Document: INTERIM REVIEW
Date: 13 February 2008
Document codes: WT/DS339/R; WT/DS340/R; WT/DS342/R
Complainant: Canada
Respondent: China
Third parties: Argentina, Australia, Brazil, Japan, Mexico, Taiwan, Thailand
Dispute stage: Appellate Body
Agreements cited: Part I, para. 1.2, Part I, para. 7.2, Part I, para. 7.3  Protocol of AccessionArt. III:2, III:4, III:5, III:1, II:1, X:1, X:3  GATT 1994Art. 2.1  Trade-Related Investment Measures (TRIMs)Art. 3.1(b), 3.2  Subsidies and Countervailing Measures (SCM)

2. Conclusion
5.128 For the reasons set forth above and in our wr itten submission, China's defense of its measures
must fail. China's unprecedented and far-reaching "anti-circumvention" measures, if upheld, will
have a chilling effect on international trade. Par ticularly, the trade in more sophisticated products
with multiple parts risks being jeopardized. Acco rdingly, Japan respectfully requests the Panel to
uphold the claims of the complainants.
VI. INTERIM REVIEW
6.1 On 13 February 2008, the Panel submitted its Interim Reports to the parties. On
27 February 2008, the European Communities, the United States, Canada and China submitted written
requests for review of the Interim Reports.
153 None of the parties requested an interim review
meeting. On 5 March 2008, the United States, Canada and China submitted written comments on
each others' requests for interim review. On the same day, the European Communities informed the
Panel that it fully supports the comments by the United States and Canada on China's interim review
comments of 27 February 2008 concerning paragraph 7.753 of the Interim Reports.
6.2 In accordance with Article 15.3 of the DSU, th is section of the Panel's reports sets out the
Panel's response to the arguments made at the interim review stage, to the extent that an explanation is
necessary. The Panel has modified aspects of its re ports in light of the parties' comments where it
considered these appropriate, as explained below. The Panel has also made certain technical and
editorial corrections and revisions to the Interi m Reports for the purposes of clarity and accuracy.
References to sections, paragraph numbers and footnotes in this Section VI relate to the Interim
Reports.
A. SECTION VII.F OF THE INTERIM REPORTS CONCERNING CKD AND SKD KITS
1. Article II:1(b) of the GATT 1994
(a) Paragraphs 7.708 and 7.734 – Canada's comments
6.3 Canada submitted that it did provide documentary evidence to support its view that China
has been "treating CKD and SKD kits as parts" by applying lower tariff rates than for whole motor
vehicles. Canada refers to pa ragraphs 67 and 68 of its second writte n submission, in particular to
Exhibits JE-25, CDA-28, and CDA-32 and the documentary evidence provided in its response to
Panel question No. 61(b). Canada requested that if this paragraph refers to the submission of the
complainants regarding tariff treatment of CKD and SKD kits, then the reference to not providing
documentary evidence be removed, and that a comme nt noting the existence of Canada's evidence be
included either in paragraph 7.708 or in a footnote.
6.4 In a similar context as its request in respect of paragraph 7.708 above, Canada submitted that
it disagrees with the Panel's finding in paragraph 7. 734 that it did not provide specific evidence that
"China 'treated' CKD and SKD kits imports with su bstantially lower tariff rates than complete motor
vehicles since 1996 and prior to China's accession". In addition to Exhibit JE-25, which is addressed
in footnote 1077 of the Interim Reports, Canada pointed to the documentary evidence referred to in its
response to Panel question No. 61(b) and statis tical evidence supported with documentation in
paragraph 68 of its second written submission and requested that the reference to not providing

153 Letter of the parties of 27 February 2008.

specific evidence be removed, and that a comment noting the existen ce of that evidence be included
either in the paragraph or in a footnote.
6.5 China objected to Canada's proposed revision to th ese paragraphs. According to China, the
only documentary evidence provided by Canada is addressed in footnote 1077 of the Interim Reports.
In addition, Canada's response to Panel question No. 61 contains no documentary evidence.
6.6 First, regarding the evidence provided in pa ragraphs 67 and 68 of Canada's second written
submission, the Panel notes that Exhibit CDA-28 provides information on the basis of which Canada
argues that CKD and SKD kits are not subject to the same tariff rate as motor vehicles, but will be
subject to a tariff rate depending on the local content rate of the CKD or SKD kit, which is lower than
the rate for motor vehicles. As we noted in f ootnote 1077 of the Interim Reports, however, this piece
of evidence uses the term CKD or SKD kits more in a general sense without confining its scope to a
particular collection of auto parts that could be considered as falling within the scope of a CKD or
SKD kit as defined by the Panel in the Interim Reports. Specifically, we recall our finding in
paragraph 7.644 of the Interim Repor ts that, with respect to the extent of auto parts and components
that need to be contained in a kit so as to constitute a CKD or SKD kit, the parties generally agree that
in the automobile industry, the term is understood as referring to "all, or nearly all, of the auto parts
and components necessary to assemble a complete vehi cle". Given the ambiguous scope of the term
"CKD and SKD kits" used in Exhibits CDA-28 and JE-25, we do not consider that these exhibits
prove that China "treated" CKD and SKD kits as pa rts by applying lower tariff rates than for motor
vehicles since 1996 and prior to China's accession to the WTO.
6.7 Second, based on Exhibit CDA-32, Canada argues th at the value of imports of motor vehicles
(HS headings 87.02 to 87.05) from Canada in 1999 was only US$279,000, while imports of auto parts
from Canada were US$75 million. Given the amount of 23,000 CKD kits imported to China in 1999,
Canada argues that these CKD kits cannot have been classified as motor vehicles, unless they were
valued at US$12 each. In contrast to Canada's observation, however, Exhibit CDA-32 shows that the
sum of imported motor vehicles falling under HS heading 87.02 to 87.05 amounts to more than
US$5 million. Because of the inaccuracy of the data referred to by Canada, we cannot draw any
conclusion from this specific evidence on how China classified CKD kits in 1999.
6.8 Finally, as argued by China, Canada has not pr ovided any documentary evidence in Canada's
response to Panel question No. 61(b). In its response, Canada addresses the creation of a tariff
commitment but does not provide documentary ev idence regarding China's treatment of CDK and
SKD kits after its accession.
6.9 The Panel has revised footnote 1077 to clarify the Panel's reasoning in response to Canada's
comments. A cross-reference to footnote 1077 has also been made in footnote 1049.
(b) Paragraph 7.731, 7.733, 7.734, and 7.735 – United States' comments
6.10 The United States submitted that paragraphs 7.731, 7.7 33, 7.734, and 7. 735, which were
based on China's response to Panel question No. 254, did not reflect the additional information that
China subsequently provided in its comments on the complainants' responses to the same question.
Therefore, the United States suggested that it would be more accurate if the reports reflected China's
acknowledgement that China did provide reduced ta riff rates on the importation of certain CKD and
SKD kits. The United States also suggested that the United States' position would be more accurately

reflected if the reports clarified the United States ' position by stating that "normally" (as opposed to
always) a lower tariff rate was applied to CKD and SKD kits.
154
6.11 Canada submitted that it fully supports the comments of the United States.
6.12 China submitted that it considered that the Pane l accurately characterized the relevant
evidence concerning China's pre-accession practices in respect of the classification and tariff
assessment of CKD and SKD kits and thus objected to the United States' suggestion to reflect the
relevant evidence concerning China's pre-accession pr actices in the reports. China suggested that to
the extent that the Panel considered that a res ponse to the United States' comment on paragraph 7.731
was warranted, an appropriate response would be to expand upon the footnote that is currently at the
end of this paragraph (footnote 1075). China di d not make any comment on the second point raised
by the United States.
6.13 The Panel has added, for clarification, the additi onal information that China subsequently
provided in its comments on the complainants' responses to Panel question No. 254 in the
accompanying footnotes to paragraphs 7.731, 7.733 , and 7.734 and also made a modification to
paragraph 7.735 by deleting the last sentence. Th e Panel has also clarified the United States' position
by inserting the word "normally" in paragraphs 7.733 and 7.734.
2. Paragraph 93 of China's Working Party Report
(a) Admission of Exhibit CDA-48
6.14 China objected to Canada's submission of Exhibit CDA-48 on the grounds that the Panel
accepted the evidence in violation of paragraph 13 of the Panel's Working Procedures and requested
the Panel to strike Exhibit CDA-48 from the record a nd remove any reference to this document in the
Panel's Final Reports. China provi ded three reasons for its position that the acceptance of Exhibit
CDA-48 violates paragraph 13 of the Working Procedures: (i) according to China, Canada was
required to present evidence that China had created separate tariff lines for CKD and SKD kits no
later than during the first substantive meeting. Because Canada submitted Exhibit CDA-48 only in its
comments on China's response to Panel question No . 254, Canada was required to explain why it was
previously unable to identify and submit the ev idence and to show good cause for submitting Exhibit
CDA-48 later than the first substantive meeting; (ii) further, China submitted that Canada's
submission of Exhibit CDA-48 is not "factual evidence necessary for purposes of comments on
answers provided by others", as required under pa ragraph 13 of the Panel's Working Procedures,
because the factual issue of whether China had created separate tariff lines for CKD and SKD kits was
central to Canada's claim under paragraph 93 of the Working Party Report and Canada should have
identified the issue as part of Canada's affirmative case and presented its argument why ten-digit
statistical annotations were relevant to whether China had created separate tariff lines for CKD/SKD
kits; and (iii) the Panel should have accorded a pe riod of time for other parties to comment on this
late-filed evidence. In particular, China should not have been required to make an unsolicited
intervention, or to comment on this evidence in a la ter submission in which the topic would not have
been pertinent.
6.15 Canada argued that Article 11 of the DSU obliges panels to make an objective assessment of
the facts of the case. Citing the statement by the Panel in EC – Selected Customs Matters that a panel
would not be abiding by its duty in Article 11 of th e DSU if it were to ignore evidence that may have
a bearing on its findings in a dispute, Canada pointed to the Panel's finding in that case that it was not

154 United States' letter of 27 February 2008, para. 6 and footnote 2.

necessary for a panel to determine whether particul ar evidence is, as China alleges, "new factual
evidence", or whether it is "rebuttal evidence".
155 Canada submitted that what is relevant is that
Article 12.1 of the DSU and paragraph 13 of the Wo rking Procedures give the Panel the authority to
admit Exhibit CDA-48. Accordingly, Canada was of the view that the Panel properly considered the
evidence, under its authority pursuant to Article 12.1 of the DSU and paragraph 13 of the Working
Procedures. Canada explained that Exhib it CDA-48 was provided as a "comment" on China's
response Panel to question No. 254, and was necessar y in order to highlight the relevance of the
evidence that China provid ed in its answer to that question. Canada argued that Exhibit CDA-48
therefore meets this requirement under paragr aph 13 of the Panel's Working Procedures and
Article 11 of the DSU does not permit the Panel to ignore the evidence that has a bearing on the facts
in the present dispute, much less to strike it from the record as China requests. China had had the
opportunity to object to this evidence on procedural grounds but failed to do so.
6.16 Canada further argued that given that Exhi bit CDA-48 is China's own customs tariff and
reflects the fact that China classifies CKD and SKD kits under a separate heading from assembled
vehicles, which China has admitted for the first tim e in its comments on the Interim Reports, China
has not explained why it did not admit to this fact earlier. 156 Canada contended that the failure of
China to produce that evidence provides additional reason for the Panel to consider Exhibit CDA-48.
6.17 Finally, Canada submitted that even if it we re appropriate to exclude Exhibit CDA-48 as
evidence, based on Exhibits CHI-47 and CHI-48 a nd the admission of China, the Panel still had
sufficient evidence to find that China created tariff lines within the meaning of paragraph 93 of
China's Working Party Report.
6.18 The United States argued that China's comments on Exhibit CDA-48 omitted that it is
China's own evidence through Exhibits CHI-47 and CHI-48 that shows China classified CKD
shipments under a separate tariff line for CKD kits and that Canada's Exhibit CDA-48 simply
confirmed the existence of such tariff lines in China's Customs Tariff for 2005. The United States
submitted that contrary to China's assertions, the evidence contained in Exhibits CHI-47 and CHI-48
and confirmed by Canada's Exhibit CDA-48, is rele vant to an assessment of China's compliance with
its obligations under paragraph 93 of China's Working Party Report.
6.19 First, as regards China's first point that Cana da was required to present evidence that China
had created separate tariff lines for CKD and SKD kits no later than during the first substantive
meeting, the Panel notes that paragraph 13 of the Panel's Wo rking Procedures allows the submission
of factual evidence after the first substantive meeting if this is necessary for the purpose of, inter alia,
comments to responses to panel questions provided by others. As an exception to this procedure, the
submission of factual evidence in other instances th an those listed in paragraph 13 will be granted
upon a showing of good cause. As stated by Chin a, Canada submitted Exhibit CDA-48 for the first
time as part of its comments on China's response to Panel question No. 254. Because the submission
of factual evidence in a party's comments on other parties' responses to a Panel question does not
constitute an exception according to paragraph 13 of the Working Procedures, we do not consider that

155 Canada's letter of 5 March 2008, para. 4, citing EC – Selected Customs Matters, paras. 7.69-7.70.
156 Canada's letter of 5 March 2008, para. 8, footnote 8, citing to China's comments on the Interim
Reports, para. 14. The Panel notes China's statement in its letter of 27 February 2008: "In its comments on
China's response to [Panel] question No. 254, and in submitting CDA-48, Canada did not explain why it was
previously unable to identify and submit as evidence the Customs Import and Export Tariff of the People's
Republic of China - a fairly obvious source of evidence, if one has the burden of establishing the creation of
separate tariff lines for CKD and SKD kits" (page 10, paragraph 18).

Canada was required to explain why it was previously unable to identify and submit Exhibit CDA-48
and to show good cause in introducing this evidence as China argues.
6.20 Regarding China's second point that Canada's submission of Exhibit CDA-48 was not "factual
evidence necessary for purposes of comments on res ponses provided by others", as required under
paragraph 13 of the Panel's Working Procedures, we do note that the factual issue of whether China
had created separate tariff lines was central to Ca nada's claim and thus an earlier submission of
evidence might have been preferable to a submission at a later stage of the panel proceeding.
However, there are no provisions in the DSU or the Panel's Working Procedures that unconditionally
preclude the Panel from accepting evidence submitted by a party later than during the first substantive
meeting. Article 11 of the DSU requires the Pane l to make an objective assessment of the matter
before it, including an objective assessment of th e facts of the case. In this context, in Argentina –
Textiles and Apparel, Argentina argued that the Panel had acted inconsistently with Article 11 of the
DSU by allowing certain evidence offered by the United States two days before the second
substantive meeting of the Panel with the parties. However, the Appellate Body stated that "Article
11 of the DSU does not establish time limits for the submission of evidence to a panel."
157 Further,
the Appellate Body noted that "t he Working Procedures in their pr esent form do not constrain panels
with hard and fast rules on deadlines for submitting evidence." 158 In addition, the Appellate Body
stressed the Panel's wide discretion concerning the acceptance of new evidence by stating that "while
another panel could well have exercised its discre tion differently, we do not believe that the Panel
here committed an abuse of discretion amounting to a failure to render an objective assessment of the
matter as mandated by Article 11 of the DSU." 159 In light of this, notwithstanding a general
preference to receive evidence at an early stage of the panel proceeding, we confirm our view that
accepting Canada's evidence that was provided as part of its comments on China's response to Panel
question No. 254 was in accordance with paragr aph 13 of the Working Procedures and doing
otherwise would be in violation of our duty under Article 11 of the DSU.
6.21 Furthermore, contrary to China's argument , the evidence submitted by Canada through
Exhibit CDA-48 should be considered "necessary for the purpose of comments on answers" according
to paragraph 13 of the Working Procedures. In th is context, we recall the Panel's reasoning in US –
Offset Act (Byrd Amendment) , where Canada asked the Panel to accept as evidence a letter which it
submitted after the first substantive meeting. The Panel accepted the evidence noting that the
information contained in the letter was pertinent to the proceedings since it related to an issue which it
had been asked to consider.
160 In this dispute, China had offered the documentation of two specific
CKD import entries (Exhibits CHI-47 and CHI-48) in its response to Panel qu estion No. 254 in order
to illustrate its classification practice respectively pr ior and subsequent to its accession to the WTO.
Specifically, Canada responded to China's argument s on classification practice of CKD and SKD kits
subsequent to China's accession, which were s upported by Exhibit CHI-48, by submitting its own
piece of evidence (Exhibit CDA-48). Therefore, it is our view that Canada's submission of additional
factual evidence should be considered necessary fo r the purpose of its comment on China's response
as it relates and is pertinent to the arguments made by China. As we noted above, although an earlier
submission of the evidence would have been prefe rred, we understand that under Article 3.10 of the
DSU all Members are expected to engage in the pane l procedures in good faith in an effort to resolve
the dispute. Accordingly, in the absence of any c ontrary proof, the Panel exercised its discretion, as
noted by the Appellate Body in Argentina – Textiles and Apparel 161, in accepting evidence provided

157 Appellate Body Report on Argentina – Textiles and Apparel, para. 79.
158 Appellate Body Report on Argentina – Textiles and Apparel, para. 80.
159 Appellate Body Report on Argentina – Textiles and Apparel, para. 81.
160 Panel Report on US – Offset Act (Byrd Amendment), para. 7.2.
161 See paragraph 6.20 and footnote 159.

by Canada on the assumption that Canada acted in good faith without the intention to deliberately
withhold the evidence until the later stage of the proceeding.
6.22 Finally, the Panel does not find any basis in the DSU or the Panel's Working Procedures for
China's argument that the Panel should, sua sponte, have accorded a period of time for other parties to
comment on Exhibit CDA-48 filed by Canada. Rather , it is at the discretion of the Panel whether it
will allow, upon request, parties time to respond to another party's submission. For example, in
Argentina – Textiles and Apparel , the Panel accepted certain eviden ce offered by the United States
two days before the second substantive meeting and at the same time allowed Argentina two weeks to
respond to it after Argentina had drawn the Panel's at tention to the difficulties in tracing and verifying
the submitted documents. The Panel noted that "[t] he Panel could well have granted Argentina more
than two weeks to respond to th e additional evidence. However, th ere is no indication in the panel
record that Argentina explicitly requested from the Panel, at that time or any later time, a longer
period within which to respond to the additiona l documentary evidence of the United States."
162 In
the present dispute, it is China, not the Panel, that should have initiated an opportunity to submit
comments on Exhibit CDA-48. As noted in footnote 1094 of the Interim Reports, China could have
invoked paragraph 13 of the Working Procedures to object to the submission of Exhibit CDA-48
and/or submitted its comments on the content of the e xhibit. China, however, chose not to request the
Panel for time to respond to the evidence submitted by Canada after receiving it on 9 August 2007.
6.23 For the foregoing reasons, the Panel concludes that the Panel's acceptance of Exhibit CDA-48
was proper in light of the Panel's obligation u nder Article 11 of the DSU and in accordance with
paragraph 13 of the Panel's Working Procedures.
(b) Panel's analysis of Exhibit CDA-48 in paragraphs 7.749-7.753 of the Interim Reports
6.24 China requested that the Panel revise its analys is so as to remove any reliance on Exhibit
CDA-48, or the existence of ten-digit codes for CKD and SKD kits in China's system of customs
administration. China submitted two reasons for it s request: (i) the exhibit relied on by the Panel
(Exhibit CDA-48) is irrelevant to the question of whether China has created separate tariff lines for
CKD and SKD kits because tariff headings at the ten-digit level (e.g. 8703.2334.90) as indicated in
Exhibit CDA-48 are not "tariff lines". According to China, "ten-digit customs codes" are used solely
for statistical or other customs administration purposes and have no bearing upon the tariff rate to
which the goods are subject; and (ii) the practice of the complainants in this regard supports China's
position. According to China, it is the unanimous prac tice of all parties to this dispute that ten-digit
codes of this type are not "tariff lines". In this connection, China referred to the complainants' tariff
schedules (Canada Customs Tariff, Harmonized Tariff Schedule of the United States, and the
Integrated Tariff of the European Communities).
6.25 With respect to the argument that tariff headi ngs at the ten-digit level are not "tariff lines",
China also referred to Canada's statement in its response to Panel question No. 61(a) that it did not
understand China, following its accession, to have creat ed a separate tariff line at the seven- or eight-
digit level for CKD or SKD kits. China argued that Canada thus understood that the relevant question
was whether China had created separate tariff lines fo r CKD and SKD kits at the seven- or eight-digit
level and that otherwise it is not clear why Canada would have referred to separate tariff lines at the
seven- or eight-digit level. In China's view, the onl y purpose of this specific clarification in Canada's
response to the Panel question would be to distingui sh separate tariff lines at the seven- or eight-digit
level from the existence of statistical annotations at the ninth- or tenth-digit levels.

