communities) In its request for the establishment of the Panel, the European
Communities submitted that, with the adoption of the measures at issue, China has nullified or
impaired the benefits accruing to the Europe an Communities under Article XXIII:1(b) GATT,
in conjunction with China's Protocol of Accession and in particular paragraph 93 of the
Working Party Report. Could the European Communities please confirm that it is not
pursuing a claim under Article XXIII:1(b) GATT.

Response of the European Communities (WT/DS339)

789. The European Communities confirms that it is not pursuing claims under Article XXIII:1(b)
GATT.