162 Appellate Body Report on Argentina – Textiles and Apparel, para. 80.

6.26 Canada argued that China's claim above was irrelevant to a determination of the proper
interpretation of paragraph 93 of China's Work ing Party Report. First, referring to the HS
Classification Handbook
163, Canada emphasized that there is no di stinction in the HS between tariff
classification at the eight- or ten-digit level. Fu rthermore, Canada contended that China's customs
tariff on its face makes no distinction between items th at are "statistical" and those that are used to
determine a tariff rate: all items listed up to the te n-digit level are described together in the column
"Tariff no.", and have a separate import duty rate listed in Exhibit CDA-48. Therefore, Canada
submitted that the Panel was correct to conclude that China has created tariff lines for CKD and SKD
kits within the meaning of paragraph 93 of China's Working Party Report.
6.27 Next, regarding China's reference to the co mplainants' practice, Canada submitted that
China's evidence was not of assist ance in interpreting paragraph 93 of the Working Party Report.
Canada argued that with respect to the general pr oposition that classification at the ten-digit level was
exclusively for statistical purposes, the practice of three Members did not meet the test for
establishing common practice evidencing agreement of the WTO Members. This is particularly so
when some Members, such as Indonesia as set fo rth in Canada's written submissions, do make
distinctions on tariff treatment based on classification differences at the ten-digit level. Furthermore,
Canada was of the view that the complainants di d not classify CKD or SKD kits for tariff purposes,
and their practice was therefore not relevant.
6.28 The United States submitted that China had not presented any basis for the Panel either to
delete or to modify the discussion of paragraph 93 contained in the Interim Reports. The United
States argued that it did not matter whether China cr eated CKD or SKD lines at eight-digit levels or
ten-digit levels because regardless of the number of digits China used for the CKD or SKD lines,
those lines served to establish where CKD and SKD k its fell within China's tariff schedule. Those
lines served to clarify that CKD and SKD kits would be classified in the same eight-digit subheadings
as complete vehicles, and would thus receive the same tariff treatment as complete vehicles. The
United States further submitted that to the extent that China was implying that ten-digit tariff lines
must be statistical, this proposition was not correct . To the contrary, there is nothing in the HS
Convention that mandates particular distinctions between eight-digit and ten-digit lines.
6.29 The European Communities expressed its support for the comments of Canada and the
United States in this regard.
6.30 The Panel notes that China's request regarding the Panel's finding in paragraph 7.753 of the
Interim Reports is based on two points: (i) "ten-digit customs codes" are solely used for statistical or
other customs administration purposes and have no b earing upon the tariff rate to which the goods are
subject; and (ii) it is the unanimous practice of all pa rties to this dispute that ten-digit codes of this
type are not "tariff lines". We address these two points in turn below.
(i) Ten-digit customs code – new argument by China
6.31 As noted above, China argued that ten-digit cu stoms codes are solely used for statistical
purposes and have no bearing upon the tariff rate whic h the goods are subject to. First, China has not
raised this line of argument during the course of the panel proceeding. In respect of the arguments of
the United States and Canada concerning China' s commitment under paragraph 93 of the Working
Party Report, China's position has been that the condition underlying the commitment made in
paragraph 93 of the Working Party Report has not occurred because China has not created separate

163 The HS Classification Handbook was cited in footnote 1092 of the Interim Reports.

tariff lines for CKD and SKD kits, whether through the challenged measures or otherwise.
164
Furthermore, in its response to Panel question No. 254, China provided an import declaration by
Shanghai GM in which a CKD kit import was classi fied and assessed at the tariff rate for motor
vehicles under a ten-digit tariff line (8703.2334.90), which belongs to the eight-digit heading for
motor vehicles.165 In relying on the ten-digit tariff line indicated in this import declaration form as the
evidence showing China's classification of CKD kits as motor vehicles, China neither distinguished
ten-digit tariff lines from eight-digit tariff lines nor argued that ten-digit tariff lines cannot be regarded
as "tariff lines". In our view, such an argument should have been raised earlier in the proceeding
when China put forward its position on the creation of tariff lines.
6.32 In this regard, the Panel in US – 1916 Act (EC) found that parties are obliged not to withhold
until the interim review stage arguments that they coul d be legitimately expected to have raised at a
much earlier stage, noting that the limited function of the interim review is confirmed by the existence
of an appeal procedure. However, the Panel in that case considered it justifiable to address the new
arguments put forward by one of the parties to the dispute in light of Article 15.3 of the DSU and the
consequent need to address partie s' arguments as well as the possi bility of appeal. Accordingly,
although we are of the view that China's arguments relating to the ten-digit customs codes put forward
in its request for the interim review should and c ould have been presented during the earlier stage of
the proceeding, we will follow the Panel's approach in US – 1916 Act (EC) and nevertheless examine
whether our analysis of China's creation of tariff lines for CKD and SKD kits should be modified
based on the new arguments advanced by China.
6.33 We now turn to the substantive aspect of Chin a's argument. First, as Canada points out,
China confirms in its request for the interim review that "complete sets of assemblies" refers to CKD
and SKD kits and that it classifies CKD and SKD kits separately at the ten-digit level as a sub-
heading of motor vehicles.
166 China submitted that ten-digit tariff codes are only for statistical
purposes and cannot constitute a tariff line. The Unite d States and Canada pointed out that there is no
distinction or nothing that mandates distinctions in the HS between tariff classification at the eight- or
ten-digit level. In this connection, the HS Classification Handbook simply notes that because very
often the goods or categories of goods referred to in the national customs tariff do not coincide with
the HS categories, further subdivisions of the HS nomenclature have to be introduced at the national
level. It does not indicate that only subdivisions at the eight-digit level will constitute tariff lines.
Furthermore, China's tariff schedule itself does not provide any distinction between items that are
statistical and those that are used to determine a tariff rate. We also note China's reference to
Canada's statement in response to a Panel questi on that Canada did not understand China, following
its accession, to have created a separate tariff lin e at the seven- or eight-digit level for CKD or SKD
kits. In China's view, the only purpose of this speci fic clarification in Canada's response to the Panel
question would be to distinguish separate tariff lines at the seven- or eight-digit level from the
existence of statistical annotations at the ninth- or tenth-digit levels. Howe ver, we do not consider
that Canada's reference to tariff lines at the seven- or eight-digit leve l necessarily implies that Canada
was distinguishing tariff lines at different levels as China argues. In particular, in its response,
Canada was comparing China's customs tariff fo r 1995 in which China had maintained a separate
tariff line at the eight-digit level for CKD and S KD kits to China's customs tariffs since 1996 from
which references to CKD and SKD kits are removed.

164 China's first written submission, para. 192; second written submission, paras. 141-142.
165 This argument by China is reflected in paragraph 7.714 of the Interim Reports.
166 Canada's letter of 5 March 2008, referring to China's comments on the Interim Reports, para. 14 in
which China states that "[China] has placed statistical annotations for CKD/SKD kits under its tariff provisions
for motor vehicles."

6.34 As the United States pointed out, regardless of th e number of digits China used for the CKD
or SKD kit lines, those lines serve to establish wh ere such CKD and SKD kits fall within China's
tariff schedule. In other words, those ten-digit lines (e.g. 8703.2334.90) clarify that CKD and SKD
kits will be classified under the same eight-digit subheadings (e.g. 8703.2334) and subject to the same
tariff rate for complete vehicles. Finally, the te n-digit tariff lines in China's tariff schedule (Exhibit
CDA-48) do provide the same tariff rates as those for the eight-digit tariff lines under which the ten-
digit tariff lines fall. Therefore, the Panel decides to maintain its analysis in paragraphs 7.749-7.753
of the Interim Reports where the Panel discusses the evidence contained in Exhibit CDA-48.
(ii) Complainants' practice – new evidence by China
6.35 To support its position concerning the ten-digit ta riff codes, China also relies on the practice
of the complainants in the present dispute. Alt hough China did not attach any physical documentary
evidence to its request for the interim review, Chin a refers to each complainant's tariff schedule by
citing in footnotes relevant website addresses and direct website links to relevant documents in pdf
format for the information used in its comments. Specifically, China refers to the following evidence,
which was not produced prior to its interim review request:
– Canada's Customs Tariff sets forth that th e term "tariff item" means "a description
of goods in the List of Tariff Provisions and the rates of customs duty and the
accompanying eight-digit number in that List", and Canada Border Services Agency
provides that the seventh and eighth digits , for Canadian trade purposes, determine
the customs duty rate, while the ninth and te nth digits additional detail for statistical
purposes;
– The Harmonized Tariff Schedule of the United States (the "HTS") provides that
"the legal provisions" of the HTS include "headings and subheadings through the
eight-digit level". The US International Trade Commission also explains on its web
site that the structure of the HTS is based on the HS; the 4- and 6-digit HS product
categories are subdivided into 8-digit unique U.S. rate lines and 10-digit non-legal
statistical reporting categories;
– The European Communities' Combined Nome nclature (the "CN") specifies rates of
duty under the Common Customs Tariff at th e level of eight-digit "CN subheadings".
The CN forms a part of the Integrated Ta riff of the European Communities ("Taric"),
which consists of the eight-digit CN subheadings plus additional Community
Subdivisions, known as Taric subheadings (i.e. the ninth and tenth digits of the Taric
code), that are used to implement other Community policies, including the collection
of statistical information. The Taric subh eadings never alter the applicable rate of
duty, which is set forth exclusively at the level of the eight-digit CN subheadings.
6.36 In this regard, previous panels and the Appe llate Body refused to consider new evidence
provided at the interim review stage because in th eir view, the interim review stage is not an
appropriate time to introduce new evidence. The Appellate Body in EC – Sardines states that
Article 15 of the DSU, which governs the interim re view, permits parties, during that stage of the
proceedings, to submit comments on the draft report i ssued by the panel and to make requests for the
panel to review precise aspects of the interim re port. In the Appellate Body's view this cannot
properly include an assessment of new and unanswered evidence.
167 Based on the same reasoning, the
Appellate Body in EC – Selected Customs Matters considered that the Panel in that dispute acted

167 Appellate Body Report on EC – Sardines, para. 301.

properly in refusing to take into account the ne w evidence during the interim review, and did not
thereby act inconsistently with Article 11 of the DSU.
168
6.37 We are of the view that the approach adopted by panels and the Appellate Body above and the
principle under Article 15 of the DSU lead us to re ject the evidence newly in troduced by China at the
interim review stage of the present dispute. Howeve r, even if we were to assess such new evidence,
in particular given the absence of any procedural objection from the complainants, we do not consider
that the practice of the complainants as advanced by China constitutes subsequent practice based on
which our analysis regarding China's creation of new tariff line at the ten-digit level must be revised.
This is because the practice of these three complain ants does not establish a common, consistent, and
discernible pattern of acts or pronouncements that imply agreement among WTO Members.
Furthermore, an example of the practice of Indo nesia, which does make distinctions on tariff
treatment based on classification differences at the te n-digit level, does not support China's argument
based on the practice of the three complainants in this dispute.
(c) Clarification of the term "tariff line" in the context of paragraph 93 of China's Working Party
Report
6.38 China requested that the Panel clarify its understandi ng of the term "tariff lines" in the third
sentence of paragraph 93 of the Working Party Report as reflected in paragraphs 7.753 to 7.758 of the
Interim Reports. In addition, China requested th at the Panel clarify footnote 1100 in the Interim
Reports.
6.39 The Panel notes that no legal definition of "tariff lines" exists. However, the conventional
understanding of this term appears to be that a tariff line is a horizont al line in a tariff schedule that
provides a specific heading number, regardless of the number of digits (i.e. be it at the eight-digit or
ten-digit level) and a specific tariff rate for the product described under that heading. Furthermore,
we do not have any basis to conclude that only tariff headings up to the eight-digit level can be
considered as tariff lines. The Panel revised para graph 7.750 to reflect its understanding of the term
"tariff line" in the context of paragraph 93 of China's Working Party Report and also modified
footnote 1100 for further clarification.
B. O
THER REQUESTS FOR REVIEW
6.40 The European Communities requested modifications to paragraphs 7.30 (first and fifth
lines); 7.40 to 7.58; 7.294 (last line); 7.374 (first sentence); 7.646 (third sentence) and 7.761 and
footnotes 175 (third sentence); 622 and 981 of th e Interim Reports and made some clerical
observations. China did not object to any of these requests and observations. With the exception of
the European Communities' reque sts regarding paragraph 7.34 (s econd line) and footnotes 622 and
981, the Panel has accordingly modified the reports to the extent it deemed necessary.
6.41 The United States also requested modifications to para graphs 7.277; 7.668 and 8.7 of the
Interim Reports and made some clerical observations . China did not object to any of these requests
and observations. The Panel has accordingly modified the reports to the extent it deemed necessary.
6.42 Canada also requested modifications to paragraphs 7.85 (second last sentence); 7.357
(starting with the second sentence); 7.543 (first line) ; 7.602 (second last line); 7.654; 7.655; 7.657;
7.721 (eighth line and second sentence); and 8.10 and footnote 686 of the Interim Reports and made

168 Appellate Body Report on EC – Selected Customs Matters, para. 259.

some clerical observations. China did not object to any of these requests and observations. The Panel
has accordingly modified the reports to the extent it deemed necessary.
6.43 China also requested paragraph 4.336 and footnote 606 of the interim reports to be modified
so as to preserve some confidential information cited therein. The complainants did not object to this
request. The Panel has accordingly modified the reports.
6.44 As noted above, the Panel has incorporated all other comments by the parties on
typographical errors in the Interim Reports.
VII. FINDINGS
A. P
RELIMINARY MATTERS
1. Measures at issue
(a) Identification of the measures at issue
7.1 The European Communities, the United States a nd Canada have identified Policy Order 8,
Decree 125 and Announcement 4 as the m easures at issue in this dispute. 169 Before examining the
specific aspects of the measures as contested by th e complainants, the Panel will first describe these
three measures.
7.2 In this connection, we recall that our mandate is, inter alia, to make an objective assessment
of the meaning of the relevant provisions of the m easures that fall within our terms of reference.
Although we are mindful that the measures are part of the domestic law of China, we will be required
to determine the meaning of particular provisions of the measures if interpretations of such provisions
are contested by the parties. Our examinati on in such cases will be for the sole purpose of
determining the conformity of the measures with relevant obligations under the WTO covered
agreements in accordance with the Appellate Body's approach in India – Patents (US).
170
(i) Policy Order 8171
7.3 Policy Order 8, entitled "Policy on Developmen t of the Automotive Industry", went into
effect on 21 May 2004, at which time the implemen tation of China's "Policy on Automotive Industry
of 1994"172 ceased. The NDRC 173, at its executive meeting, deliber ated and adopted Policy Order 8,
which was ultimately reported to and approved by the State Council.

169 As indicated in the Descriptive Part of these Re ports, when discussing China's measures, the Panel
will refer to the terms used in the common translations of China's measures, attached as Annex E to the Reports.
170 Appellate Body Report on India – Patents (US) , paras. 65-68. See also the Panel Report on EC –
Trademarks and Geographical Indications (US), para. 7.55.
171 China submits that legal instruments similar to Policy Order 8 also exist with respect to other
industry sectors such as "the Steel Industry Development Policy (8 July 2005)" and "the Cement Industry
Development Policy (17 October 2006)" (China's responses to Panel question Nos. 11 and 178).
172 The preamble to China's former Automotive Policy (1994 Policy Order) states:

"The policy is aiming at building China's automotive industry (including motorcycle sector)
into a pillar industry of the national economy by changing the current scattered investment,
small-scale production and backward products in the industry to raise the development
capacity of the producer as well as upgrade their product quality and technology and

7.4 Policy Order 8 consists of the preamble, thirteen chapters and two annexes. The preamble to
Policy Order 8 sets out, inter alia, China's general objective of promoting its automotive industry to
make it into a pillar industry of China's national economy by 2010.
174
7.5 The thirteen chapters comprising Policy Or der 8 are Policy Objectives (I); Development
Planning (II); Technical Policies (III); Structural Adjustments (IV); Access Management (V);
Trademarks and Brands (VI); Product Developm ent (VII); Parts and Related Industries (VIII);
Distribution Networks (IX); Investment Manage ment (X); Import Management (XI); Vehicle
Consumption (XII); and Others (XIII). In add ition, Annex 1 to Policy Order 8 provides "the
definitions of terminology used in the Policy", an d Annex 2 "contents to be filed for an automotive
investment project."
7.6 The Panel notes that various issues ranging from the promotion of China's automotive and
auto parts industry to product de velopment to trademarks and to import management are covered in
these thirteen chapters of Policy Order 8. We w ill refer back to specifi c provisions contained in
Policy Order 8, as necessary, in the context of our legal analysis. At this stage, we find it sufficient to
mention Chapter XI of Policy Order 8 as it provides an explicit link to the implementation measures
to be introduced by the CGA – namely, Decree 125 and Announcement 4.
7.7 In this regard, we note China's argument that Chapter XI is the one chapter of Policy Order 8
that is relevant to the present dispute – the chap ter concerning the administration and enforcement of
China's tariff provisions for motor vehicles and moto r vehicle parts – and that only Chapter XI gave
rise to the customs enforcement procedures embodied in Decree 125 and Announcement 4.
175 China
also submits that the language in the preamble to Po licy Order 8 is not meaningful or relevant to an
evaluation of Chapter XI.
7.8 The complainants submit that Decree 125 and Announcement 4 implement Policy Order 8 in
its entirety, not just Chapter XI of Policy Order 8.176

equipment level in a bit of achieving a reasonable streamline industrial structure and economic
scale of production in the industry..."

Further, Article 3 identifies "key parts and components of sedans" as one of the six "key development
products". Under Article 43, the assembly of motor vehicles through the importation of completely knock-down
(CKD) and semi-knock-down (SKD) kits was prohibited. Article 44 sets out China's policy to provide
preferential duties on imported automotive parts depending on the rates of localization of the different
automobile products (Exhibit JE-24).
Overall, the terms of the 1994 Policy Order, in particular those concerning the auto parts industry, have
some similarities to Policy Order 8 in respect of China's policy objectives.
173 According to China, the role of the NDRC relati ng to the measures at issue includes: (i) being a
member of the Leading Panel (Article 6.2 of Decree 125); (ii) marking "Characterized as Complete Vehicles" in
the Public Bulletin (Article 7.4 of Decree 125); and (iii) 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) (China's
response to Panel question No. 21).
174 See paragraph 7.306 for the full text of the preamble of Policy Order 8.
175 China's responses to Panel question Nos. 49 and 178.
176 European Communities' comments on China's respon se to Panel question No. 178, referring to its
second written submission, para. 24. Specifically con cerning Chapter XI, the European Communities argues
that the measures and in particular Chapter XI of Policy Order 8, which even China admits as motivating
Decree 125 and Announcement 4, explicitly refer to the objective of nurturing the domestic automotive industry
(European Communities' second written submission, para. 122).

7.9 Given that the measures as a whole are as such subject to the dispute and without specific
proof that other provisions in Policy Order 8 ar e not in any manner related to Decree 125 and
Announcement 4, the Panel will not preclude at this stage the possibility of examining other chapters
and provisions of Policy Order 8 when analysing th e parties' claims and arguments in respect of
Decree 125 and Announcement 4. Having said that, for the purpose of understanding the operation of
the measures, we will focus in th is section on the structure of Chapter XI of Policy Order 8 without
prejudice to the parties' specific arguments on the objectives and functions of Policy Order 8 as a
whole in relation to Decree 125 and Announcement 4.
7.10 Chapter XI, entitled "Import Management", consis ts of nine provisions (Articles 52-60).
Article 52 states:
"The State supports the efforts of vehicle manufacturers to increase their domestic
production capacity, giving impetus to the technological progress of auto parts
manufacturers and to the development of the automotive manufacturing industry."
7.11 Articles 53 to 59 of Chapter XI address issues relating to the importation of automobiles and
auto parts as well as the prohibition of the import of used vehicles and used parts. The final provision
of Chapter XI, Article 60
177, as China explains, directs the CGA, together with other relevant
agencies, to draw up the specific management measures for the import of whole vehicles and parts.
China submits that Decree 125 an d Announcement 4 are the specifi c management measures the CGA
drew up pursuant to Article 60.
178
7.12 We note that the obligations set out in the provisions of Chapter XI, Policy Order 8, in
particular Articles 53, 55, 56, and 57, are implemented in specific terms in Decree 125 and
Announcement 4. For example, Article 53 provides, inter alia, that any vehicle manufacturers using
"imported auto parts characterized as complete vehicles" to produce vehicles should report this
factually to the Ministry of Commerce, the CGA and the NDRC. Specific procedural requirements
relating to this obligation to report are set forth in various provisions in Decree 125, including Articles
2, 3, 5, 6, 7, and 10. For example, motor ve hicle manufacturers/importers who produce vehicles with
imported auto parts are required to conduct a self-eva luation of whether imported auto parts used in a
particular vehicle model should be characterized as complete vehicles and apply to the CGA for
verification of such fact.
179
(ii) Decree 125 and Announcement 4
7.13 Decree 125, entitled "Administrative Rules on Importation of Automobile Parts Characterized
as Complete Vehicles", was introduced by the CGA, the NDRC, the Ministry of Finance, and the
Ministry of Commerce pursuant to Policy Order 8, in particular Article 60 as noted above.
Decree 125 went into effect on 1 April 2005.

177 Article 60 provides:

"Specific management measures for the import of whole vehicles and parts shall be drawn up
by the Customs jointly with other relevant departments, and implemented upon approval by
the State Council. Sample vehicles sent from abroad for testing and vehicles temporarily
imported to be shown at exhibitions shall be managed in accordance with customs
management regulations for the temporary import and export of goods."

178 China's response to Panel question No. 48.
179 See paragraphs 7.39-7.69 for more detailed description of the administrative requirements under the
measures.

7.14 Decree 125 consists of seven chapters (thirty- eight articles) and three annexes and provides
the specific rules applicable to the supervision and administration of auto parts and assemblies
180 that
are imported to be incorporated for production/assembly 181 of automobiles. 182 The seven chapters
comprising Decree 125 are General Provisions (I); Administration of Registration (II); Administration
of Customs Clearance (III); Criteria for Whether or Not to be Characterized as Complete Vehicles and
the Verification (IV); Duty Collection Principles and Calculation of Duties (V); Legal Liabilities (VI);
and Miscellaneous (VII). Decree 125 also includes th ree annexes: Assembly (System) List (1);
Scope of Automobile Parts in Assemblies (Systems) (2); and Purchase List of Automobile Parts of
Registered Vehicle Models (3).
7.15 Announcement 4, entitled "Rules on Verification of Imported Automobile Parts Characterized
as Complete Vehicles", was also introduced by the CGA in order to implement Decree 125 and
became effective as of 1 April 2005. As can be seen from its title, Announcement 4 lays down the
specific rules on the verification of "imported auto parts characterized as complete vehicles". The
four chapters comprising Announcement 4 are: Ge neral Provisions (I); Verification Procedure (II);
Verification Criteria (III); and Supplementary Pr ovisions (IV). Announcement 4 also includes 8
annexes.183
7.16 A number of the provisions of Announcement 4 overlap with those of Decree 125, in
particular the provisions under Chapter IV ("Criteri a for Whether or Not to be Characterized as
Complete Vehicles and the Verification") of Decr ee 125. Announcement 4 also provides additional
details concerning certain procedures applicable to automobile and auto parts manufacturers
importing auto parts with respect to the evaluati on of verification process required with respect to
certain imported auto parts.184
7.17 In sum, Policy Order 8 provides a legal basis for the introduction of Decree 125 and
Announcement 4, which set out specific rules relati ng to the charge imposed on imported auto parts
and the administrative procedures necessary for the imposition of the charge. According to China,
there is no legal hierarchy between these measures, at least not in the sense that one prevails over the
others in case of conflict between them.185
7.18 In this regard, China states that "the [m]easures do not themselves impose any duty, fee, or
charge, but merely define the circumstances under which China will classify imported merchandise as
falling under different tariff provisions."186
7.19 As explained in more detail below 187, however, the Panel considers that the measures do
impose both the charge 188 and the administrative procedures attach ed to the charge. In fact, China

180 See paragraphs 7.88-7.89 below for the description of the product term "assemblies".
181 See footnotes 191, 212.
182 See Article 2(1) of Decree 125.
183 These 8 annexes to Announcement 4 are: Names and Illustration of the Vehicle Structure and Body
Parts (1); Table of HS Codes on the Key Parts and Sub- assemblies of Motor Vehicles (2); Application Form for
Review of Complete Vehicle Character (3); Detailed List of Parts for Verification and Review of Complete
Vehicle Character (4); Review Report for Complete Vehicle Character (5); Application Form for Verification of
Complete Vehicle Character (6); Docu ment List for Verifying Complete Ve hicle Character (7); and Report on
Verification of Complete Vehicle Character (8).
184 See Part D.3 of the Factual Background Section jointly submitted by the complainants (European
Communities' first written submission, para. 34). Also see Article 20 of Announcement 4.
185 China's response to Panel question No. 48.
186 China's first written submission, para. 44.
187 See paragraphs 7.20-7.69.

itself explained that Decree 125 sets forth the legal obligation of auto parts manufacturers to pay a
charge on imports of auto parts characterized as complete vehicles and the procedural requirements
adopted to administer and collect the charge.
189 Although other domestic laws or regulations in China
may also prove relevant to how the imposition of the charge is operated, the "legal obligation" to pay
the charge originates in the measures themselves.190
(b) Effects of the measures at issue: charge and administrative procedures
7.20 Article 2 of Chapter I ("General Provisions") of Decree 125 provides:
"These Rules are applicable to the superv ision and administration of the importation
of automobile parts characterized as co mplete vehicles, used to produce/assemble 191
vehicles by automobile manufacturers approved by or registered with relevant state
authorities. …"
7.21 The complainants claim that the measures have an impact on imported auto parts in two ways:
first, the measures impose on imported auto parts a charge equivalent to the tariff rate applicable to
motor vehicles if such auto parts are characterized as complete motor vehicles according to the criteria
set out in the measures; and, second, th e measures impose allegedly burdensome administrative
procedures192 on automobile manufacturers importing auto parts to both determine the applicability of
the above charge and govern the imposition of the charge on imported auto parts.
7.22 China does not dispute the two above-mentioned e ffects of the measures – namely, the charge
and the administrative procedures, although it does dis pute the complainants' cl aim that the measures

188 We note, for example, that th e second sentence of Article 28 of Decree 125, as cited below in
paragraph 7.28, contains mandatory la nguage directing Customs to impose the charge ("... the customs ... shall
base both the tariff and the import VAT on rates applicable to ..."). See also Article 13(1) of Decree 125 ("... an
automobile manufacturer ... shall ... pay duties ..."); Ar ticle 28(1) ("... Customs shall ... proceed with ... duty
collection."); Article 31(1) of Decr ee 125 ("An automobile manufacturer shall declare duty payment ..."); and
Article 34 ( "... declaration for duty payment ...").
While the term "tariff (duty)" is used in China's m easures, the Panel will use the term "charge", instead
of "tariff", as the nature of the charge is one of the lega l issues raised by the parties, which will be discussed in
the subsequent sections. Thus, the Panel's reference to the term "charge" is without prejudice to the parties'
arguments as to whether the charge falls within the meaning of Article II or III of the GATT 1994, which is
considered below in Section VII.B.1, and should be understood to mean the "tariff", as used in the measures,
that is imposed on "imported auto parts characterized as complete vehicles" under China's measures, unless
specified otherwise.
189 China's responses to Panel question Nos. 48-50.
190 China has confirmed in many instances throughout this dispute that the charge is imposed "pursuant
to Decree 125" (China's second written submission, para. 110). Also see, inter alia , China's first written
submission, para. 47 ("... duties collected pursuant to Decr ee 125 are classified as ordi nary customs duties ...");
first written submission, para. 48 ("... any duties that Ch ina collects pursuant to this measure are ordinary
customs duties ..."); response to Panel question No. 79 ("... the challenged measures result in the imposition of
ordinary customs duties ..."); seco nd written submission, para. 118 ("... customs duties that the CGA collects
pursuant to Decree 125 ...").
191 The complainants note that the Chinese original text contains the two words "shengchan" and
"zuzhuang", which are properly translated into "to produce" for "shengchan", and "to assemble" for "zuzhuang".
China considers that the two words ar e used in an interchangeable sense (footnote 1 of the common translation
of Decree 125). The Panel's use of the terms "to assemble" and "to produce" in these reports is without
prejudice to the parties' views on these two terms. Also see footnote 212 below.
192 See paragraphs 7.39-7.69 below for the description of the administrative procedures under the
measures.

are adopted to favour domestic auto parts over importe d auto parts. China submits that the measures
are introduced to strictly enforce correct tariff duti es on imported auto parts in order to prevent tariff
evasion.
193
7.23 To the extent that the compla inants' claims concern the speci fic obligations arising from the
charge and the administrative procedures relating to such a charge, the Panel considers it important to
have at the outset a good understanding of how the measures operate in terms of these two effects of
the measures. Having said that, our examination in the following section of how the measures
factually operate is without prejudice to the par ties' legal claims and arguments concerning the
consistency of the measures with China's obliga tions under the WTO covere d agreements, which will
be analysed in the subsequent sections of these reports.
194
(i) Charge under the measures
7.24 In essence, China imposes under the measures a charge equivalent to the amount of the tariff
rate applicable to complete vehicles (i.e. 25 per cent on average 195) on auto parts that are imported by
automobile manufacturers and used in the produc tion/assembly of complete vehicles, if those
imported auto parts are characterized as complete vehicles according to the criteria set out in the
measures.196 If such imported auto parts used in the production/assembly of motor vehicles are "not
characterized as complete vehicles", the tariff rate applicable to auto parts (i.e. 10 per cent on
average197) will be levied pursuant to China's Customs Law and China's Schedule.
Conditions under which the obligation to pay the charge arises
7.25 As noted above, the obligation to pay the charge under the measures depends on whether
imported auto parts are determined to be "auto parts characterized as complete vehicles" according to
the criteria set out in the measures. The provisions of Decree 125 that address procedural aspects of
the charge are in relevant part:
7.26 Article 5 of Chapter I ("General Provisions") provides:
"The reference to 'automobile parts characterized as complete vehicles' in these Rules
shall mean that the imported automobile pa rts should be characterized as complete
vehicles at the stage when complete vehicles are assembled . The reference to

193 China's first written submission, para. 24.
194 For example, our reference to the term "imported auto parts" in describing how the measures operate
is based on the common translations of China's measures as provided by the parties and has no bearing on the
question of when goods are considered "imported" within the meaning of the WTO covered agreements. It is
our understanding for the purpose of this dispute that " imported auto parts" refers to " foreign auto parts", as
opposed to domestic auto parts, unless specified otherwise.
195 See China's Schedule CLII (Exhibit JE-2) for the exact tariff rates applicable to products falling
under tariff headings 87.02-87.04. Although the exact tariff rates under these tariff headings, in particular at the
8 digit level, slightly vary, the parties agree that 25 per cent is the average tariff rate applicable to motor vehicles
at issue in this case.
196 See, inter alia, Articles 2, 5 and 28 of Decree 125.
197 China's first written submission, para. 15; Part D.2 of the factual background section jointly
submitted by the complainants (European Communities' first written submission, footnote 43 to paragraph 31;
United States' first written submission, footnote 43 to paragraph 32; Canada's first written submission,
footnote 42 to paragraph 30).

'automobile parts characterized as assemblies (systems)'
198 shall mean that the
imported automobile parts should be char acterized as assemblies (systems) at the
stage when the assemblies (systems) are assembled." (emphasis added)
7.27 Article 7 of Chapter II ("Administration of Registration") provides:
"Automobile manufacturers shall conduct a self-evaluation of whether imported
automobile parts used in a particular veh icle model should be characterized as
complete vehicles in accordance with these Rules, if the automobile manufacturers
produce vehicles with imported automobile pa rts for domestic sales. If, through the
self-evaluation, an automobile manufacturer determines that the imported automobile
parts should be characterized as complete vehicles, the automobile manufacturer shall
register the relevant vehicle models with the CGA prior to the importation of such
automobile parts. Each vehicle model of the same automobile manufacturer shall be
registered separately." (emphasis added)
7.28 Article 28 of Chapter V ("Duty Collection Principles and Calculation of Duties") provides:
"After the imported automobile parts have been assembled into complete vehicles, the
automobile manufacturer shall make a decl aration of duty payable to Customs and
Customs shall, ... , proceed with classification and duty collection.
If the Verification Center, after verifications, concludes that the imported automobile
parts should be characterized as complete vehicles, the customs shall classify them as
complete vehicles , and shall base both the tariff and the import VAT on rates
applicable to complete vehicles . If the imported automobile parts should not be
characterized as complete vehicles, the cust oms shall classify them as parts, and shall
base the tariff and the import VAT on rates applicable to parts." (emphasis added)
7.29 As shown in the above provisions, to determ ine whether imported auto parts should be
characterized as complete vehicles, automobile manufacturers are required first to conduct a self-
evaluation in respect of a specific vehicle model for which they plan to use imported auto parts and to
register such a vehicle model with the NDRC. Once the first batch of automobiles for a given vehicle
model is assembled in China, imported auto parts used for the assembly of that vehicle model are
classified as complete vehicles and assessed at the tari ff rate applicable to complete vehicles "if the
Verification Center, after verifications, concludes that the imported automobile parts should be
characterized as complete vehicles," in accordance with Article 28 of Decree 125. Various
administrative procedures in this connection are expl ained in further detail in Section VII.A.1(b)(ii)
below.
7.30 Substantively, whether imported auto parts s hould be characterized as complete vehicles is
determined based on the criteria provided in Article s 21 and 22 of Decree 125: if imported auto parts
used in the assembly of a particular vehicle model satisfy any of the criteria indicated in Article 21 of
Decree 125, which are in turn affected by the app lication of the criteria set out in Article 22 of
Decree 125, they are characterized as complete vehicles.

198 Article 4 of Decree 125 lists eight types of assemblies: the vehicle body (including cabin) assembly,
the engine assembly, the transmission assembly, the drivin g axle assembly, the driven axle assembly, the frame
assembly, the steering system, and the braking system.

7.31 In turn, whether imported auto parts used for the assembly of a certain vehicle model meet
any of the criteria is determined once such auto pa rts are "assembled" into mo tor vehicles in China.
This means that the charge is imposed on imported auto parts after their assembly into motor vehicles,
regardless of whether such auto parts are imported together in a single shipment or separately in
multiple shipments, insofar as they are used in assembling a common registered vehicle model.
199 We
will describe these two aspects (criteria and multiple shipments) of the substantive criteria used for the
determination of "auto parts characterized as complete vehicles" in turn below.
Criteria for determining whether imported auto parts should be characterized as complete
vehicles – criteria for determining auto parts characterized as complete motor vehicles
7.32 The criteria for deciding whether certain impor ted auto parts are to be characterized as
complete motor vehicles are provided in Ar ticles 21 and 22 of Chapter IV of Decree 125. 200
Article 21 sets out the thresholds of the importe d auto parts that would make those used to
produce/assemble a motor vehicle "to be characterized as complete motor vehicles".
"Imported automobile parts shall be characterized as complete vehicles if one of the
following applies:
(1) imports of CKD or SKD kits for the purpose of assembling vehicles;
(2) within the scope identified in Article 4 of these Rules:
(a) imports of a body (including cabin) assembly
201 and an
engine assembly for the purpose of assembling vehicles;
(b) imports of a body (including cabin) assembly or an engine
assembly, plus at least three other assemblies (systems), for the
purpose of assembling vehicles;
(c) imports of at least five assemblies (systems) other than the
body (including cabin) and engine assemblies for the purpose of
assembling vehicles; or
(3) the total price of imported parts account s for at least 60% of the total price of
a complete vehicle of that vehicle model. This criterion shall enter into force on
July 1, 2006."
202

199 See China's response to Panel question No. 40. China submits that "[t]he structure of the import
transactions is not relevant; what matters is whether the imported part and components in a particular vehicle
model, in their entirety, have the essential character of a motor vehicle."
200 Articles 13 and 14 of Announcement 4 are identical to Articles 21 and 22 of Decree 125. Also,
Article 23 of Decree 125 provides:

"An assembly (system) manufactured by a domestic automobile assembly (system)
manufacturer shall be considered a domestic assembly (system), if the imported automobile
parts used in the manufacturing of the assembly (system) are not characterized as an assembly
(system)."

201 For the term "assembly", see paragraphs 7.88-7.89 below.

7.33 Article 22 sets out the criteria according to which imported auto parts used to produce an
"assembly" (of a motor vehicle) would make such an assembly a "Deemed Imported Assembly".
Under Article 22, therefore, if an "assembly" is produced with imported auto parts above the
thresholds specified therein, such an assembly it self is considered as imported assembly ("a Deemed
Imported Assembly").
203
"Article 22 Imported automobile parts shall be characterized as an assembly
(system) if one of the following applies:
(1) imports of a complete set of parts for the purpose of assembling assemblies
(systems);
(2) imports of key parts or sub-assemblies for the purpose of assembling
assemblies (systems), if the quantity of the imported key parts or sub-assemblies
reaches or exceeds the specified level as set forth in Annexes 1 and 2
204; or

202 The entry into force of this third criterion is postponed until 1 July 2008 (CGA Joint Bulletin No. 38
of 5 July 2005) (Exhibit JE-28). In response to the Panel's question concerning the postponing of this criterion,
China has explained that it is primarily because of the administrative complexity of implementing this particular
criterion and that once auto manufacturers and customs officials have gained more experience with the
implementation of Decree 125, and have laid a solid foundation of record-keeping 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 (C hina's response to Panel question No. 59). Further,
concerning the specific nature of the complexity relating to the implementation of Article 21(3) of Decree 125,
China submits that the specific difficulty encountered by the customs is how to identify the fair value of the
parts (China's response to Panel question No. 170).
We note that the complainants have challenged the m easures as such and in th eir entirety. We do not
consider therefore that the postponement of the applicability of this criterion in any way affects the scope of the
measures falling within our terms of reference. We reca ll that previous panels "have always considered that
mandatory legislation of a Member, even if not yet in force or not applied, can be challenged by another WTO
Member" (Panel Report on Turkey – Textiles, para. 9.37, citing GATT Panels on US – Superfund, EEC – Parts
and Components and US – Malt Beverages ). See also the Panel Report on US – Countervailing Measures on
Certain EC Products (Article 21.5 – EC), para. 7.37.
203 As noted in footnote 169, the Panel uses the terms as indicated in the common translations of the
measures at issue in these reports. For "an assembly characterized as imported assembly" in the context of
Article 22 of Decree 125, however, we will instead use the term "a Deemed Imported Assembly" as suggested
by Canada in its letter of 4 October 2007.
204 As of 1 July 2008, lower quantity thresholds will apply to those key parts identified as class A in
Annex 1 to Decree 125. If those thresholds are met, the assembly will be characterized as an "imported
assembly" (Note 5 of Annex I to Decree 125 and Article 19 of Announcement 4). The entry into force of this
class A/B distinction was initially foreseen on 1 July 2006, but was postponed until 1 July 2008 (CGA Joint
Bulletin No. 38 of 5 July 2005) (Exhibit JE-29). For the same reason explained above at footnote 202, such
postponement does not affect the scope of the measures falling within our terms of reference.
Further, Article 20 of Announcement 4 provides:

"If the imported parts account for more than 60% of the price of the key
parts or sub-assemblies, such key parts or sub-assemblies shall be deemed as
imported key parts or sub-assemblies. Manufacturers shall provide a list of
price ratios of parts needed.

Key parts or sub-assemblies, in princi ple, shall only be traced back to the
secondary suppliers of the manufacturers of complete vehicles.

(3) the total price of imported parts account s for at least 60% of the total price of
that assembly (system)."
7.34 Based on the criteria set out in the ab ove provisions, the Verification Centre
205, entrusted by
the CGA, makes a determination of whether certai n imported auto parts should be characterized as
complete vehicles and thus should be charged at the tariff rate applicable to complete vehicles after
vehicles are produced/assembled using such auto parts.
Criteria for determining whether imported auto parts are characterized as complete vehicles –
auto parts imported in multiple shipments
7.35 To apply the thresholds set out in Articles 21 and 22 of Decree 125 to imported auto parts
used in the assembly of motor vehicles, China' s customs authorities wait until auto manufacturers
finish the assembly of motor vehicles. As a result, auto parts, which might have been imported in
multiple shipments, meaning imported at various tim es, in various shipments, from various suppliers,
and/or from various countries, can still be characteri zed as a complete vehicle. In other words, the
charge under the measures is assess ed for auto parts assembled into a particular vehicle model,
regardless of whether those parts are imported separa tely "in multiple shipments" or together "in a
single shipment".206
Charge imposed on auto parts imported by third party suppliers – Article 29 of Decree 125
7.36 As described above, the measures impose the charge on auto parts imported by automobile
manufacturers.207 Auto part suppliers or auto part ma nufacturers that are not also automobile
manufacturers are not subject to the obligations un der the measures when they import auto parts.
Auto part suppliers or manufacturers will pay the duty for imported auto parts at the tariff rates
applicable to auto parts pursuant to China's regular customs law and Ch ina's Schedule. In this regard,
China submits that in most cases, imported parts that the auto manufacturer purchases from a third-
party supplier in China (either auto part suppliers or auto part manufacturers) will have completed the
necessary customs formalities and are no longer subject to customs control. 208 Further, the rules for

Imported parts purchased by domestic suppliers or trading companies shall
be counted as imported parts."

205 According to Articles 3 and 4 of Announcement 4, the "Verification Centre" is responsible for, inter
alia, (i) prior to the importation of subject auto parts, conducting simplified or on-site reviews of the conclusions
of self-evaluations to be filed by automobile manufacturer s; and (ii) after the importation of subject auto parts,
conducting on-site verifications of the registered vehi cle models that have been assembled into complete
vehicles using such imported auto parts and issuing verification reports (i.e. the verification of whether the auto
parts concerned should be characterized as complete vehicles).
The actual verifications under the measures are perfor med by "Special Verification Teams" formed by
3 or 5 automobile experts and established by the "Verification Centre". In case a manufacturer disputes the
conclusion of a verification, it can still request a re view under the so-called "appraisal meeting", which
encompasses all interested parties. This review can result in the determination of a "re-verification", which shall
be conducted by a new "Verification Team" formed by no more than 1/3 of the original "Special Verification
Team" (Articles 5 and 12 of Announcement 4).
206 See also footnote 199.
207 Article 2(1) of Decree 125 provid es that "[t]hese Rules are appli cable to … automobile parts …,
used to produce/assemble vehicles by automobile manufacturers …"
208 China's responses to Panel question Nos. 65, 66, 83, 92, 101. In this connection, the complainants
explain the consequence of this requirements as follows:

bonded goods do not apply to auto parts imported by a third party and subsequently sold to the
automobile manufacturer. These auto parts are thus in free circulation in China.
209
7.37 However, if an automobile manufacturer subsequently purchases parts from third party
suppliers, Article 29 provides:
"Article 29 If the customs treats the imported automobile parts used by an
automobile manufacturer as complete vehi cles for the purpose of classification and
duty collection, and if the supplier of the automobile manufacturer imported some of
the automobile parts used by the automobile manufacturer and already paid import
duty and import VAT upon importation, such paid import duty and import VAT shall
be deducted from the total amounts of import duty and import VAT due from the
automobile manufacturer, provided that the automobile manufacturer provides
relevant proof of payment of import duty and import VAT. ..."
7.38 In other words, in determining whether imported auto parts used in the assembly of vehicles
in China should be characterized as comple te vehicles, imported auto parts purchased by
manufacturers from domestic suppliers or domestic part manufacturers are also counted toward the
thresholds set out in Articles 21 and 22 of Decree 125. In such a case, pursuant to Article 29 of
Decree 125, automobile manufacturer s are liable for the difference between the amount of duty for a
complete motor vehicle and the amount of duty that was assessed on the imported auto parts at the
time of importation, provided that the automobile ma nufacturers can prove that the auto part suppliers
or auto part manufacturers paid, at the time of impo rtation, the amount of duty owed for the parts at
the tariff rates applicable to the auto parts.
210
(ii) Administrative procedures
7.39 Now, the Panel will turn to the administra tive procedures required in relation to the
imposition of the charge at issue. 211 These procedures, as indicated in Decree 125 and
Announcement 4, are explained in chronological order below.

"As a result of Article 22 of Decree 125 and Article 20 of Announcement 4, the level of
imported content will have to be tracked down the chain of supply to determine whether
individual Assemblies and key parts are to be treated as imported for purposes of the
Measures. Such tracking will be made first at the level of the Assembly to determine if the
Assembly is Deemed Imported, and subsequently at the level of 'second-tier' suppliers for key
parts.

As a result, parts manufacturers and suppliers that use imported parts have to maintain records
of the quantity, type and cost of imported parts used in any parts incorporated into a
manufactured vehicle. They do this in order to meet their contractual obligations to vehicle
manufacturers and guarantee to them that they meet the domestic content requirements of the
measures. They may also be required to provide details to Customs about the purpose for
which the imported product will be used. This information may be provided directly to
Customs or indirectly by providing the information to the vehicle manufacturer."

(See Part F.6 of the Factual Background Section provided jointly by the complainants, European
Communities' first written submission, paras. 63, 64).
209 China's response to Panel question No. 20(b).
210 China's first written submission, footnote 20 to para. 46.
211 The relevant departments of the Chinese government responsible for the administration of these
procedures include the following: (1) CGA; (2) NDRC; (3) the Ministry of Commerce; (4) the Ministry of

Self-evaluation by the automobile manufacturers who assemble/produce
212 vehicles with
imported auto parts for domestic sales
7.40 Under Article 7 of Decree 125 and Article 6 of Announcement 4, automobile manufacturers
who plan to produce, for domestic sales 213, vehicles using imported auto parts are required to conduct
a self-evaluation of whether imported auto parts used in a particular vehicle model are characterized
as complete vehicles in accordance with the rules under Decree 125, including the substantive criteria
indicated above in paragraphs 7.32-7.33.214
7.41 If the self-evaluation suggests that the importe d auto parts should not be characterized as
complete vehicles, the automobile manufacturer sh all request the CGA to conduct a review. Upon
such a request, the CGA will designate the Verifi cation Centre to conduct a simplified or on-site
review of the auto manufacturer's self-evaluation.
7.42 In this regard, in response to a question from the Panel, China has stated that even if the
manufacturer's self-evaluation is positive, su ch conclusion is still subject to review. 215 T h e
European Communities comments that China's reply is cont rary to the text of Article 7 of
Decree 125 and Article 6(2) and (3) of Announceme nt 4, according to which review by the
Verification Centre seems to take place only when the result of the self-evaluation is negative.
Canada also takes note of China's response, which Ca nada submits confirms that the Verification
Centre reviews determinations of vehicle ma nufacturers under the measur es, whether positive or
negative.216
7.43 Article 7 of Decree 125 provides:
"[I]f the self-evaluation suggests that th e imported automobile parts should not be
characterized as complete vehicle, the au tomobile manufacturer shall request the
CGA to conduct a review. ..."
7.44 Based on the text of Article 7 of Decree 125 and Article 6(2) and (3) of Announcement 4, the
Panel agrees with the European Communities' view on the content of the obligation arising under
Article 7 of Decree 125, namely, review by the Verification Centre takes place only when the result of

Finance; (5) the Leading Panel for the administration of the importation of automobile parts characterized as
complete vehicles, which is represented by the CGA, the NDRC, the Ministry of Commerce; and the Ministry of
Finance; and (6) the Verification Centre. See China's response to Panel question No. 21. Also see footnote 191
above.
212 The complainants note that the Chinese original text contains the word "shengchan", which is
properly translated in to "to produce", whereas China considers that this word is used interchangeably with
"zuzhuang", "to assemble" (footnote 2 of the common translation of Decree 125). The Panel's use of the terms
"to assemble" and "to produce" in these reports is without prejudice to the parties' views on these two terms.
Also see footnote 191 above.
213 According to China, automobile manufacturers operating under the processing trade, including those
located in special customs zone such as "bonded-zone", "export processing zone" or "other special zones special
zones supervised by the customs under Article 30 of Decree 125" are outside the scope of Decree 125 unless
they sell such motor vehicles into the domestic Chinese market (China's response to Panel question No. 16).
Such a situation is addressed in Article 30 of Decree 125.
214 In addition, Article 6(5) of Announcement 4 provides that "[i]f the status of whether imported
automobile parts can be characterized as complete vehicles changes due to the fact that the composition of such
parts is altered, the relevant vehicle model shall be registered as a new model." (See also Article 25 of
Announcement 4).
215 China's response to Panel question No. 167.
216 Canada's response to Panel question No. 304, footnote 15.

the self-evaluation is negative. China appears to have misunderstood the Panel question concerning
Article 7 of Decree 125 and uses the word "review" in a general sense rather than in the context of
"review" required under Article 7 of Decree 125. Further, China's response regarding which the Panel
sought further confirmation in Panel question No. 167 was related to Panel question No. 5, which
concerned Articles 17 and 18 of Decree 125, provisions on verification by the Verification Centre, not
review of the automobile manufacturers' self-evaluation results addressed by Article 7 of Decree 125.
7.45 Further, under Article 7 of Decree 125, the self-evaluation results for the vehicle models
concerned must be submitted when automobile manufacturers apply to the NDRC to be listed in
Public Bulletin on On-Road Moto r Vehicle Manufacturers and Products (the "Public Bulletin") and
apply to the Ministry of Commerce for an Automatic Importation Licence.
217 If auto parts to be
imported are not characterized as complete vehicles as a result of the self-evaluation, the automobile
manufacturer must also submit the review opinion of the CGA.
7.46 For those vehicle models assembled with imported auto parts characterized as complete
vehicles, the NDRC will then mark "Char acterized as Complete Vehicles" in the Public Bulletin and
the Ministry of Commerce will mark the same in the Automatic Importation Licence.
7.47 In this connection, applications to the NDRC and to the Ministry of Commerce above appear
to take place in no specific order.
Registration with the CGA prior to the importa tion of auto parts characterized as complete
vehicles
7.48 Article 7 of Decree 125 also requires that, if an automobile manufacturer determines as a
result of self-evaluation that the imported auto parts contained in a vehicle model should be
characterized as complete vehicles, the automobile manufacturer must register the relevant vehicle

217 China submits that being listed in the Public Bulletin is required for automobile manufacturers to
produce and sell motor vehicles in China and that one of the regulatory characteristics that is listed in the Public
Bulletin with respect to a specific vehicle is its customs st atus under Decree 125 (China's response to Panel
question No. 28).
Further, according to China, the purpose of establishing the alleged automatic licence system is to
monitor the importation of motor vehicle products and, if the automobile manufacturer is planning to import
auto parts which are subject to an automatic import licence requirement, it must apply to the Ministry of
Commerce for this purpose. China explains that this process is unrelated to the listing in the Public Bulletin
(China's response to Panel question No. 28).
Concerning the import licence system in relation to auto parts imports, see China's responses to Panel
question Nos. 171, 173 and the comments by the European Communities and Canada on China's response. In
particular, China states in its response to a Panel question, inter alia, that the evaluation and verification process
does not prevent the auto manufacturer from importing parts and components to assemble a particular vehicle
model (China's response to Panel question No. 171). The European Communities argues in its comments on
China's response that China's reply is difficult to reconc ile with the text of Article 7(3) of Decree 125, which
provides:

"When an automobile manufacturer applies…to the Ministry of Commerce for an Automatic
Importation License, it shall submit the self-evaluation results for the vehicle models
concerned. If the imported automobile parts are not characterized as complete vehicles, the
automobile manufacturer shall also submit the review opinion by the CGA."

Thus, according to the European Communities, to get the import licence allowing the import, the auto
manufacturer will need to go first through the self-e valuation and the review by Customs when the self-
evaluation has concluded that the imported auto parts are not characterized as complete vehicles.

models with the CGA prior to the importation of auto parts. If the imported auto parts are determined
not to constitute "auto parts characterized as comple te vehicles" (after self-evaluation and review by
the Verification Centre as designated by the CGA), registration with the CGA is unnecessary.
218
7.49 When registering with the CGA, an auto ma nufacturer must submit the following documents
pursuant to Article 9 of Decree 125:
(1) a brief introduction of the manufacturer;
(2) an annual production plan for the vehicle model to be registered;
(3) a classification and price ratio schedule of the auto parts of the vehicle model
to be registered, the total price of the vehicle model to be registered, and the itemized
prices of domestic parts and imported parts u sed in the vehicle model to be registered
(each of the above shall exclude relevant taxes);
(4) a complete list of the domestic and foreign suppliers that supply the auto
parts used in the vehicle model to be regi stered, and a list of the auto parts supplied
by each supplier; and
(5) evidence that the vehicle model to be registered has been included in the
Public Bulletin.
7.50 Under Article 10 of Decree 125, upon receipt of a registration application, the CGA
distributes relevant documents to the NDRC, the Mi nistry of Commerce and district customs offices
in charge of the area where the manufacturer is located for the administration of their respective
responsibilities.
219 For example, Article 11 of Decree 125 indicates that once a district customs office
in charge of the area where the manufacturer is located receives a manufacturer's registration
documents distributed by the CGA, it examines the re gistration documents, and if the criteria are met,
registers the auto manufacturer and its vehicle models, and notifies the manufacturer.
Provision of duty bonds prior to the importation of auto parts
7.51 After a vehicle model has been registered, an automobile manufacturer, pursuant to Article 12
of Decree 125, must provide duty bonds commensura te with its importation plans to the district
customs office prior to the importation of auto pa rts. The amount of the comprehensive duty bonds
should not be less than the manufacturer's monthly average of duties payable on the importation of
such parts.
220 Third-party auto part suppliers and auto part manufacturers that import auto parts are
not covered by this requirement, as they are subject to the normal customs process and thus pay the
customs the import duty for the imported auto parts at the tariff rate applicable to auto parts at the
time of importation.221

218 "Registered vehicle models" are those that have been listed on the Public Bulletin published by the
NDRC (Article 8 of Decree 125).
219 See China's response to Panel question No. 21 for China's explanation of the respective roles played
by various Chinese government authorities concerned.
220 If importation plans are modified or if the number of registered vehicle models is changed, the
automobile manufacturer must apply for an adjustment of the amount of the comprehensive duty bonds to the
district customs office in charge of the area where the manufacturer is located (Article 12 of Decree 125).
221 China's responses to Panel question Nos. 20(b), 83, 185(a) and (b).

7.52 China has explained that the amount of th e comprehensive duty bonds is based on the
projected amount of duties that the importer will pa y each month, which is, in practice, calculated
based on the applicable rates for auto parts (i.e. 10 per cent on average).
222 China explains that such
calculation is made to minimize the burden on auto manufacturers 223 and that, contrary to what the
complainants submit, there is no necessary concordance between a bonding rate and the rate of duty at
which the imported good will be assessed.224
Customs clearance by the auto manufacturers concerned at the time of importation
7.53 Article 13 of Decree 125 states that auto manufact urers importing auto parts characterized as
complete vehicles must declare their importation of such auto parts and pay duties to the district
customs office. According to Ar ticle 14 of Decree 125, at the time of declaration, the following
should be submitted: (1) an importation declar ation form, (2) the Automatic Importation Licence
marked with "Characterized as Complete Vehicles" , (3) other relevant licence, and (4) accompanying
documents required by the customs. Article 13 re fers to the obligation not only to declare the
importation of auto parts, but also to pay duties. However, as noted below in paragraphs 7.59-7.65,
actual payment of the charge under the measures does not occur until the Verification Centre has
completed the verification after the manufacturers fi nish the assembly of auto parts into complete
vehicles.
7.54 Then, under Article 16 of Decree 125, upon entry of auto parts characterized as complete
vehicles into China's customs territory, the cust oms handles the importation formalities by reference
to relevant regulations regarding the administration of bonded goods .225 Similarly, Article 27 of
Decree 125 stipulates that the customs in charge of the area where the manufac turer is located shall
administer, by reference to the rules for bonded goods , the imported automobile parts that are
characterized as complete vehicles, during the peri od from the customs declaration and clearance of
the goods to the payment of duties.
7.55 In response to a question from the Panel regarding the administration of bonded goods and the
rules for bonded goods referred to in the above mentioned provisions, China explained during the first
meeting with the Panel that "bonded goods" in this context means the requirement imposed on
automobile manufacturers to pay bonds for imported au to parts and does not mean physical control of

222 China's response to Panel question No. 18.
223 China's response to Panel question No. 18.
224 China's response to Panel question No. 201.
225 In response to a question from the Panel what procedural requirements "the administration of
bonded goods" under Article 16 of Decree 125 entail, China submits that the "the administration of bonded
goods" may vary from one type of customs matter to another and provides an outline of the procedure relating to
the administration of bonded goods in a typical scenario (China's response to Panel question No. 19). China
also provides the categories of good s that are defined under Article 100 of China's Customs Law as "goods
remaining under customs control", which include "goods in bonded status" or "goods not fulfilling all necessary
customs requirements".
We take from China's responses in this connection (Panel question No. 19) as well as in relation to "the
rules for bonded goods" under Article 27 of Decree 125 (Panel question No. 20(a)) that the procedural
requirements relating to the administration of bonded goods in a typical scenario as explained in China's
response to Panel question No. 19 is not applicable to the importation of auto parts under the measures.
Rather, China explains in its response to Panel question No. 20(a) that the bonding requirements under
the measures at issue include the elements listed in paragraph 7.55 above.

imported auto parts themselves.
226 China further elaborates that the bonding requirements under the
measures at issue include the following elements:227
• the registration of vehicle models for which the imported auto parts have the essential
character of a motor vehicle;

• a requirement that the auto manuf acturer 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 connects the auto manufacturer to the relevant
customs office via the Internet; recording each entry of bonded auto parts for 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.

Verification of whether imported auto parts should be characterized as complete vehicles
7.56 Auto manufacturers must submit a verification application 228 to the CGA within 10 days after
the first batch of vehicles of the registered mode l has been assembled. Upon receiving a verification
application, the CGA entrusts the Verification Centre to conduct verifications. Pursuant to Articles 17
and 19 of Decree 125 and Articles 7 and 9 of Announ cement 4, within one month of receiving these
instructions, the Verification Centre must conduct ve rifications to determine whether imported auto
parts should be characterized as complete vehicles, i.e. whether the imported auto parts in a given
relevant vehicle model meet one or more of the thresholds set forth in Article 21 of Decree 125.229
7.57 In this connection, the Panel notes a clarificati on by China, which has not been disputed by
the complainants, that the verification process under Article 17 of Decr ee 125 is conducted on a

226 China also submits that Article 27 of Decree 125 does not refer to "the Procedures on Customs
Control over Bonded Areas (provided by the complainants in Exhibit JE-31)", which is only one of many types
of "rules for bonded goods" and that 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 (China's response to Panel question No. 20(a)).
See also China's response to Panel question No. 19 concerning the administration of bonded goods
under China's customs law.
227 China's responses to Panel question Nos. 19, 20(a).
228 The documents to be provided are as follows: (1) application form for verification; (2) report of self-
verification; (3) procurement list of parts; (4) document list for verifying "deemed whole vehicles"; and
(5) other documents as required (Article 25 of Decree 125 and Article 7 of Announcement 4).
229 See also China's response to Panel question No. 30 4. In addition, if a vehicle manufacturer objects
to the results of the verification, a meeting is held be tween the manufacturer, government officials and technical
experts to determine whether the Verification Centre must perform a re-verification of the registered model and
the re-verification must occur within one month of the in struction of the Center to conduct it (Article 12 of
Announcement 4).
The complainants argue that a ma nufacturer may incur significant administrative delay in the final
assessment of a charge as it could take up to 48 days from submission of the application after the first batch of
vehicles is complete until the verification is actually carried out (Part F.3 of the Factual Background Section
submitted jointly by the complainants). See paragraphs 7.61-7.65 below for a more detailed discussion on this
issue.
Article 26 of Announcement 4 stipulates that certain on-site review reports themselves may serve as the
Verification Report, provided that the manufacturer agrees to and the Leading Panel approves doing so. At least
in this circumstance, the alleged delay in the final assessment of a charge may not exist.

vehicle model basis.
230 According to China, the manufacture r may request, pursuant to Article 19 of
Decree 125, verification after the first batch of comp lete vehicles is assembled and the first batch can
be one vehicle or a small quantity of vehicles, a number that the manufacturer may choose at its
discretion. The verification findings based on the firs t batch of vehicles of the registered model will
then apply to all subsequent importation of au to parts for the same vehicle model until the
manufacturer can demonstrate, under Article 20, sec ond paragraph of Decree 125, that the imported
auto parts in that vehicle model no longer have the essential character of a motor vehicle.
7.58 Also, Article 20, first paragraph of Decree 125 pr ovides that if optional parts are installed on
a vehicle, the manufacturer must report the options to the Verification Centre and make declarations
at the time of the actual installation of the optional parts.
Payment of the charge by the auto manufacturers concerned
7.59 Pursuant to Articles 28 and 31 of Decree 125, af ter the imported automobile parts have been
assembled into complete vehicles, the automobile manufacturer shall make a declaration of duty
(charge) payable to the customs office by the te nth working day of each month subsequent to the
month in which the Verification Centre issues a verification report on whet her imported auto parts
should be characterized as complete vehicles.
7.60 At the time of declaration of payment of th e charge, the auto manufacturer must submit the
following information in accordance with Article 34 of Decree 125: (1) verification report by the
Verification Centre; (2) the quantity of the complete vehicles of relevant vehicle models that were
assembled by the manufacturer in the last month, exce pt for those models for which the imported auto
parts should not be characterized as complete vehicles; (3) the list of imported auto parts used in the
assembling of complete vehicles of relevant vehicle models in the last month, except for those parts
that are not characterized as complete vehicles in the Verification Report; and (4) other documents
deemed necessary by the customs. The district customs office then classifies such imported auto parts
as complete motor vehicles and collects an amount of duty equivalent to the tariff rates applicable to
complete vehicles.
7.61 In this regard, the parties do not dispute th e overall timeline of the procedures listed above,
namely, first, the assembly of imported auto parts into the first batch of complete motor vehicles,
second, verification by the Verification Centre of whet her imported auto parts used in the assembly of
motor vehicles should be characterized as complete motor vehicles, third, declaration by auto
manufacturers for the payment of the amount of duty owed under the measures for imported auto
parts, and finally, the customs' authorities' classi fication and collection of duties for such imported
auto parts.231

230 China's responses to Panel question Nos. 167(b) and 304; the complainants' responses to Panel
question No. 304. China submits that the same principle applies to self-evaluation and review by the
Verification Centre. The parties, however, dispute the ramifications of this rule. For example, the United States
submits that, contrary to what China seems to suggest in its response to Panel question No. 167, an initial
decision on the first batch of assembled vehicles does not establish certainty on all future imports. The United
States considers that in the entire period prior to the i ssuance of the verification report, which can take weeks or
months, the level of charges to be imposed on imported parts used in the vehicle model is unsettled. Also,
according to the United States, a "vehicle model" is not a static concept.
231 Parties' responses to Panel question No. 304. In their response, the complainants provide various
scenarios under the measures concerning the assembly of motor vehicles using imported auto parts and/or
domestic auto parts.

7.62 However, the parties do dispute the period of time that each step of the above procedures may
take.
Time taken for the administrative procedures under the measures

7.63 In response to a question from the Panel in this regard, China has stated that it is not possible
to calculate an average period of time or provid e another form of estimate because China does not
maintain these statistics.232 China submits that the Verification Ce ntre is to complete the verification
and issue a verification report within 30 days fro m the receipt of a complete set of documentation
from the CGA under Article 19 of Decree 125, but the verification of a vehicle model can take longer
than 30 days in cases where the documentation submitted by the auto manufacturer may give rise to
further inquiries and on-site reviews, or may require the submission of additional documentation.
7.64 The European Communities submits that a sample of currently pending applications for
review and verification under the measures dem onstrates that the completion of the various
procedures under the measures can take years.233
7.65 The sample of pending applications for review and verification, submitted by the European
Communities, does indicate that among the applicati ons made in 2005, certa in applications dated
29 September 2005 for review234 by the Verification Centre were still pending as of the research date,
16 July 2007.235 Also, certain applications filed on 22 August 2006 for verification, not to mention all
applications made during January-February 2007 show n on this sample table, were not completed as
of 16 July 2007.
7.66 Therefore, the evidence on the r ecord shows that the period for review and verification by the
Verification Centre can take from 30 days to a couple of years.

232 China's response to Panel question No. 171.
233 The European Communities' response to Panel question No. 171, referring to Exhibit EC-26. Also
see footnote 229. Further, according to the European Communities, the complexity of the measures in itself
affects the launching of a new model in the Chinese market. The European Communities argues that the
conception and launching of a new model can be delayed by 2-3 years, as automobile manufacturers will have to
look for domestic suppliers who are able to provide the required proportion of domestic parts or assemblies, and
test their reliability. Establishing self-verification re port required by Article 7 of Decree 125 may take an
additional 6 months for a team of 10-15 highly skilled experts. Even after a manufacturer decides to begin the
procedures for introducing a new model, it can in reality take up to one year befo re all the procedures are
finalized (European Communities' response to Panel question No. 8).
The United States submits that 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 (United States' response to Panel question No. 8).
Canada submits that it is not possible to describe, as a general rule, 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 of parts. The most significant delay results from a combination of the
procedural and substantive requirements (Canada's response to Panel question No. 8).
234 It is not clear on the face of the status of these applications what stage of the procedures under the
measures is covered by "review" by the Verification Centre. As we examined above in paragraph 7.41, the
Verification Centre conducts a review when the result of a self-evaluation by an automobile manufacturer is
negative. We will thus assume that "review" indicated in respect of the status of these pending applications
refers to the type of review to be conducted by the Ve rification Centre if a negative result is obtained after self-
evaluation by an automobile manufacturer.
235 "On-Line Administration of Automobile Parts Deemed Whole Vehicles – The leading group office
of import administration of automobile parts deemed whole vehicles"
(http://autoadmin.chinaport.gov.cn/autoadmin/search.do) (Exhibit EC-26).

(iii) Overall operation of the measures
7.67 Overall, the measures at issue impose a charge and the administrative procedures necessary to
impose the charge on imported auto parts used in the assembly of complete motor vehicles.
7.68 The charge is imposed on imported auto part s that are characterized as complete motor
vehicles, which in turn is determined based on the criteria set out in the measures: if the imported
auto parts used in the assembly of a vehicle mode l meet one of the categories of the criteria under
Article 21 of Decree 125, then such auto parts are characterized as complete motor vehicles and thus
assessed at the tariff rates applicable to motor vehicles, not auto parts.
7.69 In this connection, to determine the appli cability of the charge, customs officials wait
pursuant to Article 28 of Decree 125 until automob ile manufacturers finish assembling auto parts into
motor vehicles and then the Verification Centre fi nishes its verification of whether the imported auto
parts used in the assembly of a certain vehicle model should be characterized as complete motor
vehicles within the meaning of the measures. This is because what is pertinent for the purpose of
imposing the charge under the measures is whether im ported auto parts used for the "assembly" of a
vehicle model meet the criteria set out in the me asures. This process is based on the assessment of
auto parts imported at different times, in different shipments, from different exporters, and/or from
different countries. The parties to the dispute refer to this situation as auto parts imported in "multiple
shipments".
236
(c) Exceptions under the measures
7.70 Decree 125 provides certain exceptions from th e administrative procedures and from the
application of the substantive criteria under Articl es 21 and 22. The Panel will first look at the
exemption provided in Article 2 of Decree 125 from the administrative procedures under the
measures.
(i) Exemption of CKD and SKD kits from the admin istrative procedures - Article 2(2) of
Decree 125
7.71 Article 2, second paragraph ("Article 2(2)") of Decree 125 provides:
"[A]utomobile manufacturers importing comp letely knocked-down (CKD) or semi-
knocked-down (SKD) kits may declare such importation to the Customs in charge of
the area where the manufacturer is located and pay duties, and these Rules shall not
apply."
7.72 China submits that under Article 2(2) of Decr ee 125, an automobile manufacturer declares
imports of CKD or SKD kits as "auto parts character ized as complete vehicles" and pays the duty at
the tariff rates applicable to complete vehicles at th e time of importation. Rega rding the scope of this
provision, however, we note some evolution in Ch ina's explanation throughout the course of this
proceeding. China initially explained that the importers who opt for the exemption under this
provision would be importing CKD or SKD kits in accordance with the ordinary provisions of China's

236 Article 37 of Chapter VI ("Legal Liabilities") of De cree 125 also refers to "multiple shipments".
The relevant part of Article 37 reads, "...or if an automobile manufacturer imports automobile parts that should
be characterized as complete vehicles in multiple shipments without applying for registration with the CGA
prior to the importation, the NDRC shall temporarily take relevant vehicle models off the Public Bulletin on On-
Road Motor Vehicle Manufacturers and Products until such automobile manufacturer corrects its failures"
(emphasis added).

customs law.
237 China also submitted that since its adoption of the measures, all imports of CKD and
SKD kits have been made under this provision.238
7.73 In response to a question from the Panel af ter the second substantive meeting, however,
China submits that to import CKD and SKD kits, the importer shall make customs clearance at the
customs where the auto manufacturer is located and pay import duties under the normal customs
procedure for imports. China explains that ther e are no other customs procedures for the importation
of CKD and SKD kits but the ordinary customs procedures. 239 This is so because there is no doubt
that the proper classification of imported CKD or SKD kits is that of complete vehicles.240
7.74 The European Communities and the United States argue that Article 2(2) is an optional
provision. The European Communities and the Un ited States argue that China's explanation is
manifestly erroneous on the face of the measure s and in contradiction with China's own initial
explanation of this provision given in its first writte n submission. The language of Article 2(2) itself,
which uses "may" instead of "shall", and that of Articles 7 and 21(1) of Decree 125 confirm their
point.
7.75 In the Panel's view, the language of Article 2(2) and China's own explanation provided
earlier in the proceeding of this dispute do not support China's subsequent position that the
importation of CKD or SKD kits unde r Article 2(2) is mandatory. Ar ticle 2(2), on its face, indicates
that automobile manufacturers importing CKD or SKD kits may declare the kits as such and pay the
duties. The use of an auxiliary verb "may" e xpresses only an objective po ssibility, rather than
command or exhortation connoted by the verbs "sha ll" or "should." Furthermore, the phrase "... and
these Rules shall not apply" in Artic le 2(2) indicates that the inap plicability of the measures to CKD
or SKD imports depends on the importer's decision to exercise the option provided in Article 2(2) of
Decree 125 and to declare the importation of CKD or SKD kits as such to Customs and pay the duties.
China itself shared the same understanding and stated in its first submission: "Article 2 of Decree 125
states that importers of CKD/SKD kits can declare these imports to the relevant Customs authorities,
and the provisions of Decree 125 will not appl y. Thus, the importer of CKD/SKD kits can declare
these imports as complete vehicles at the time of importation, pay the complete vehicle duty rate, and
avoid the bonding and record-keeping requirements of Decree 125."
241
7.76 Furthermore, the context of Article 2(2), in particular Article 21(1) of Decree 125, also
confirms our conclusion. China argues that the ex istence of Article 21(1) does not conflict with
Article 2(2), but in fact confirms Article 2(2) by reiterating that CKD or SKD kits are always
classified as complete vehicles.242 According to China, Article 21 de fines the collections of parts and

237 The procedures to be followed by an importer of CKD or SKD kits under China's Customs Law are:
(1) to apply to the Ministry of Commerce for an auto matic import licence; (2) to declare, at the time of
importation, the imports of CKD or SKD kits to the customs and provide the relevant import documentation,
including the declaration form, the automatic import licence, and the certificate of origin; and (3) to pay the
applicable motor vehicle duty rate for the CKD or SKD kits in accordance with the regular procedures for the
payment of customs duties, following the classification by the customs of the imported CKD or SKD kits
(China's response to Panel question No. 58).
238 China's response to Panel question No. 15.
239 China's response to Panel question No. 193.
240 China's first written submission, para. 195.
241 China's first submission, para. 38 (emphasis added). China also st ated, "[M]anufacturers may
therefore import CKD/SKD kits, pay the appropriate motor vehicle duties at the time of importation, and bypass
the procedures established under Decree 125" (China's first written submission, para. 195) (emphasis added).
242 China's first submission, footnote 136 to para. 195.

components that have the essential character of a motor vehicle, which includes CKD/SKD kits.
243
However, in our view, if Article 2(2) were to be understood as automatically excluding CKD or SKD
kits from the measures, it would make Article 21( 1) of Decree 125 inutile, wh ich categorizes CKD or
SKD kits as auto parts characterized as complete vehicles under the measures. In other words, it
would make meaningless the only logical explanation for the raison d'être of Article 21(1), which is
to apply the measures to CKD or SKD kits imports if they were to be imported without recourse to the
exceptional option under Article 2(2). Article 21 of Decree 125 is a provision setting forth the
thresholds for auto parts that should be character ized as complete vehicles under the measures and no
language in this provision shows any other meaning.
7.77 We therefore consider that Article 2(2) of Decree 125 is a provision that gives auto
manufacturers an option to have their CKD or SK D kits imports excluded from the "administrative
procedures" under the measures and to import them under regular customs procedures and pay the
duties applicable to motor vehicles at the time of im portation. This, however, does not affect the fact
that CKD and SKD kits imports are in principle s ubject to "the charge" under the measures by falling
within the scope of the substantive criteria provided in Article 21(1) of Decree 125. Our reference to
"the measures" in these reports therefore should be understood as including within its scope CKD and
SKD kits.244
7.78 Furthermore, we understand that an exemption provided for CKD and SKD kits in Article2(2)
of Decree 125 is limited to the administrative procedures under the measures, not the substantive
criteria under Article 21(1) of Decree 125. In par ticular, China itself submits, "[M]anufacturers may
therefore import CKD or SKD kits, pay the appr opriate motor vehicle duties at the time of
importation, and bypass the procedures established under Decree 125. ..." 245 We note China's
statement that Article 21(1) of Decree 125 simp ly reiterates that CKD and SKD kits are always
classified as complete vehicles and that vehicles that are assembled entirely from CKD or SKD kits
can be imported as complete vehicles, consistent with GIR 2(a), and the challenged measures do not
apply. However, we do not find any support in the text of Decree 125 for China's proposition that
Article 21(1) of Decree 125 exists simply to reitera te the alleged general principle that CKD and SKD
kits are always classified as complete vehicles. Th erefore, for the purpose of this dispute, we will
consider that although importers of CKD or SKD kits can opt in accordance with Article 2(2) of
Decree 125 to be exempted from "the administrativ e procedures" under the measures, their obligation
to pay the charge under the measures for CKD and SKD kits arises from Article 21(1) of Decree 125.
7.79 Next, we will briefly describe a provision under the measures that provides an exception for
the imported auto parts that have been substantially processed in China.
(ii) Imported auto parts that have been substantially processed in China – Article 24 of
Decree 125
7.80 Under Article 24 of Decree 125 (and Articl es 16-18 of Announcement 4), if domestic
automobile manufacturers or domestic auto parts manufacturers substantially process imported auto
parts or imported unfinished auto parts to manufacture auto parts, the auto parts manufactured by such
domestic manufacturers are considered as domestic auto parts.

243 China's response to Panel question No. 193.
244 To the extent that an importer exercises the op tion provided in Article 2(2) of Decree 125 and
imports CKD or SKD kits under the regular customs procedures, the parties agree, as we find in paragraph
7.636, that the treatment of CKD and SKD kits imports under the measures (i.e. imposition of the charge on
CKD and SKD kits) falls under the disciplines of Article II, not Article III of the GATT 1994.
245 China's first written submission, para. 195 (emphasis added).

7.81 The provision excludes assemblies and sub-assemblies
246 from its application, which is
understood to mean that the substantial processing exception does not apply to the processing of the
imported assemblies or sub-assemblies themselves, but applies to imported parts incorporated into
assemblies and sub-assemblies.247
2. Products at issue
(a) Scope of the products at issue
7.82 The scope of the products at issue in a given case is determined by the measures falling within
a panel's terms of reference. In the present dispute, therefore, the products at issue are those subject to
Policy Order 8, Decree 125 and Announcement 4.248
7.83 The text of the measures does not provide any sp ecific categories of auto parts falling within
the measures. Article 1 of Decree 125 simply re fers to "automobile pa rts", and Article 21 of
Decree 125, a provision on the substantive criteria for determining whether certain imports of auto
parts should be characterized as complete vehicles, refers to, inter alia, "assemblies" and "CKD and
SKD kits".
7.84 Based on the parties' arguments in their writte n submissions and their responses to the Panel
questions, auto parts subject to the measures at issu e can be generally categorized into the following
four groups of the HS headings at the four-digit level:249
(1) complete vehicles under tariff headings 87.02, 87.03 and 87.04 250;
(2) the body and the chassis fitted with engine under tariff headings 87.06 and
87.07;
(3) parts and accessories of motor vehicles under tariff heading 87.08; and
(4) parts and accessories of motor vehicl es under chapters other than chapter 87,
in particular under tariff headings 84.07, 84.08, 84.09, 84.83, 85.01, 85.03, 85.06,
85.11, 85.12 and 85.39.

246 See paragraphs 7.88-7.89 below for the discussion on "assemblies" and "sub-assemblies".
247 Further, in response to the Panel's question of whether assemblies and sub-assemblies are not
excluded in "imported unfinished automobile parts" under Article 24 of Decree 125, China has stated that they
are excluded from "imported unfini shed automobile parts" and that assemblies and sub-assemblies are not
susceptible to substantive transformation since they already constitute a finished portion of the motor vehicle
and will not undergo further transformation prior to their assembly into the vehicle (China's response to Panel
question No. 41). The complainants have not raised any issue with this explanation from China.
248 The United States and Canada also submit that the products encompasse d in this case are all
products that are, or could be, subject to the measures at issue (Responses of the United States and Canada to
Panel question No. 73).
249 Parties' response to Panel question No. 73.
250 Article 3 of Decree 125 provides:

"The reference to 'vehicles' in these Rules shall mean the classes M and N
vehicles as defined in the Classification of Vehicles and Trailers (National
Standard of China, GB/T15089-2001).
'Class M Vehicles' shall mean passenger ve hicles with at least four wheels.
'Class N Vehicles' shall mean cargo vehicles with at least four wheels."

7.85 The Panel notes in this regard that "the body" and "the chassis fitted with engine" respectively
under tariff headings 87.06 and 87.07 are referred to by the complainants as "intermediate products",
in the sense that they are the products that are more than basic units of auto parts or accessories falling
under the tariff headings such as those listed in (3) and (4) above, but are not complete motor
vehicles. Specifically, a chassis fitted with an engine under 87.06 is composed of, inter alia , the
individual parts that make up the chassis and the parts that make up the engine.
251 Likewise, the body
under 87.07 is composed of the individual auto parts that make up the body.
7.86 In conclusion, the products at issue in this case are all imported auto parts that are potentially
subject to the measures, and they generally fall under the four categories listed above.
(b) Product terms referenced in the measures at issue
7.87 Aside from the scope of the products at issue, the Panel notes that certain product terms are
referred to in China's measures. We will briefly examine these terms.
7.88 We recall that the second criterion for the dete rmination on "auto parts characterized as
complete vehicles" under Article 21 of Decree 125 uses the term "assembly (system) ". Article 4 of
Decree 125 in turn provides the list of the eight assemblies:
"The reference to 'assembly (system)' in these Rules shall include the vehicle body
(including cabin) assembly, the engine assembly, the transmission assembly, the
driving axle assembly, the driven axle ass embly, the frame assembly, the steering
system, and the braking system."
7.89 According to the complainants, "assembly", a key concept in the measures, corresponds
roughly to major parts of a vehicle.
252 China submits that 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 assembly".253
7.90 Article 22(2) of Decree 125 refers to "key parts or sub-assemblies" when it sets out,
"[i]mported automobile parts shall be characterized as an assembly (system) if ... the quantity of the
imported key parts or sub-assemblies [for purpose of assembling assemblies (systems)] reaches or
exceeds the specified level as set forth in Annexes 1 and 2." In turn, Annex 1 to Decree 125 specifies
auto parts considered under China's measures as key parts and sub-assemblies for each assembly
(system). For example, a vehicle body – a type of assembly – will consist of key parts and sub-
assemblies such as side panel, door, bonnet, roof box, or luggage compartment. Therefore, we
understand for the purpose of this dispute that th e product terms "key parts" and "sub-assemblies"
refer to certain units of auto parts constituting "assemblies" as defined under the measures.
7.91 Furthermore, the first group of auto parts char acterized as complete vehicles under Article 21
of Decree 125 is CKD and SKD kits .254 At the outset, we note that all parties agree that there exists
no standard definition of what constitutes a CKD or SKD kit, although they generally agree that these
product terms refer to "auto parts that are either fully or partly unassembled and that are shipped

251 The European Communities' first written submission, paras. 226-230. See also paragraph 7.583
below.
252 Part E.1 of the factual background section submitted jointly by the complainants.
253 China's response to Panel question No. 63.
254 As noted in paragraphs 7.71-7.77 above, Article 2(2) of Decree 125 is an optional provision that
exempts CKD and SKD kit imports from the administrative procedures under the measures.

together for assembly and further processing into a whole vehicle [in an importing country]."
255 We
will examine CKD and SKD kits in more detail when we address the parties' claims and arguments
pertinent to these products.256
3. Burden of proof
7.92 As the Appellate Body explained in US – Wool Shirts and Blouses , the general rule of burden
of proof is that the burden rests upon the party, whether complaining or defending, who asserts the
affirmative of a particular claim or defence.257 Given this general rule, it is the complainant in a given
case who initially bears the burden of proof to establish a prima facie case of inconsistency of a
measure with a provision of the WTO covered agreem ent, before the burden of showing consistency
with a provision or defending it under an exceptiona l provision (e.g. Article XX of the GATT 1994)
shifts to the defending party.
7.93 In the present case, therefore, it is the complain ants who have the initia l burden of proof to
establish a prima facie case of alleged inconsistencies of China's measures with, inter alia, Article III
of the GATT 1994, or alternatively, Article II of the GATT 1994. China, then, as a party making an
affirmative defence of its measures under Article XX(d) of the GATT 1994, bears the initial burden to
prove that its measures are justified under this provision.
7.94 In this connection, a prima facie case is "one which, in the absence of effective refutation by
the defending party, requires a panel, as a matter of law, to rule in favour of the complaining party
presenting the prima facie case".
258 To establish a prima facie case, the party asserting a particular
claim must adduce evidence sufficient to raise a presumption that what is claimed is true, although
precisely how much and precisely what kind of evidence will be required to establish a presumption
that a claim is valid will necessarily vary from case to case.
259
7.95 Bearing in mind the above, we will commence our analysis of the complainants' claims in
respect of the measures in the order indicated in the following section.
4. Panel's order of analysis
7.96 As set out in paragraphs 3.1-3.10 of the Descriptive Part of these Reports, the complainants in
this dispute have presented their claims in r espect of the measures at issue under the GATT 1994,
TRIMs Agreement, SCM Agreement and China's Accession Protocol.
7.97 We note that the parties, with the exception of the European Communities, have not requested
the Panel to examine these claims in any specific order.

255 Part C of the factual background section submitted jointly by the complainants. China submits that
a CKD kit consists of all, or nearly all, of the parts and components necessary to assemble a complete vehicle,
and that an SKD kit differs from a CKD kit in the extent of its prior assembly (i.e. unlike a CKD kit, an SKD kit
includes significant parts and component s that have already been assembled) (China's first written submission,
paras. 35-36). China also submits that there is no particular relationship between CKD or SKD kits and the
assemblies referred to in Article 21(2) of Decree 125, other than they all consist of auto parts in various states of
assembly (China's response to Panel question No. 63).
256 See Section VII.F of these reports.
257 Appellate Body Report on US – Wool Shirts and Blouses, page 14.
258 Appellate Body Report on EC – Hormones, para. 104.
259 Appellate Body Report on US – Wool Shirts and Blouses, page 14.

7.98 The European Communities, citing the Appellate Body Report on EC Bananas III, submits
that the TRIMs Agreement, as "the agreement which is more specific to the claim before the Panel"
should be considered first
260, followed by its claims under Article III of the GATT 1994. The United
States and Canada, on the other hand, have presented thei r claims under Article III of the GATT
1994 first, followed by their claims under the TRIMs Agreement. The United States and Canada have
not indicated a particular view on the order of analysis to be followed by the Panel in respect of their
claims under Article III of the GATT 1994 and the TRIMs Agreement.
261
7.99 The Panel notes that in EC – Bananas III the Appellate Body enunciated a test to be applied
in order to decide the Panel's order of analysis where two or more provisions from different covered
agreements appear a priori to apply to the measure in question. According to the Appellate Body, the
provision from the agreement that "deals specifically, and in detail" with the measures at issue should
be analysed first. 262 However, regarding the order of analysis between the GATT 1994 and the
TRIMs Agreement, as a previous panel has pointed out 263, WTO jurisprudence is not uniform on the
question of which one of these two agreements is more specific. 264 Furthermore, we do not consider
that the present case is one in which the relations hip of the various provisions under which the
complainants base their claims requires us to fo llow a particular mandatory sequence of analysis,
which, "if not followed, would amount to an error in law."265
7.100 In light of the foregoing, we will start our analysis with the complainants' claims under
Article III of the GATT 1994 with respect to imported auto parts in general. Specifically, we will
analyse the complainants' claims in the following order:
 – Article III of the GATT 1994;

260 European Communities' first written submission, para. 76 (citing the Appellate Body Report on EC-
Bananas III, paras. 202-204).
261 See the United States' and Canada's respective responses to Panel question No. 153. The United
States, for instance, says that it "considers that the order of analysis is within the discretion of the Panel." Ibid.
262 Appellate Body Report on EC – Bananas III , para. 204.
263 See Panel Report on India – Autos, para. 7.156.
264 In Canada – Autos, the Panel analysed the measures at is sue, including a duty exemption accorded
based on the local content requirements, under the GATT 1994 first on the grounds that: 1) the TRIMs
Agreement could not be properly char acterised as being more specific than Article III:4 of the GATT 1994 in
respect of the claims raised in that case; 2) there was disagreement between the parties on whether the measures
under consideration could be considered to be "trade-re lated-investment measures" and on whether they were
explicitly covered by the Illustrative List. (Panel Report on Canada – Autos, paras. 10.63 and 10.91).
The Panel in India – Autos held that as a general matter, even if there was some guiding principle to
the effect that a specific agreement might appropriately be examined befo re a more general agreement, the
TRIMs Agreement should not be inherently characterised as more specific than the relevant GATT provisions.
Thus, the Panel analysed the measures at issue, in cluding the localization requir ements attached to the
importation of CKD/SKD kits, under the GATT 1994 first. The Panel concluded that, having found that the
"indigenization requirement" was in violation of Article III:4 of the GATT 1994, it was not necessary to
consider separately whether it was also inconsistent with Article 2 of the TRIMs Agreement. (Panel Report on
India – Autos, paras. 7.156, 7.157, 7.159-7.161 and 7.324, and footnote 377).
After noting that the TRIMs Agreement is a fully-fl edged agreement in the WTO system, the Panel in
Indonesia – Autos considered that this agreement was more specific than Article III:4 of the GATT 1994 in
addressing the claims relating to the Indonesian car programme under which tariff and tax benefits were granted
contingent upon meeting specified local content requi rements. Having found that the measures were
inconsistent with Article 2 of the TRIMs Agreement, the Panel exercised judicial economy with respect to
complainants' claims under Article III of the GATT 1994. This has been the only dispute in which a panel
examined the TRIMs Agreement first (Panel Report on Indonesia Autos, paras. 14.61-14.63 and 14.93).
265 See Appellate Body Report on Canada – Wheat Exports and Grain Imports, para. 109.

 – TRIMs Agreement;

 – Article II of the GATT 1994; and

 – SCM Agreement.

7.101 Then, we will address the complainants' claims with respect to the treatment of CKD and
SKD kits under the measures in the following order;
 – Article II of the GATT 1994; and

 – Paragraph 93 of China's Working Party Report.

B. A
RTICLE III OF THE GATT 1994
1. Are the measures consistent with Article III:2, first sentence, of the GATT 1994?
7.102 The complainants submit that the measures impose an internal charge in a manner
inconsistent with Article III:2, first sentence, of the GATT 1994. China rejects these arguments,
claiming instead that the charge imposed under th e measures is an "ordinary customs duty" under
Article II:1(b), first sentence, of the GATT 1994.
7.103 Article III:2, first sentence, of the GATT 1994 provides:
"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall not be subject, directly or indirectly, to internal taxes
or other internal charges of any kind in ex cess of those applied, di rectly or indirectly,
to like domestic products."
7.104 The Appellate Body in Canada – Periodicals clarified that the analysis of whether a measure
is inconsistent with the first sentence of Article III:2 of the GATT 1994 involves a two-step test:
"[T]here are two questions which need to be answered to determine whether there is a
violation of Article III:2 of the GATT 1994: (a) whether imported and domestic
products are like products; and (b) whether the imported products are taxed in excess
of the domestic products. If the answers to both questions are affirmative, there is a
violation of Article III:2, first sentence."266
7.105 However, before we can proceed w ith the analysis as explained in Canada – Periodicals we
must preliminarily determine whether the charge un der the measures indeed falls within the scope of
Article III:2 of the GATT 1994. This is because the parties dispute from the outset whether such
charge is an "internal charge" under Article III:2 of the GATT 1994, as the complainants contend, or
an "ordinary customs duty" under Article II: 1(b) of the GATT 1994, as China asserts. 267 This is

266 Appellate Body Report on Canada – Periodicals, DSR 1997:I, page 468.
267 We note that the parties agree that the question before us is whether such charge is an "ordinary
customs duties" under the first sentence of Article II:1(b) of the GATT 1994, not an "other duty or charge"
under the second sentence of this provision. (See, e.g., European Communities' second written submission,
para. 36 and footnote 34; United States' second wr itten submission, para. 23; Canada's second written
submission, para. 27; and China's responses to Panel question Nos. 79 and 88).

indeed a crucial question for a charge cannot be at the same time an "ord inary customs duty" under
Article II:1(b) of the GATT 1994 and an "internal ta x or other internal charge" under Article III:2 of
the GATT.
268 Therefore, as panels before us have similarly decided, 269 we must first decide which of
these two provisions is applicable to the charge under the measures.270

268 We see no objection from any of the parties to this dispute in starting our analysis of the claim under
Article III:2 of the GATT 1994 with this preliminary determination as China and the complainants agree that the
"charges in this dispute are either internal ones (as complainants contend), or customs duties (as China asserts)."
(United States' response to Panel question No. 88; s econd written submission, para. 13 and second oral
statement, para. 9). See also Canada's response to Pa nel question No. 103. China also notices this nuanced
position of the complainants on the binary character of Article II and Article III of the GATT 1994 and claims
that "Canada, at a minimum, appears to accept that a measure or charge th at is validly within the scope of
Article II cannot be analysed under Article III" (Chi na's response to Panel question No. 179(a) and second
written submission, para. 123). Howeve r, China considers that the "threshold question" before the Panel is in
relation to the nature of the entirety of the measures, although it also specifically states, only in relation to the
charge, that "... a customs duty under Article II cannot simultaneously be analysed as an 'internal charge' under
the disciplines of Article III ..." (China's response to Panel question No. 203). We also recall that the
complainants have respectively made alternative claims, inter alia, under Article II:1(a) and (b) of the GATT
1994, in case the Panel were to find that the charge under the measures were a border charge (see European
Communities' first written submission, paras. 210-213; United States' first written submission, para. 117; and
Canada's first written submission, para. 132). We consider that the complainants' focus on the charge in their
alternative claims under Article II:1(a) and (b) of the GATT 1994 reinforces our und erstanding that they accept
that the question whether the charge under the measures is within the meaning of the first sentence of
Article II:1(b) or Article III:2 of the GATT 1994 is indeed a binary one.
269 See GATT Panel Report on EEC – Parts and Components , para. 5.4. See also the GATT Panel
Report on Greece – Import Taxes , which stated that the "... principal question arising for determination was
whether or not the Greek tax was an internal tax or charge on imported products within the meaning of
paragraph 2 of Article III. If the finding on this point were affirmative, the Panel considered that it would be
subject to the provisions of Article III ..." (para. 5). In the unadopted GATT Panel Report on Canada – Gold
Coins the parties themselves agreed to include in the terms of reference of the Panel "the understanding that the
Panel would provide its views ... on the question of whet her the Ontario provincial sales tax measure on gold
coins accorded with the provisions of Articles III [or] II of the General Agreement before proceeding to hear
additional arguments relating to the remaining elements outlined in the terms of reference" (para. 49 – from the
context of this sentence we understand that the panel meant "or" instead of "and"). See also the Panel Report on
Argentina – Hides and Leather, para. 11.139. With regard to our citation of the unadopted GATT Panel Report
on Canada – Gold Coins above, we recall the Appellate Body's statement in Argentina – Textiles and Apparel
that although "unadopted panel Repo rts have no legal status in the GATT or WTO system ... a panel could
nevertheless find useful guidance in the reasoning [of such Reports] ... that it considered to be relevant" (para.
43).
270 In doing so we would be fulfilling our duty under Article 11 of the DSU to determine the
applicability of the provisions cited by the complainants to the contested measures. Furthermore, we believe
that in the present case, answering such a prelimin ary question does not require us to provide positive
definitions of what constitutes an "internal charge" a nd an "ordinary customs duty" under respectively Article
III:2 and Article II:1(b) of the GATT 1994 as it would suff ice for us to examine the el ements that differentiate
these two kind of charges. We will then apply these el ements to the specific aspects of the charge under the
measures to determine under which provision it should fall. We also believe that such preliminary analysis is
without prejudice to our separate analysis, below, on wh ether certain aspects of th e measures fall within the
scope of Article III:4 of the GATT 1994. We believe however that our finding here on whether the charge is
within the meaning of Article III:2 or Article II:1(b) of the GATT 1994 may have an impact on that other
preliminary analysis. Finally, as the parties do not di spute that the charge imposed under the measures is not
covered by the term "all other duties and charges of any kind imposed on or in connection with the importation"
within the meaning of Article II:1(b), second sentence, of the GATT 1994, we consider that the object of our
analysis in this section is not to delineate "ordinary cust oms duties" under the first sentence of Article II:1(b) of
the GATT 1994 from "all other duties and charges of any kind" under the second sentence of this provision. As

7.106 We will thus begin our preliminary analysis by recalling how the charge is imposed under the
measures.
271
(a) Charge under the measures
7.107 The Panel recalls that China, as described a bove in paragraph 7.24, imposes under the
measures a charge in the amount equivalent to the ta riff rate applicable to motor vehicles (25 per cent
on average) on auto parts that are imported and used by automobile manufacturers for the assembly of
motor vehicles, if such auto parts are characterized as complete vehicles based on the thresholds set
out in the measures. As we have explained above in Section VII.A.1(b)(i), under the measures, the
final determination of whether certain auto parts are characterized as complete vehicles and thus
subject to the charge is made once the auto part s, imported in a single or multiple shipments, are
assembled into complete vehicles in China.
7.108 We also recall that Article 29 of Decree 125 272 provides that auto parts imported by a third-
party supplier and subsequently purchased by an automobile manufacturer for their assembly into
motor vehicles in China, will also be counted toward s the thresholds set out in the measures. China
has explained that imported auto parts that the auto manufacturer purchases from a third-party
supplier in China will have completed the necessary customs formalities and are no longer subject to
customs control. China further explains that th e rules for bonded goods do not apply to auto parts
imported by a third-party supplier. Pursuant to Article 29 of Decree 125, automobile manufacturers
are then liable in respect of imported auto pa rts purchased from a third-party supplier for the
difference between a charge equivalent to the amou nt of the tariff rates for motor vehicles and the
amount of duty for auto parts that would have alr eady been paid by a third-party supplier at the time
of importation.273
7.109 Given that China submits that the imposition of the charge on imported auto parts purchased
from a third-party supplier operates under the measur es in a different manner from the charge on auto
parts imported by automobile manufacturers, we wi ll first examine whether we must consider the
charge imposed pursuant to Article 29 of Decree 12 5 separately from the charge imposed in general
under the measures for the purpose of examining th e complainants' claim under Article III:2 of the
GATT 1994.
(i) Arguments of the parties
7.110 The complainants argue that the charge under Article 29 of Decree 125 cannot be separated
from the charge imposed under the other provisions of Decree 125.
7.111 The European Communities submits that Article 29 is a ge neral provision that applies to
automobile manufacturers that purchase automotive pa rts from suppliers. Article 29 uses the general
language of the measures on parts "characterized as co mplete vehicles" and is directly connected with
the overall logic of the measures according to whic h the classification of the imported parts depends
on their internal use in China.274 Additionally, the fact that customs duties and the 15 per cent internal

analysed in more detail below, the second sentence of Article II:1(b) of the GATT 1994 is only relevant to the
present case insofar as it confers contex tual support for the interpretation of "on their importation" in the first
sentence of Article II:1(b) of the GATT 1994.
271 See also Section VII.A.1(b)(i) above.
272 The text of Article 29 of Decree 125 is partially cited above at paragraph 7.37.
273 See China's responses to Panel question Nos. 20, 20(b), 31, 65, 83, 92 and 101.
274 European Communities' response to Panel questio n No. 101; second written submission, para. 54;
second oral statement, para. 21.

charges are due by the same person when the importer is the automobile manufacturer, and can thus
be hidden under a global 25 per cent charge, cannot affect the legal assessment under Articles II and
III of the GATT 1994.
275
7.112 The United States argues that the number or value of parts imported by third parties can be
determinative of whether charges are imposed on a ll imported parts used in a domestically produced
vehicle. Under Decree 125, if the number or valu e of imported parts in a specific vehicle exceeds the
designated thresholds, all imported parts in that vehicle will be assessed a 25 per cent charge.
Article 29 of Decree 125 allows a manufacturer to deduct from that charge the value of any customs
duties that another supplier has paid on one of the parts assembled into the vehicle. Accordingly,
there is no "separate charge," only a permissible deduction upon provision of sufficient evidence that
the payment was made at the border by the third- party supplier. Similarly, all imported parts,
regardless of their source, are counted together in determining whether the thresholds in Articles 21
and 22 of Decree 125 have been met. Hence, unde r China's analysis, there really is nothing to
distinguish the charge imposed on parts importe d by third parties and parts imported by the
manufacturer. If, as China appears to concede, the charge on third-party parts is an internal charge,
the charge on the manufacturer's parts must be as well.276
7.113 Canada argues that all imported parts (regardless of the importer) are considered collectively
for purposes of the thresholds under the measures. As such, the measures are not even applied to
imported parts in accordance with the express intenti on of the measures to enforce China's Schedule.
This demonstrates how arbitrary and discriminatory the measures truly are as the volume and value
thresholds, clear domestic-content requirements in themselves, are applied to products that even
China admits should be the subject of national treatment.277
7.114 China, on the one hand, submits that Article 29 of Decree 125 is "conceptually different" in
relation to Article II, because the original importe r of these third-party parts and components has, in
most cases, already completed the customs formaliti es in respect of these imports, and the goods are
no longer subject to customs control. On the othe r hand, China submits that the charges collected
pursuant to Article 29 are nevertheless ordinary cu stoms duties under Article II of the GATT 1994, in
that they objectively 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. Article 29 therefore results in th e application of the motor vehicle duty to imported
auto parts regardless of who imported them.
278
(ii) Consideration by the Panel
7.115 The Panel considers that Article 29 does not administer a charge that is different from the
charge imposed in general under the measures: au tomobile manufacturers use auto parts imported by
a third-party supplier in the same manner as auto parts the manufacturers themselves directly import
for the assembly of motor vehicles; and auto parts imported either by vehicle manufacturers or by
third-party suppliers are subject to the same thresholds set out in the measures. 279 In the Panel's view,

275 European Communities' comments on China's response to Panel question No. 185(d).
276 United States' responses to Panel question Nos. 185(e) and 198; comments on China's response to
Panel question No. 185(c); first oral statement, para. 28.
277 Canada's second written submission, paras. 4-5; responses to Panel question Nos. 101, 185(e) and
198.
278 China's responses to Panel question Nos. 83, 92 and 101; second written submission, para. 186.
279 We see, for example, nothing in Articles 21 and 22 of Decree 125 (which establish the thresholds
for determining, respectively, whether auto parts should be "characterized as complete vehicles" and "deemed
imported assemblies") distinguishing parts imported under Article 29 from parts imported in general under the

the elements cited by China, such as those described above in paragraph 7.108, in an effort to argue
that the charge imposed on auto pa rts in the context of Article 29 is conceptually different from the
charge in general
280, do not change our conclusion that there is only one charge, which is ultimately
triggered by the application of the thresholds afte r the assembly of the imported parts into complete
vehicles in China. For these reasons, we do not cons ider that the charge imposed under Article 29 of
Decree 125 should be analysed separately from the char ge imposed in general under the measures. In
fact, they are the same charge.
(b) Is the charge an "internal charge" within the meaning of Article III:2 of the GATT 1994?
(i) Overview of the arguments of the parties
7.116 The European Communities argues that the charges are internal, and thus subject to
Article III of the GATT 1994, because the application of the measures is only triggered by the actual
manufacturing process taking place inside China by wh ich imported automobile parts are used to
produce vehicles for domestic sale in China (Artic le 7 of Decree 125). China's charges are not
collected at the time or point of importation, but internally after assembly and manufacture, as
confirmed by the language of Article 28 of D ecree 125. More specifically, the European
Communities maintains that the charges under China' s measures are not imposed on the basis of how
auto parts are presented on importation, but on the basis of how they are used after importation and,
in particular, whether they are subsequently assemb led and manufactured in China into vehicles with
an insufficient level of local content. The reason or event that triggers the charges under the measures
is not the importation of the parts into China but the assembly, fitting, equipping and manufacture of
such parts into a complete vehicle after importation.281
7.117 The United States also argues that China's measures apply after importation of the product
and cannot therefore be considered to impose an ordi nary customs duty. China's charges are thus not
imposed at the time of, or as a condition to, the entry of the parts into China, but are rather internal
charges the application of which turns on the deta ils of the manufacturing operations conducted in
China. They are therefore internal charges. For the United States, th e internal nature of the measures
and the charges is confirmed, inter alia, by the following factors: first, the determination of whether
imported parts constitute "features of a complete autom obile" is made at the time the parts are used in
the assembly process rather than at the time the parts enter the territory to which China's Schedule
relates (Article 5 of Decree 125); 282 second, under the measures, a ll of the parts of a completed

measures. See paragraphs 7.32 and 7.33 for a descrip tion of these two provisions of Decree 125. See also
paragraph 7.37.
280 As China itself explains, the 10 per cent a third-party supplier pays at the border when importing
auto parts is simply "deducted" from the final charge liability the manufacturer eventually incurs after these
parts, together with other parts, domestic and/or imported, are assembled/produced into whole vehicles in China.
See China's responses to Panel question Nos. 31 and 65.
281 European Communities' first written submission, para. 139; first oral statement, paras. 25-26;
second written submission, para. 51; second oral statement, para. 18; responses to Panel question Nos. 90,
90(b) and 181.
282 In this regard, the United States emphasizes that even if a manufacturer c ould identify that certain
auto parts are going to be used in a specific vehicle model, given the assembly-line pr ocess, the manufacturer
would have no idea into which particular vehicle a particular part is going to be incorporated. Moreover, within
a bulk shipment of parts, one cannot identify in advanc e which parts will actually be used in production, as
opposed to being discarded as defective, damaged in proc essing, or being held in inventory for eventual use as
replacement parts. Thus, there is not – and cannot be – a specific vehicle identified with a collection of specific
parts until that vehicle has actually b een assembled within Chin a. The Unites States r ecalls that China asserts
that it can identify parts of a specific model at the border, but it does not assert that it can identify parts of a

vehicle are combined for the determination of whet her the 25 per cent charge applies, regardless of
where those parts originate, when or where they entered the territory of China, or who imported them;
third, even if a part has been imported by a supplie r, and even if the supplier has already paid customs
fees and duties, the part is nonetheless grouped together with parts imported by the manufacturer itself
when making the determination (therefore, identical imported parts included in the same shipment can
be subject to different charges depending on their in ternal use); fourth, the 25 per cent charge is
imposed not on the importer, but on the manufacturer – whether or not the manufacturer is actually
the importer of the part in question; and fifth, the official verification is performed by Chinese
authorities at the manufacturer's site, not at the bo rder (Article 7 of Decree 125). Finally, also
relevant is that determinations under the measure s are not made by Chinese Customs through normal
customs procedures, but by a special administrative body pursuant to measures developed by agencies
with industrial policy functions.
283
7.118 Canada submits that the measures impose charges and administrative requirements on
imported auto parts based not on the state of the product upon presentation at the border, but upon the
use of those imported parts in vehicle manufacturing that takes place after importation. In other
words, the liability that applies to imported produc ts under the measures occurs only after the final
related product, the complete automobile, rolls o ff the assembly line. As a result, Canada sees
nothing in the measures to suggest a relationship with the administration and enforcement of valid
customs liabilities. For auto parts manufacturers us ing imported parts, the bound tariff rate for parts
(usually 10 per cent) is paid at the border. If that imported auto part is then used in manufacturing a
vehicle of which the imported content exceeds th e value or quantity thresholds set out in the
measures, then an additional internal charge (usu ally an additional 15 per cent) is assessed on the
value of the imported auto part. If the vehicle ma nufacturer can establish that the tariff was already
paid by the auto parts manufacturer, the original importer, then the vehicle manufacturer will receive a
10 per cent credit, in effect paying an internal charge of 15 per cent. If the vehicle manufacturer is not
able to establish this to the satisf action of Customs, it would then be subject to a 25 per cent internal
charge. This shows that the measures apply to auto parts only once they are in free circulation in the
internal Chinese automotive market, and are based entirely on their use after importation.
284
7.119 In sum, the core of the complainants ' arguments 285 under this issue is that the charge on
imported auto parts resulting from the measures is an internal charge subject to the first sentence of
Article III:2 of the GATT 1994 because it is triggered by the actual use of these parts in the
assembling of complete vehicles taking place inside China after importation. The complainants argue
that if the charge were truly an "ordinary customs duty", it would be assessed solely on the status or
condition of these goods at the moment they were presen ted at the border "on their importation" into

specific vehicle. As a result, concludes the United States, the measures wait until the vehicle has been
assembled before making the final assessment of charges (United States' response to Panel question No. 176).
283 United States' first written submission, para. 76-80; first oral statement, paras. 23-26; second oral
statement, paras. 14 and 16-17; second written submissi on, para. 22 and footnote 13 to para. 22; responses to
Panel question Nos. 87, 90 and 186; comments on China's response to Panel question No. 134.
284 Canada's first written submission, para. 84 and footnote 114 to this paragraph; response to Panel
question No. 90(a).
285 Argentina, Australia, Japan and Mexico, who participated in the Panel's proceeding as third parties
and submitted written submissions, support the complainants ' view on this issue. (see Argentina's third party
submission, paras. 8-17; Argentina's oral statement, paras. 2-7; Australia's oral statement, paras. 4-16; Japan's
third party submission, paras. 4-22; Japan's oral statement, paras. 2-11; and Mexico's third party submission,
paras. 4-6). Brazil did not express any views on the proper characterization of the measures at issue but
highlighted key considerations regarding the differences between Article II and III of the GATT 1994 (see
Brazil's oral statement, paras. 2-9).

China
286, as required by a proper interpretation of the first sentence of Article II:1(b) of the GATT
1994, not on their use inside China in the assembly of complete vehicles. To the complainants, an
"ordinary customs duty", even if collected after th e time or point of importation, must be assessed
taking into consideration only the state of the product at the moment of importation. The stated policy
purpose of the measures, the description and characterization of the charge under the measures as well
as the fact that the charge is co llected by the customs authority ar e all irrelevant factors to the
determination of whether the charge is an "ordinary customs duty".
7.120 China, however, submits various arguments in s upport of its defence that the challenged
measures impose ordinary customs duties under Article II:1(b), first sentence, of the GATT 1994.
First, because the charges are imposed conditioned upon the entry of goods into China. Additionally,
because these charges are imposed "on their importati on" within the meaning of Article II:1(b), first
sentence, because they relate to, or fulfil, a condition of liability that attaches at the time of
importation.287 Further, these charges are ordinary cust oms duties also because they are charges
China is allowed to impose by reason of , or as a condition of , the importation of the product,
irrespective of the precise time and place when and where they are imposed or collected. 288 Finally,
China explains that an important factor in the characterization of the charges as ordinary customs
duties is that they are imposed by measures that implement and enforce China's Schedule of
Concessions by giving effect to the provisions of Ch ina's Schedule relating to "motor vehicles." They
do so by defining the circumstances under which China will classify imported auto parts and
assemblies as having the essential character of a complete motor vehicle under these tariff
provisions.289 This is done irrespective of how importe rs choose to structure such auto part
importations: either in a single or in multiple shipments. It is therefore the importation of parts of
registered vehicle models, i.e. those containing imported parts that assembled together have the
essential character of a complete vehicle, that trigge rs the imposition of the charge, not their internal
use.
7.121 In light of the parties arguments on whether th e charge falls within the scope of the first
sentence of Article III:2 of the GATT 1994 or the first sentence of Article II:1(b) of the GATT
1994
290, the Panel considers that it must examine these two provisions in accordance with the
customary rules of treaty interpretation under the Vienna Convention on the Law of Treaties ("Vienna
Convention")291. In doing so, we will also follow the inte rpretative approach taken by the Panel in
India – Autos:
"The Panel feels that it is vital that th e task be approached solely through an
application of the customary rules of inte rpretation of public international law as

286 Or based on their "snapshot", as Canada calls it (see Canada's response to Panel question No.90(b));
or based on the goods "as entered" (see United States' second written submission, para. 22).
288 China's first written submission, para. 7; second written submission, para. 115; responses to Panel
question Nos. 87 and 109.
290 European Communities' second written submission, para. 36 and footnote 34; United States' second
written submission, para. 23; Canada's second written su bmission, para. 27; and China's responses to Panel
question Nos. 79 and 88.
291 See Article 3.2 of the DSU. These rules require an interpretation in good faith in accordance with
the ordinary meaning to be given to the terms in their context and in the light of the object and purpose of the
agreement (Article 31 of the Vienna Convention ). Recourse may be had to supplementary means of
interpretation in accordance with Article 32 of the Vienna Convention. See, e.g., the Appe llate Body Report on
US – Gasoline , DSR 1996:I, page 16-17; Appellate Body Report on Japan – Alcoholic Beverages II , DSR
1996:I, page 104; and Appellate Body Report on India – Patents (US), paras. 45-46.

required by Article 3.2 of the DSU. This should occur without any presumption as to
some preordained or systemic balance betw een the two Articles. The customary rules
provide sufficient mechanisms to ensure an appropriate outcome that should deal with
such concerns, as they require considerati on of ordinary meaning in context and in
the light of object and purpose of the treaty. In this regard, context includes a reading
of each Article in relation to other potentia lly relevant provisions and an analysis,
where necessary, of any differences in terminology. The principle of effectiveness
would also apply to prevent reducing any provision to inutility.
While other provisions in the WTO Agreement may usefully be considered as part of
the context which informs the meaning of a given provision, the scope of that
provision should not be assumed a priori to vary depending on the mere presence of
other provisions which may have some releva nce to the situation: the contours of a
provision should flow from its terms, as read in context alongside the other provisions
of the agreement. The Panel is also mindful of the fact that different aspects of a
particular measure may legitimately be c overed by distinct provisions of the WTO
Agreements."
292
(ii) Internal taxes or other internal charges within the meaning of Article III:2 of the GATT 1994
Arguments of the parties
7.122 The European Communities argues that internal charges under Article III:2 of the GATT
1994 are not imposed on "products on their importation into the territory", but on products already
"imported into the territory".293
7.123 The United States submits that an examination of the language used in Article III:2 involves
a relationship between products that have been "i mported into the territory" of a Member with
"internal taxes or other internal charges". Thus, in contrast to ordinary customs duties under
Article II, which are based on the product at the time of importation, an internal charge under
Article III:2 may be associated with the product as it exists after it is impo rted into a Member's
territory.294 The United States submits that the applicabilit y (or not) of Article III:2 follows from this
provision's use of the terms "internal charges" and not from any notion (as China contends) that
Article II provides "permission" for a violation of Article III.
295 For this reason, China is wrong in
asserting that customs duties would always constitute "a violation of the non-discrimination principles
under Article III." The same type of discriminat ion does not apply to customs duties regularly
imposed by WTO Members. That is, the level of charges on other imported products does not depend
on how an imported part is used within the Member's territory.296
7.124 Canada adds that the Appellate Body and GATT acquis have made it abundantly clear that
Article III exists to prevent discrimination against im ported products, by protecting expectations of an
equal competitive relationship between imported and domestic products. The protection afforded by
Article III does not work simply in respect of products once in the internal market, but also in respect
of establishing the very point at which na tional treatment must apply. That point must be when a

292 Panel Report on India – Autos , paragraphs 7.222 and 7.223. The complainants agreed with this
approach in their respective responses to Panel question No. 203.
293 European Communities' second written submission, para. 38.
294 United States' response to Panel question No. 186.
295 United States' second oral statement, para. 9.
296 United States' second oral statement, para. 12.

product is physically presented at the border. Otherwise, how can the objective of Article III be
realized when the very scope of the tariff concession s is uncertain, and the border itself can be set as a
Member sees fit so as to deny national treatment?
297
7.125 China submits that 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 unde rstanding of what it means for products to have
completed the process of importation. It is the completion of this process that marks the turning point
between permissible discrimination under Article II and impermissible discrimination under
Article III. In China's view, 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 a 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.
298
Consideration by the Panel
7.126 The first sentence of Article III:2 of the GATT 1994 provides:
"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall not be subject, directly or indirectly, to internal taxes
or other internal charges of any kind in ex cess of those applied directly or indirectly,
to like domestic products."
7.127 Neither Article III:2 of the GATT 1994 nor an y other WTO covered agreement provides a
definition of the term "internal taxes or charges". The Dictionary of Trade Policy Terms defines
"internal taxes" as follows:
"Government charges applied to sale of goods and services inside a customs
territory. Article III of the GATT requires that such charges are levied at the same
rate for domestic products as for impo rted products. In other words, national
treatment is a fundamental obligation in this regard. ..."299
7.128 This definition of "internal taxes" above illustra tes that the term "internal" seems to indicate
that the element triggering the obligation to pay th e charge – for example, the sale of the good – takes
place inside the customs territory.
7.129 This also appears to be in line with the langua ge of the first sentence of Article III:2 of the
GATT 1994, which refers to "the products of the territory of any contracting party imported into the
territory of any other contracting party". 300 In other words, products that have already been imported
into the customs territory of a Member should not be subject to internal taxes and other internal

297 Canada's second written submission, para. 13.
298 China's response to Panel question No. 37.
299 Dictionary of Trade Policy Terms , W. Goode, WTO Fourth Edition, 2003, page 184. Emphasis
added.
300 Emphasis added. Article III:1 also refers to imported products.

charges in excess of those applied to like domestic products. Thus, the imposition of an internal
charge is not triggered by the act of importing a product into to the territory of any other contracting
party.
301
7.130 We also find useful guidance from previous GATT jurisprudence on the question of whether
a charge is subject to the disciplines of Article s II or III of the GATT 1994. For example, in the
GATT Panel Belgium – Family Allowances , the Panel considered that because a levy was "collected
only on products purchased by pub lic bodies for their own use and not on imports as such, and that
the levy was charged, not at the time of importa tion, but when the purchase price was paid by the
public body" as enough reason to characterize such a levy as an "internal charge" under
Article III:2.302 In Canada – Gold Coins, an unadopted GATT Panel Report, the panel, faced with the
question of whether an Ontario provincial sales ta x measure on gold coins was within the scope of
Articles III or II of the GATT, noted, based on the language of Belgium - Family Allowances, that the
tax was levied at the time of retail sale of goods within the province, not at the time of importation
into Canadian territory and thus affected the in ternal retail sale of gold coins rather than the
importation of Krugerrands as such. The panel therefore considered that the tax was an "internal tax"
under Article III and not an "import charge" under Article II.303
7.131 Furthermore, in Argentina – Hides and Leather , the panel found that the pre-payment of the
Value-Added Tax (VAT) established by the chal lenged measure was an internal measure under
Article III:2, first sentence, because the measure a pplied to "definitive import transactions, but only if
the products imported were sub sequently re-sold in the internal Argentinean market." 304 In other
words, the measure provided for the pre- payment of the VAT chargeable to an internal transaction.
Furthermore, the panel, relying on Ad Note Article III of the GATT 1994, stated that the fact that the
charge was "collected at the time and point of importation" did not preclude it from qualifying as an
"internal tax measure".305
7.132 Consistent with those GATT and WTO panels, we also consider that an important element
that would indicate that a charge constitutes an "i nternal tax or other internal charge" within the
meaning of Article III:2 of the GATT 1994 is whet her the obligation to pay such charge accrues
because of an internal factor (e.g., because the product was re-sold internally or because the product
was used internally), in the sense that such "internal factor" occurs after the importation of the
product of one Member into the territory of another Member.
7.133 We find contextual support for this reading in Ad Note Article III of the GATT 1994, which
clarifies that any internal tax or other internal ch arge which applies to an imported product and to the
like domestic product and is collected in the case of the imported product at the time or point of
importation is nevertheless to be regarded as an internal tax or other internal charge within the scope
of Article III. The Ad Note Article III, therefore, appears to confirm that when or where the internal
charge is collected is not necessarily the decisive criterion to indicate that it falls within the scope of
Article III:2 of the GATT 1994.306

301 Obviously, importation is a necessary prerequisite to become an "imported product" and thus to be
given national treatment on internal taxation. See also paragraph 7.133, below.
302 GATT Panel Report on Belgium - Family Allowances, para. 2 (emphasis added).
303 GATT Panel Report on Canada – Gold Coins (unadopted), para. 50. See also footnote 269.
304 Panel Report on Argentina – Hides and Leather , para. 11.145 (emphasis added, original footnote
omitted).
305 Panel Report on Argentina – Hides and Leather, para. 11.145.
306 See also Panel Report on India – Autos, para. 7.260. The Panel in India – Autos stated that "the fact
that the measure applies only to imported products need no t, in itself, be an obstacle to its falling within the

7.134 However, China submits that the charge under the measures is an ordinary customs duty, not
an internal charge because it is imposed as a condition of – that is, by reason of – the importation of a
product (auto parts) into China's customs territory and that this charge objectively relates to a duty
liability that arises by reason of the importation of the product . In other words, China is of the view
that the assessment of the charge based on the as sembly of auto parts into motor vehicles is a
condition of the importation of such auto parts.
7.135 Given China's arguments, we will next turn to the meaning of the term "ordinary customs
duties" in Article II:1(b), first sentence, of the GATT 1994, before analysing whether the charge under
the measures falls under either Article II:1(b), first sentence, or Article III:2 of the GATT 1994.
"Ordinary customs duties" within the meaning of Article II:1(b) of the GATT 1994
7.136 Article II:1(b) of the GATT 1994 provides:
"The products described in Part I of the Schedule relating to an y contracting party,
which are the products of territories of other contracting parties, shall, on their
importation into the territory to which the Schedule relates, and subject to the terms,
conditions or qualifications set forth in that Schedule, be exempt from ordinary
customs duties in excess of those set forth and provided therein. Such products shall
also be exempt from all other duties or charges of any kind imposed on or in
connection with the importation in excess of those imposed on the date of this
Agreement or those directly and mandator ily required to be imposed thereafter by
legislation in force in the importing territory on that date." (emphasis added)
7.137 The Panel first recalls its statement at paragraph 7.121 above that it would follow the
interpretative approach taken in India – Autos in dealing with the preliminary issue as to whether the
charge under the measure falls within the scope of either Article II:1(b) or III:2 of the GATT 1994.
We recall in particular our endorsement of that pane l's statement that "[w]hile other provisions in the
WTO Agreement may usefully be considered as part of the context which informs the meaning of a
given provision, the scope of that provision should not be assumed a priori to vary depending on the
mere presence of other provisions which may have some relevance to the situation: the contours of a
provision should flow from its terms , as read in context alongside the other provisions of the
agreement."
307
7.138 With this statement in mind, we recall our conclusion above at pa ragraph 7.105 that the
preliminary question before us is whether the charge under the measures is an "ordinary customs

purview of Article III. For example, an internal tax ... conditioning the sale of the imported but not of the like
domestic product, could nonetheless 'affect' the conditions of the imported product on the market and could be a
source of less favourable treatment." It further observed that "Article III:1 refers to the application of measures
'to imported or domestic products', which suggests that application to both is not necessary." (Panel Report on
India – Autos, para. 7.306 and footnote 437; original footnotes were omitted).
We concur with the Panel in India – Autos. We do not consider that the language of Ad Note Article
III supports the interpretation that any charge not imposed on domestic products would fall ipso facto outside
the scope of Article III:2 of the GATT 1994. Otherw ise, Members could easily escape the application of
Article III:2 of the GATT 1994 by simply exempting domestic products from a charge that would otherwise be
internal.
See also China's response to Panel question No. 88 and the complainants' respective responses to Panel
question No. 88.
307 Panel Report on India – Autos, para. 7.223 (emphasis added).

duty" under the first sentence of Article II:1(b) of the GATT 1994 or an "internal charge"
308 under
Article III:2 of the GATT 1994. We are of the view therefore that the ordinary meaning of the words
"ordinary customs duties" in the firs t sentence of Article II:1(b), read in their context and in light of
the object and purpose of the GATT 1994, is an im portant element in our preliminary task to
determine which provision of the GATT 1994 the charge falls under.
Ordinary meaning of an "ordinary customs duty"
7.139 The term "ordinary customs duties" is not defined in the WTO covered agreements.
Regarding the ordinary meaning of "customs duties", we do find some guidance in the following
definitions:
"Duties laid down in the Customs tariff to which goods are liable on entering or
leaving the Customs territory";
309
"2. (pl.) Duties imposed on imports and exports. 3. ( pl.) The agency or procedure for
collecting such duties";310
"charges levied at the border on goods entering or, much less often, leaving the
country":311
7.140 The definitions of "customs duties" above seem to indicate that "customs duties" refer to
"duties or charges" imposed when goods enter or leave the customs territory and because of
importation or exportation.312 "Customs territory" can be defined as follows:
"The geographical territory upon which a sovereign nation imposes its import and
export regulations and duties. Certain territorial possessions and special economic
zones (such as foreign trade zones) are ofte n considered outside the customs territory
of a nation."313

308 We consider that the precise categ orization of the charge as an "int ernal tax" or an "other internal
charge" within the meaning of Article III:2 of the GATT 19 94 is immaterial to the present case. Therefore, and
without prejudice to the relevance of distinguishing th ese subsets of charges in other cases, in the present
proceedings we will simply use "internal charge" in lieu of them.
309 WCO, Glossary of International Customs Terms, 2006, page 8; Revised Kyoto Convention, General
Annex, Chapter 2 and 4.
310 Black's Law Dictionary, Seventh Edition, 1999, page 390.
311 Dictionary of Trade Policy Terms, W. Goode, WTO Fourth edition, 2003, page 90.
312 The Panel in Chile – Price Bands System elaborated on the dictiona ry meaning of "ordinary",
including its French and Spanish versions. The Panel explained that:

"the dictionary meaning of 'ordinary' is 'occurring in regular custom or practice', 'of common
or everyday occurrence, frequent, abundant', 'of the usual kind, not singular or exceptional,
commonplace, mundane' ' Propiamente dicho ' has been translated as 'true (something)' or
'(something) in the strict sense'. ' Proprement dit ' has been explained as ' au sens exact et
restreint, au sens propre ' and ' stricto sensu'." (Panel Report on Chile – Price Bands System ,
para. 7.51. Footnotes omitted).

313 Handbook of the Global Trade Community, Dictionary of International Trade , E. Hinkelman,
Fourth Edition, 2000, page 59.

7.141 Although WTO/GATT jurisprudence does not provide guidance on the precise definition of
the term "ordinary customs duties",
314 we nevertheless find useful the following statement of the
Appellate Body in Chile – Price Bands System on the interpretation of "variable import levies" within
the meaning of footnote 1 to Article 4.2 of the Agreement on Agriculture:
"We begin with the interpretation of 'var iable import levies'. In examining the
ordinary meaning of the term 'variable import levies' as it appears in footnote 1, we
note that a 'levy' is a duty, tax, charge, or other exaction usually imposed or raised by
legal execution or process. An 'import' levy is, of course, a duty assessed upon
importation. A levy is 'variable' when it is ' liable to vary'. This feature alone,
however, is not conclusive as to what cons titutes a 'variable import levy' within the
meaning of footnote 1. An 'ordinary customs duty' could also fit this description. A
Member may, fully in accordance with Article II of the GATT 1994, exact a duty upon
importation and periodically change the rate at which it applies that duty (provided
the changed rates remain below the tariff rates bound in the Member's Schedule)."
315
(original footnotes omitted; emphasis added)
7.142 Although the Appellate Body in Chile – Price Band System was not concerned with the
delineation between "ordinary customs duties" and "internal charges", this reasoning indicates that the
act of importation is an important element 316 for the analysis of whethe r a charge falls within the
scope of Article II:1(b), first sentence, of the GATT 1994.
7.143 We will now move on to examine the scope of "o rdinary customs duties" in its context, in
particular, the first sentence of Article II:1(b) of the GATT 1994, which requires that the products of
one Member shall, "on their importation" into th e territory of another Member, be exempt from
ordinary customs duties in excess of those set fort h and provided in the Schedule of the importing
Member. In the following section, we will therefor e analyse whether the term "on their importation"
provides further guidance on the meaning of "ordinary customs duties".
"Ordinary customs duties" in the context of the first sentence of Article II:1(b) - "on
their importation"
Arguments of the parties
7.144 The European Communities disagrees with China's various formulations on the scope of
Article II:1(b) of the GATT 1994. Under the first sentence of this provision ordinary customs duties
can only be imposed on the importation of the product not in connection with the importation. These
various formulations made by Chin a are vague and simply used as an attempt to widen the scope of
Article II to the detriment of that of Article III of the GATT 1994. There is nothing in law that
supports China's position that Article II applies to charges that relate to a valid customs duty that a

314 In the one occasion a panel has attempted to define "ordinary customs duties", albeit in the context
of Article 4.2 of the Agreement on Agriculture, it was overruled by the Appellate Body. In Chile – Price Bands
System, the panel defined an ordinary customs duty as "referring to a customs duty which is not applied on the
basis of factors of an exogenous nature" (Panel Report on Chile – Price Band System , para. 7.52). The
Appellate Body disagreed with such definition stating that it did not have any basis either on the ordinary
meaning or the context of Article II:1(b), first sentence, of the GATT 1994 (Appellate Body Report on Chile –
Prince Bands , paras. 271-278). The Appellate Body did not however present its own definition of ordinary
customs duties in lieu of that of the panel.
315 Appellate Body Report on Chile – Prince Band Systems, para. 232.
316 As we will discuss below, importation is not the only element to the determination as to whether a
charge falls within the scope of the first sentence of Article II:1(b) of the GATT 1994.

Member is allowed to impose, or to those that are imposed as a condition of the importation of the
product into other Members.
317 Although not defined in the GATT 1994, an "ordinary customs duty",
within the meaning of Article II:1(b), first sente nce, of the GATT 1994 would be one set out in a
country's tariff schedule and generally denotes a fina ncial charge in the form of a tax imposed "on
importation" and the liability to which is created by the importation. On the other hand, "other duties
and charges" within the meaning of Article II:1(b), second sentence, of the GATT 1994 aims
generally at preventing undermining the prohibitio n of Article II:1(b), first sentence, to impose
ordinary customs duties in excess of the bindings. 318 This different language indicates that "ordinary
customs duties" cannot be imposed "in connection with the importation".319
7.145 The European Communities further submits that the term "on importation" has both a
temporal and material aspect. The temporal aspect means that "ordin ary customs duties" are
generally collected "at the time or point of importation", as suggested by the language of
Interpretative Note Ad Article III:2 of the GATT 1994. 320 However, although the precise time and
place of the actual payment or collection of a charge may happen after importation and is not
determinative of the nature of the charge as a border charge, the determination of the amount due
must be done "on importation", i.e. on the basis of the objective characteristics of the product when
presented for classification at the border.321 The European Communities asserts that China attempts to
overstretch such temporal aspect by stating that "on importation" encompasses a "process of
importation", the same process China contends th e measures provide for, which is only over after all
customs-related formalities are satisfied and there is no longer any customs control over the imported
goods. The European Communities finds, therefore, not surprising that China asserts that the entire
administrative procedure under Decree 125 and Announ cement 4 is part of such customs-related
formalities.322 A s t o t h e material aspect of the term "on importation", the European Communities
maintains that it means that a charge is levied "on the importation" if it is due because of the
importation of the product, but not because of other even ts or criteria, e.g. the amount of local content
in products into which the imported product is sub sequently assembled. This is confirmed by the
difference of scope between the first and second sentences of Article II:1(b) of the GATT 1994. 323
China attempts to extend such material aspect by suggesting that a charge is levied "on importation"
when it "bears an objective relationship to the administration and enforcement of a valid customs

317 European Communities' responses to Panel ques tion Nos. 84 and 246; second written submission,
para. 45.
318 European Communities' responses to Panel question Nos. 96(a) and 96(b); second written
submission, para. 38.
319 European Communities' response to Panel question No. 100. The European Communities also
recalls that there is also no definition or jurisprudence defining the words "in connection with the importation"
in Article II:1(b), second sentence, of the GATT 1994. It argues that the GATT Panel in EEC – Parts and
Components simply cited certain factors (e.g. the policy purpose of a charge, the mere description or
categorization of a charge under domest ic law or the treatment of the goods "as not being in free circulation")
that were not relevant to provide the required "connection with the importation." (European Communities'
responses to Panel question Nos. 98 and 189).
320 European Communities' second written submission, paras. 39-40.
321 European Communities responses to Panel question Nos. 87, 180 and 186; observations on the
letter of the WCO Secretariat of 30 July 2007 (WCO's response to question 18).
322 European Communities' second written submission, para. 43; responses to Panel question Nos. 181
and 183.
323 European Communities' second written submissi on, paras. 39 and 41. See a more detailed
description of the parties' arguments on the relationship between the two paragraphs of Article II:1(b) of the
GATT 1994, below at paragraphs 7.168 to 7.172.

liability", an overly broad, imprecise and unsuitabl e concept not found in the language of the first
sentence of Article II:1(b).
324
7.146 The United States equally disagrees with China's understanding that the term "on their
importation" in Article II, first sentence, of the GATT 1994 includes measures that Members are
allowed to impose " conditional upon the importation of a product" or those that are merely " related"
to importation. There is no textual or contextu al basis presented by China for such a broad
interpretation. In fact, China's use of the expression "conditional upon" is so broad that it would seem
to allow an internal sales tax to be different for domestic products and imported products simply
because the higher tax on imported products would be "conditional" upon the fact that the product had
been imported.325 This demonstrates that China's analysis under this issue is essentially backwards: it
starts with a purported interpretation of its Schedule, then moves to an analysis of Article II stating
that if there is any "relation to importation," then Article II applies to the exclusion of Article III. This
mode of argumentation is based on the false premis e that Article II and China's Schedule give China
the "right" to define a "customs duty" however Chin a sees fit and to adopt measures inconsistent with
Article III in order to collect such supposed "custo ms duties". To the contrary, Article II does not
provide for any of these "rights" as it imposes oblig ations on Members that choose to impose customs
duties. If China were correct that Article II provide d such "rights" to WTO Members then Article III
could be rendered a nullity through the ruse of defining internal charges as "customs duties".326
7.147 The United States further argues that it is mindful that the GATT 1994 does not define the
term "ordinary customs duty" but it understands such term to mean 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 specific 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. "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 duti es. 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 obligations deriving from paragraph 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.'"
327
7.148 For the above reasons, the United States submit s that the imposition of ordinary customs
duties occurs at the time of importation of goods into the te rritory to which a Member's Schedule
relates.328 The reference in Article II:1(b) of the GATT 1994 to "on their importation into the territory
to which the Schedule relates" connects the imposition of the duties to the goods as they exist at the
time of importation. Accordingly, a relationship be tween the charge and the condition of the goods at
the border, at the time of importation, must be pr esent in order for the charge to be an ordinary

324 European Communities' second written submission, para. 44; response to Panel question No. 181.
325 United States' response to Panel question No. 84.
326 United States' comments on China's responses to Panel question Nos. 179(a), 187, 234 and 243;
second written submission, paras. 7-8.
327 United States' responses to Panel question Nos. 96 (a) and 96 (b). The European Communities and
Canada also used a description similar to that used by the United States to describe ordinary customs duties and
other duties and charges under Article II:1(b) of the GATT 1994 (see their respective responses to Panel
question Nos. 96 (a) and 96 (b)).
328 United States' responses to Panel question Nos. 181 and 183.

customs duty within the meaning of Article II:1(b). The United States relies on the findings of the
Appellate Body in EC – Chicken Cuts to support its view on the existence of a necessary connection
between the condition of the good as imported and the cust oms duty, in particular in the part of that
finding that explained that "in characterizing a product for purposes of tariff classification, it is
necessary to look exclusively at the 'objective ch aracteristics' of the product in question when
presented for classification at the border."
329 The United States does not however maintain, nor does
it believe, that there is disagreement between the complainants on this point, that the time and place at
which a charge is collected is the determinative consideration in evaluating whether the charge is an
internal charge or a customs duty. Although it considers that the time and place of assessment or
calculation of the charge would be relevant in evalua ting whether the charge is an internal or a
customs duty.330
7.149 Canada also disagrees with China on the proper interpretation of Article II:1(b), first
sentence, of the GATT 1994 as this provision only provides for the imposition of ordinary customs
duties to products " on their importation" not, as China proposes, " by reason of the importation",
"dependent upon importation" or " conditional upon importation."331 China's various propositions in
this regard are just an attempt to infer, without any basis in the text of Article II or in the practice of
WTO Members, that the application of an ordinary customs duty is somehow related to the ultimate
justification for importation, independent of the proper classification of the good as presented at the
border. This cannot be so as the "reason or event" under the first sentence of Article II:1(b) of the
GATT 1994 is always the same: the physical state of products when arriving at the border . Liability
for an ordinary customs duty can only arise from that single event at the very beginning of the
importation process.
332 The ordinary meaning of "on their importation" in Article II:1(b), read in the
context of Articles I, III and XI, and as evinced by Member practice, demonstrates such
understanding.
333 For example, the reference to "on" in Article II:1(b) of the GATT 1994 emphasizes
a single event and the ordinary meaning of "importation", supported in both the Shorter Oxford
English Dictionary and the WCO Glossary, refers to the physical act of products being brought across
the border into a country. Furthermore, the GATT 1994 generally, GATT acquis, the WTO Appellate
Body and even the WCO support this interpretati on of "on their importation", and confirm that
ordinary customs duties may only be imposed on pr oducts based on their state as presented at the
border.334 Canada clarifies however that while ordinary customs duties must, as stated above, be

329 United States' response to Panel question No. 186.
330 United States' response to Panel question No. 180.
331 Canada's responses to Panel question Nos. 84 and 180. Canada and the other co-complainants have
also made the point that the use of the expression "co nditional upon importation", that China borrowed from the
GATT Panel Report on EEC – Parts and Components , does not have any legal valu e, because, besides the fact
of not being supported by the text of Article II itself, this expression was not even used in that GATT panel in a
legal sense in its findings on the proper interpretation of that Article. To them, the GATT panel's use of that
expression was only a reference to an argument put forw ard by the then EEC, which, in any case, was made in
the context of the second sentence of Article II:1(b). See also the responses of the European Communities and
the United States to Panel question No. 84.
332 Canada's responses to Panel question Nos. 13(a), 179(b), 181 and 183; first oral statement, para. 22;
second written submission, paras. 15 and 39.
333 Canada's second written submission, para. 17.
334 Canada's second written submission, paras. 18-23. In support of this interpretation, Canada cites the
GATT panel in Canada – FIRA , which emphasized that Article XI, whic h also contains the expression "on
importation", shows the intention of the drafters of the GATT to define the concept of "importation" narrowly so
as to prevent it from covering internal requirements on "imported products". Canada argues that this link to the
state of products on physical entry is also supported by the drafting history of Article II and the language of the
Interpretative Ad Note Article III. Canada recalls that in EEC – Parts and Components , the panel said that in
characterizing a charge as subject to Article II or Article II I:2 "[t]he relevant fact, according to the text of these

based on the state of goods as presented at the border, there is some flexibility for the application of
"other border charges" until a product is ava ilable for internal use within a Member.
335 A s C h i n a
alleges that its measures impose "ordinary customs du ties", that flexibility is not relevant to this
dispute. Regardless, the measures apply well after the process of importation is complete and must be
internal measures.336 Finally, even if China had explicitly included in its Schedule a note allowing it
to impose conditions on the importation of auto part s as an "ordinary customs duty", it could not rely
on that condition to impose internal charges contra ry to Article III of the GATT 1994 as Panels have
consistently ruled that Members cannot use condi tions reflected in a Schedule so as to justify
measures otherwise inconsistent with their WTO obligations.337
7.150 Canada also clarifies however that the precise time and place of the collection of a charge is
not determinative of whether it falls within the scope of Article I II or Article II of the GATT 1994.
The actual payment need not take place at the border, nor even must the amount owing be determined
at that point (which could be characterized as th e "calculation" or "assessment" of the charge),
provided that the duty, as Canada explains above, is levied in respect of the good as presented at the
border. Conversely, a clearly internal charge (for example, a value-added tax) may 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 product as presented at a
Member's border. Any border charge, whether collect ed at the border or at some later time, may only
relate to the product at that point in time. If it do es not (i.e., a charge based on end-use), then it must
be an internal charge.
338
7.151 China believes that it is consistent with the c ontext of Article II:1(b), as well as the object
and purpose of the GATT 1994, to interpret the term "on their importation" to encompass charges that
Members impose as a condition of – that is, by reason of – the importation of a product into its
customs territory. Customs authorities may calcu late, assess, and collect a particular charge after the
products have physically entered the customs territory, so long as the charge objectively relates to a
duty liability that arises by reason of the importation of the product. Such charges, and measures that
Members adopt to collect such charges, are with in the scope of Article II of the GATT 1994.
Applying this understanding of the term "on thei r importation", the determ ination of whether a
particular charge is within the scope of Article II will depend upon the reason or event that triggered
the imposition of the charge. China does not pe rceive any substantial disagreement by the
complainants and third parties on this point as th ey also support the conclusion that a measure or

provisions, is not the policy purpose attributed to the char ge but rather whether the charge is due on importation
or at the time or point of importation or whether it is collected internally". According to Canada, this
interpretation has been followed consistently. For example, in EC – Chicken Cuts, both the Appellate Body and
the panel cited with approval the opinion of the WCO that a proper classification is done on the basis of the
objective characteristics of the product at the time of importation, and may be based on a visual inspection and
laboratory analysis. Canada claims that GIR 2(a), on which China places so much emphasis, supports a reading
that classification (and thus assessment of duty which follows it) must occur based upon the time of physical
entry by referring to the state of a product "as presented". Canada also recalls that the Customs Co-operation
Council, the predecessor to the WCO, noted that the words "as presented" replaced the words "imported" in GIR
2(a) "to make it quite clear that the provisions of the Rules concerned applied to a given article in the state in
which it is presented for Customs clearance. " (Canada's second written submission, paras. 18-23; emphasis in
the original).
335 Canada elaborates more on this point as set out below at paragraph 7.170.
336 Canada's second written submission, para. 32.
337 Canada's response to Panel question No. 84, citing the GATT Panel Reports on EEC – Imports of
Beef and US – Sugar.
338 Canada's responses to Panel question Nos. 11, 87, 90, 90(b) and 180.

charge is within the scope of Article II if it relat es to what the United States refers to as "a valid
customs liability."
339
7.152 China adds that the characterization of the ch arges that China collects pursuant to Decree 125
requires an assessment of whether they are charges that China is allowed to impose by reason of the
importation of auto parts and components into its cu stoms territory, i.e., "on their importation" into
China. If the measures fulfil a "valid customs liab ility", they are measures that are subject to the
disciplines of Article II of the GATT. China believ es that this inquiry returns the analysis to the
interpretation of China's tariff provisions for "motor vehicles", and, in particular, to the question of
whether China may classify multiple shipments of auto parts and components on the basis of their
common assembly into a complete article. An importa nt part of this analysis is the meaning of the
term "as presented" in GIR 2(a), and the practice of other WTO Members in resolving the relationship
between complete articles and parts of those articles in the context of customs administration.340
7.153 China then submits that, for the above reasons, the time or place at which the charge is
collected is not determinative; what matters is wh ether the charge fulfils a duty obligation that arises
by reason of the importation of the product. 341 In fact WTO Members routinely assess border charges
after such time or place. Examples of specific customs practices from so me WTO Members support
this point as they show that these countries a llow, in certain general circumstances, duty
(re)determinations and payments after the importation and entering into free circulation of the goods.
For instance, in the United States final classification determinations and duty liability assessments can
be made up until one year after the merchandise has en tered the US customs territory and been in free
circulation. Duties paid "at the time or point of importation" are merely estimated duties.
Additionally, in many (if not most) cases, the merchandise has been sold, consumed, processed, or
used in the manufacture of other products by the time that customs duties are actually imposed and
collected.
342 Therefore, and consistent with Article 31(3)(b) of the Vienna Convention, the term "on
their importation" must be interpreted in the light of the consistent and widespread practice among
Members of imposing customs-related measures, and collecting customs duties, after goods have
crossed the frontier.343
Consideration by the Panel
7.154 The Panel first notes China's argument 344 that the meaning of the word "importation" alone
would suffice to the inquiry of whether the charge under the measures falls within the scope of Article
II or III of the GATT 1994. 345 In the first sentence of Article II:1(b) of the GATT 1994, however, the

339 China's second written submission, paras. 102-104; response to Panel question No. 54.
340 China's second written submission, para. 105-106.
341 China's second written submission, paras. 102-104; response to Panel question No. 54.
342 China cites examples from customs laws of Australia, Canada, India, the European Communities
and the United States. China also says that many countries also have "more specialized circumstances" in which
duties can be assessed after the time or point of importation: (i) goods initially in transit but that subsequently
enter free circulation; (ii) payment of imports that fail to adhere to conditions for temporary duty-free
importation; or (iii) payment of imports that fail to ad here to inward processing and re-export requirements
(China's first written submission, para. 66). See also Ch ina's first written submission, paras. 63-65 (including
footnote 34 to para. 65) and 101.
343 China's response to Panel question No. 179(a); China's second written submission, para. 101.
344 China's responses to Panel question Nos. 87 and 89.
345 We are mindful that other panels have identified the words "importation" and "imported" as
important and relevant to the delineation between border and internal measures (encompassing fiscal and non-
fiscal aspects). But the question before us is a narrower one: the categorization of a charge, which is the fiscal

word "importation" is preceded by the preposition "o n" and the pronoun "their", and followed by the
words "into the territory". Therefore, we will consider both terms "on their importation", in its
entirety, and "into the territory" in examining the meaning of an "ordinary customs duty".
7.155 The word "importation" can be defined as: the "bringing of goods into a country from
another country";
346 the "action of importing or bringing in something, spec. goods from another
country";347 and "the act of bringing or causing any goods to be brought into a customs territory". 348
The ordinary meaning of the word thus indicates that "importation" is an action with a locational
element as it refers to "[t]he bringing of goods into a country from another country." This locational
element is reinforced, in the context of Article II: 1(b), first sentence, by the reading of "importation"
together with the words "into the territory". We further note that the dictionary definitions of
"importation" refer to it as an "action" or an "act" in the singular and not to various "actions" or "acts"
in the plural.
7.156 The preposition "on" and the pronoun "their" furt her qualify the word "importation": "their"
by indicating which products "importation" refers to (i.e., those "products described in Part I of the
Schedule relating to any contracting party, which ar e the products of territories of other contracting
parties ... "); and, "on" by potentially providing either a temporal or relational precision to the act it
modifies. We therefore attach particular importanc e to the word "on", which, as a preposition, is
defined in the Shorter Oxford English Dictionary, inter alia as follows:
"on / preposition. … II Of time, or action implying time . 6 During, or at some time
during (a specified day or part of a day) ; contemporaneously with (an occasion).
Also (now chiefly US & Austral. ) in or at (any period of time); dial. & US used
redundantly with tomorrow, yesterday. b Within the space of; in (a length of time).
c Exactly at or just coming up to (a specified time), just before or after in time. 7 On
the occasion of (an action); immediately after (and because of or in reaction to), as a
result of."
349
7.157 The Webster's New Encyclopedic Dictionary , on the other hand, defines "on" inter alia as
follows:
"on / prep … 4: with respect to <agreed on a price> 5a: in connection, association,
or activity with or with regard to < on a committee> < on a tour> b in a state or
process of <on fire> <on the increase> 6: during or at a specified time <every hour
on the hour> <cash on delivery> …" 350
7.158 We note that some of these meanings carry a precise and strict temporal connotation, as
argued by the complainants, others, a more flexible, relational one, as argued by China. We are also
mindful that those are not the only ordinary meanings of the word "on", but we believe they are the
ones more closely related to the context of Article II:1(b), first sentence, of the GATT 1994.

aspect of the Chinese measures. Thus, this circumstan ce requires a reading of the word "importation" in its
proper proximate context, which is the first sentence of Article II:1(b) of the GATT 1994.
346 Black's Law Dictionary, Seventh Edition, 1999, page 759.
347 The Shorter Oxford English Dictionary, 2002 (5th edition), Volume 1, page 1331.
348 WCO, Glossary of International Customs Terms, 2006, page 16.
349 The Shorter Oxford English Dictionary, 2002 (5th edition), Volume 2, page 1996.
350 Webster's New Encyclopedic Dictionary, 2003 ed., page 701.

7.159 We have also reviewed the French and Spanish te xts of the first sentence of Article II:1(b) of
the GATT 1994, which are equally authentic.
351
7.160 The French text of the first sentence of Article II:1(b) reads:
proprement dits plus élevés que ceux de cette liste." (emphasis added).
7.161 We note that, unlike the two alternative applicable meanings of "on" in English we have
identified above at paragraph 7.158, the dictionary Le Grand Robert de la langue française
352, gives
only the preposition "à" ("on" in English) a temporal meaning as follows:
"À
TEMPS.
 [a] Avec un verbe ou un nom d'action. A rriver, venir, rentrer... à l'aube, au
soir, à la nuit. Ils sont venus à l'époque, au moment, à l'instant où..., au moment dit,
prévu, à l'heure dite.
 [b] Mod. Avec un nom d'action (ci-d essus) ou un repère temporel. à l'annonce
de... à ces mots, à ce signal, telle chose se passa."

7.162 The Spanish text of the first sentence of Article II:1(b) reads:
contratantes, que son productos de los te rritorios de otras partes contratantes, no
estarán sujetos -al ser
en cuenta las condiciones o cláusulas especi ales establecidas en ella- a derechos de
7.163 Similarly to the French text, we also conclude that the expression "on their importation" ("- al
ser importados ") in the Spanish text of the first senten ce of Article II:1(b) points us more in the
direction of a temporal meaning than a relational one. In reaching such a conclusion we first note
that the Real Academia Española states that the construction " al" (which is the contraction of the
preposition " a" and the article " el") when followed by an infinitive verb , usually amounts to a
"temporal subordinate clause". 353 We further note that in another publication, the Real Academia
Española states that the combination of < Al + infinitive> "indicates simultaneity between the time of
the subordinate event and the time of the main event, and amounts to when with a finite verb."354 We

351 See the final clause of the WTO Agr eement. See also the Panel Report on EC – Trademarks and
353 See Esbozo de una Nueva Gramática de la Lengua Española (Real Academia Es pañola, 3.16.5,
page 487).
354 Unofficial translation. Gramática Descriptiva de la Lengua Española (Real Academia Española,
y el tiempo del evento principal y equivale a cuando con verbo finito." Ibid. See also the Diccionario de uso
del Español (by María Moliner, 1987, Vol. I, page 107), according to which the construction "al" is widely used
before a verb in the infinitive to express the "momenta neous simultaneity" of the action expressed by this term
with another action.

are mindful, on the other hand, that there are also pa rticular exceptions to such grammatical rules, in
which the combination of < Al + infinitive> does not have a temporal connotation. For such cases, in
order to verify the temporal value of the construction " al + infinitive", the Real Academia Española
indicates that this can be confirmed by posing the question "when?"
355
7.164 Applying the above grammatical rules to the presen t case, we first note that the Spanish text
of the first sentence of Article II:1(b) contains the phrase " al ser importados" (on their importation).
We further note that this phrase contains the construction " al" (resulting from the contraction of the
preposition " a" and the article " el") together with the infinitive verb " ser" and followed by the
participle "importado", which indicates a verbal action in the passive voice. We therefore believe
that the use of the phrase " al ser importados " in the Spanish text of the first sentence of
Article II:1(b) was meant to have a temporal ordinary meaning. The "temporal value" of this phrase
is further confirmed by the fact that it is possible to answer the question when? In the present case,
this question should be: when shall the products described in the first sentence of Article II:1(b) be
exempt from ordinary customs duties in excess of those set forth in the Part I of the Schedule? To
which the answer is: "on their importation" ("al ser importados").
7.165 Under Article 33(3) of the Vienna Convention "[t]he terms of the treaty are presumed to have
the same meaning in each authentic text." 356 As a consequence, in interpreting these terms we should
"seek the meaning that gives effect, simultaneously, to all the terms of the treaty, as they are used in
each authentic language." 357 Following the guidance provided by the Appellate Body in EC – Bed
Linen (Article 21.5 – India) 358, we note that our analysis above reveals that the only "simultaneous"
ordinary meaning of "on" as used in each auth entic language version of the first sentence of

355 See Gramática Descriptiva de la Lengua Española (Real Academia Española, Vol. II, 48.5.3,
page 3187).
356 Appellate Body Report on US – Countervailing Duty Investigation on DRAMs, footnote 176 to para.
111.
357 Appellate Body Report on US – Softwood Lumber IV , para. 59. The Appellate Body also noted in
footnote 50 to para. 59 that:

"[I]n discussing the draft article that was later adopted as Article 33(3) of the Vienna Convention, the
International Law Commission observed that the 'presumption [that the terms of a treaty are intended to
have the same meaning in each authentic text] requi res that every effort shou ld be made to find a
common meaning for the texts before preferring one to another' ( Yearbook of the International Law
Commission (1966), Vol. II, page 225). With regard to the application of customary rules of
interpretation in respect of treaties authenticated in more than one language, see also International
Court of Justice, Merits, Case Concerning Elettronica Sicula S.p.A. (ELSI) (United States v. Italy)
1989, ICJ Reports, para. 132, where, in interpreting a provision of the Treaty of Friendship, Commerce
and Navigation between the United States of America and the Italian Republic of 1948, the
International Court of Justice noted that it was possibl e to interpret the English and Italian versions 'as
meaning much the same thing', despite a potential divergence in scope. "

358 Referring to Article 33(3) of the Vienna Convention , the Appellate Body in EC – Bed Linen
(Article 21.5 – India) found confirmation for the temporal meaning of the English terms being scrutinized: "The
Spanish terms ('se han cumplido' and 'hayan limitado'), in paragraphs 1 and 4 of Articles 9, have the same
temporal meaning as the English terms ('have been fulfilled' and 'have limited'). The French terms ('sont
remplies' and 'auront limité') can also accommodate this temporal meaning." (emphasis added). (Appellate Body
Report on EC – Bed Linen (Article 21.5 – India), footnote 153 to para. 123).

Article II:1(b) of the GATT 1994 is a strict temporal meaning. We therefore conclude that this is the
proper ordinary meaning of the word "on".
359
7.166 With the above conclusion in mind, we consid er that, taken together, the terms "on their
[products] importation" and "into the territory" in th e first sentence of Articl e II:1(b) suggest that
"ordinary customs duties" are charges which the ob ligation to pay accrues based on the products as
they enter the customs territory of another Member. In particular, the strict temporal element of the
word "on", which points to the precise moment of th e action it modifies, indicates that an "ordinary
customs duty" must be assessed on the basis of a good at the moment of importation.
7.167 We proceed to the second sentence of Article II:1(b) of the GATT 1994 to examine whether it
provides any further assistance in understanding the meaning of "ordinary customs duties".
"Ordinary customs duties" in the context of the second sentence of Article II:1(b) –
"on or in connection with the importation"
Arguments of the parties
7.168 The complainants and China disagree on the issue of the relationship between the first and
second sentences of Article II:1(b) of the GATT 1994 a nd the importance of such relationship to the
interpretation of what types of charges qualify as ordinary customs duties.
7.169 The complainants argue that the expression "in connec tion with", only present in the second
sentence, provides important context for the interpretation of "on importation" in the first sentence, for
it demonstrates the narrowness of the notion of "on importation". It s hows that an ordinary customs
duty can only be imposed "on" the importation of a product and never "in connection with" such
importation, for the latter concept is only limited to the imposition of "all other charges and duties."
There is therefore a tighter nexus between "ordin ary customs duties" and importation than between
"all other duties and charges" and importation. For this reason, in contrast to charges imposed "on
importation", those imposed "in connection with import ation" can take into account events other than
the importation as such. WTO jurisprudence on the meaning of the expression "on importation" in
Article XI:1 of the GATT 1994 is not automatically tr ansferable to this issu e because the contexts of
Articles XI:1 and II:1(b) are different. For example, unlike Article II:1(b), Article XI:1 does not make
an express distinction between "on importation" on the one hand and "on or in connection with
importation" on the other. Additionally, Article XI:1 is a broad and comprehensive provision that

359 We also note that had our analysis on the ordinary meaning of "on" focused only on the English text
of the first sentence of Article II:1(b) of the GATT 1994, we would have been presented with the task of
choosing one of the two different meanings claimed by the complainants and China, as described above in
paragraph 7.158. In such case we would have similarly proceeded with our inquiry into which of those two
meanings would be attributable to the word "on" by anal ysing it in its proper context. This was the approach
taken by the Appellate Body in US – Gambling, in which it found that the panel erred by not taking due regard
to the fact that, at least in some contexts, the word being interpreted, "sporting", was indicated in dictionaries as
meaning "gambling" and "betting". To the Appellate Body the Panel's finding on the meaning of that word was
premature because it "should have taken note that, in the abstract, the range of possible meanings of the word
'sporting' includes both the meaning claimed by Antigua and the meaning claimed by the United States, and then
continued its inquiry into which of those meanings was to be attributed to the word as used in the United States'
GATS Schedule." (Appellate Body Report on US – Gambling, paras. 166-167). We understand that in that case
the choice was between different meanings of the word "sporting" given by different dictionaries, not, as in the
present case, between different meanings coming fr om the three authentic language versions of an Agreement
(the GATT 1994). Regardless, we believe that the same general approach would have applied mutatis mutandis
here had we been faced with two choices of meaning instead of one, as stated above.

speaks in terms of "restrictions ... on importation." If anything, such precedents and the difference in
context between Articles II:1(b) and XI:1 confirm th e narrowness of the concept of "on importation"
in Article II:1(b). Finally, even if arguendo the question were instead to whether the charges were
"other duties and charges" within the meaning of the second sentence of Arti cle II:1(b), the Chinese
measures would not pass muster as they do not even provide for charges imposed "in connection with
the importation." And even if they did, and the second sentence of Article II:1(b) was applicable, the
measures would violate such provision because the charges would not have been provided for in
China's Schedule.
360
7.170 Canada further elaborates on this issue saying that China is "misapplying the logic" of the
relevant jurisprudence on Article XI:1 of the GA TT 1994 to the context of Article II:1(b) of the
GATT 1994.361 Article XI:1 applies to the whole of the importation phase, and to direct and indirect
import and export restrictions. Accordingly, it may be appropriate to read into "on importation" the
phrase "in connection with" in the context of Ar ticle XI, since the latter phrase connotes both a
general phase of importation and the application of direct and indirect measures to that importation
phase. The distinction between the specific act of importation and the general importation phase is
also seen in the different language used in the fi rst and second sentences of Article II:1(b) (i.e., "on or
in connection with" in Article II:1(b), second sentence, refers to the general importation phase ). As
the Appellate Body confirmed in Chile – Price Band System , ordinary customs duties are assessed
under the first sentence only, and other duties and charges under the second sentence. "In connection
with" is used because it encompasses both direct charges and other, indirect "duties and charges" that
can be applied throughout the process of importation 362 that begins when a product first arrives at the
border. It encompasses a greater (although still temporally limited) period during the "importation"
stage, and during this period these other charges can be assessed.
363 Therefore, given the contextual
differences between Article XI and Article II:1(b), the expressions "on their importation" and "on the
importation" cannot be read as synonymous by virtue of containing the word "on".364
7.171 China disagrees with the complainants on the u sefulness of comparing the language of the
first and second sentences of Article II:1(b) in order to define their respective scopes. China explains
that while there is considerable ambiguity in this terminology, the most likely explanation for the use
of the different formulation in Article II:1(b), second sentence, is that the types of charges at issue
("other duties or charges") are more varied in na ture than "ordinary customs duties," the subject
matter of Article II:1(b), first sentence. 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. There is a single
event that triggers the Member's right to impo se the ordinary customs duty, and the importer's
obligation to pay it – the importation of the product into the customs territory. This does not mean
however that the ordinary customs duty must be collected at the time or place of importation. An
"other duty or charge," by contrast, may have other, more specific events or conditions that trigger the
right to impose the charge and the obligation to pa y it. These events or conditions would be spelled
out in the Member's Schedule of Concessions. Beca use these events or conditions are more varied,

360 European Communities' responses to Panel question Nos. 97, 189, 197 and 203; European
Communities' comments on China's response to Panel question No. 197; European Communities' second
written submission, para. 41; United States' responses to Panel question Nos. 84, 97-98, 100 and 203; United
States' comments to China's response to Panel questio n No. 246; Canada's response to Panel question No. 203
and Canada's comments on China's response to Panel question No. 197.
361 Canada's comments on China's response to Panel question No. 203.
362 Canada's response to Panel question No. 197.
363 Canada's second written submission, paras. 27-29.
364 Canada's comments on China's response to Panel question No. 203.

the drafters may have used the "in connection w ith" language in Article II: 1(b), second sentence, to
reflect this fact.
365
7.172 After noting the similarity between the expressions "on their importation" in Article II:1(b) of
the GATT 1994 and "on the importation" in Article XI:1 of the GATT 1994, China also argues that
the jurisprudence on the delineation between Article III:4 and XI:1 is highly relevant to the present
case for two reasons. First, because it underscore s the importance of the threshold issue in this
dispute concerning the classification of the challenge d measures in relation to Article II or Article III
by showing that the scope of Article XI must be inte rpreted in relation to the scope of Article III so as
to maintain the distinction between these separa te articles of the GATT 1994, and to avoid reducing
either article to superfluity or inutility. Moreove r, these provisions must be interpreted to maintain
what the Appellate Body has referred to as "the distinction normally made in the GATT between
restrictions affecting the importation of products (i.e. border measures) and restrictions affecting
imported products (i.e. internal measures)." This same rationale is applicable to the delineation
between Articles II and III, and disregarding it would have the effect of rendering inutile a Member's
right to impose customs duties in accordance with its Schedule of Concessions. Secondly, this
jurisprudence establishes the interpretation of the term "on." The Panel report on India – Autos found
that "[a]n ordinary meaning of the term ' on', relevant to a description of the relationship which should
exist between the measure and the importation of the product, includes 'with respect to', 'in
connection, association or activity with or with rega rd to.'" This supports China's interpretation of the
term "on their importation" to encompass charges that a Member collects by reason of (or "with
respect to," or "in connection, association or activ ity with") the importation of a product, without
regard to the exact point in time or space at which the charge is collected."366
Consideration by the Panel
7.173 The Panel first recalls its provisional finding abov e at paragraph 7.166 that the terms "on
their [products] importation" and "into the territory" in the first sentence of Article II:1(b) of the
GATT 1994 suggest that an "ordinary customs duty" is a charge which the obligation to pay accrues
based on the product as it enters the customs territo ry of another Member. We further recall our
emphasis on the strict temporal element of the word "on" in that sentence, which indicates that an
"ordinary customs duty" must be assessed on the basis of a good at the moment of importation.
7.174 The second sentence of Article II:1(b) provides:
"Such products shall also be exempt from all other duties or charges of any kind
imposed on or in connection with the importation in excess of those imposed on the
date of this Agreement or those directly and mandatorily required to be imposed
thereafter by legislation in force in the importing territory on that date." (emphasis
added)
7.175 We note that Article II:1(b) of the GATT 1994 refers to two sets of charges: "ordinary
customs duties", referred to in its first sentence , and "all other duties and charges of any kind",
referred to in its second sentence. This indicates that although contained in the same sub-paragraph of
the same article, these charges are governed differently. This has been confirmed by the Appellate
Body, which stated that "[o]rdinary customs duties are governed by the first sentence of

365 China's response to Panel question No. 97. See also China's responses to Panel question Nos. 96(a),
96(b), 100 and 197.
366 China's response to Panel question No. 203.

Article II:1(b); they are not relevant to the second sentence."
367 Likewise, we consider that the use
of the expression "on their importation" in the first sentence and of the expression "on or in
connection with the importation" in the second sente nce also suggests a diff erence in the scope of
"ordinary customs duties" and "other duties or ch arges". Consequently, any interpretation giving
these two expressions the same meaning would risk reducing the intention of the drafters of the
GATT 1994 to regulate "ordinary customs duties" and "all other duties and charges of any kind"
differently.
7.176 China points out, albeit in the context of Article XI:1 of the GATT 1994, that previous panels
interpreted that the preposition "on" as contained in Article XI:1 meant "with respect to," or "in
connection, association or activity with".
368 The complainants argue th at the conclusion reached in
previous panels on the ordinary, contextual a nd purposive meanings of the expression "on ...
importation" in Article XI:1 of the GATT 1994 cannot be automatically transferred to the
interpretation of "on their importation" and " on or in connection with the importation" in
Article II:1(b) of the GATT 1994.
7.177 We share the complainants' view. Unlike Article II:1(b) of the GATT 1994 in which
"ordinary customs duties" and "other duties or charges" are addressed in two separate sentences – first
and second sentences of Article II:1(b), Article XI:1 provides Members' obligations in respect of the
various quantitative restrictions in the same sentence. 369 This confirms the need to make the intended
difference between "ordinary customs duties" and "other duties or charges" in Article II:1(b)
meaningful. We find further useful context for our understanding in this regard in Articles I:1 and

367 Appellate Body Report on Chile – Price Band System, para. 156.
368 We note that in Dominican Republic – Import and Sale of Cigarettes , the panel said that it was "not
persuaded that the bond requirement is a restriction 'on the importation' of cigarettes. Article XI:1 of the GATT
does not cover any restriction, but only those restrictions that are instituted or maintained by any Member 'on
the importation' (or exportation) of products" (para. 7.258). Referring to The New Shorter Oxford English
Dictionary, the panel continued stating that:

"In the expression 'on the importation' – read in the context of an Article [Article XI] that is
entitled 'General Elimination of Quantitative Restrictions' –, the ordinary meaning of the word
'on' suggests that it is a preposition denoting a rela tion. In that sense, the expression 'on the
importation' would be akin to 'with respect to the importation'." (Ibid.; footnote omitted)

The panel in Dominican Republic – Import and Sale of Cigarettes then found confirmation to such
conclusion in the following statement of the Panel Report on India – Autos:

"An ordinary meaning of the term 'on', relevant to a description of the relationship which
should exist between the measure and the impor tation of the product, includes 'with respect
to', 'in connection, association or activity with or with regard to'. In the context of
Article XI:1, the expression 'r estriction … on importation' may thus be appropriately read as
meaning a restriction 'with regard to' or 'in connection with' the importation of the product."
(Ibid; footnotes omitted, citing the Panel Report on India – Autos, para. 7.257)

We note however that in India – Autos the panel only used the definition of "on" contained in the
Webster's New Encyclopedic Dictionary (see footnote 421 to para. 7.257 of the Panel Report on India – Autos).
We also note that the Panel in EC – Sugar (paras. 7.274-7.275) used the same approach in India – Autos to
interpret the meaning of "on the export" in Article 9.1(c) of the Agreement on Agriculture and concluded that "a
payment 'on export' need not be 'contingent' on export but rather should be 'in connection' with exports."
(para. 7.275).
369 That is to say: prohibitions or restrictions, other than duties, taxes or other charges, made effective
through quotas, import or export licences or other measures.

VIII:1(a) of the GATT 1994. We first note that these provisions, which also deal with fiscal matters,
use the expression "on or in connection with importation"
370, not "on importation" alone. This seems
to indicate the intended broad scope of these provisions and hence the choice of a broader language.371
Had the framers of the GATT considered the term "on importation" as synonymous with the term "in
connection with importation", irrespective of the context in which these terms are laid out, they would
have simply used one or the other not both. The same, we believe, holds true in regard to
Article II:1(b) of the GATT 1994.
7.178 Indeed, the language of the first sentence of Article II:1(b) of the GATT 1994 clearly
indicates that "ordinary customs duties", with in the meaning of that provision, apply only "on" the
importation of a product, while "other duties and ch arges" are referred as those imposed "on or in
connection with the importation." In the present context, interpreting "on" as also meaning "in
connection with" (or any similar meaning) would ev iscerate such difference. We are however bound
by the general rules of interpretation of the Vienna Convention to "give meaning and effect to all
terms of the treaty" and we therefore are not "fr ee to adopt a reading that would result in reducing
whole clauses or paragraphs of a treaty to redundancy or inutility." 372 Hence, this contextual analysis
confirms our conclusion above at paragraph 7.165 that the ordinary meaning of "on" in the first
sentence of Article II:1(b) of the GATT 1994 contains a strict temporal connotation.373
Subsequent practice
7.179 China argues that there is widespread and c onsistent practice among WTO Members that
demonstrates that a charge is "on … importation" of a product if the charge bears an objective
relationship to the administration and enforcement of a valid customs liability.374
7.180 In this respect, China refers to the practic e of the United States, indicating that customs
authorities are not required to make a final cl assification determination and assessment of duty
liability until one year after the merchandise has ente red the customs territory of the United States.
Furthermore, China describes practices of other WTO Members that have customs procedures that
result in the collection of customs duties after the time of importation. China refers in particular to
Australia, Canada, the European Communities, India and New Zealand. 375 Additionally, China points
to many specialized circumstances in other Members in which duties can be assessed after the time or
point of importation, including:
"[t]he payment of duties on imports that en ter in transit but that subsequently enter
free circulation, the payment of duties on impor ts that fail to adhere to conditions for
temporary duty-free importation, and the pa yment of duties on imports that fail to

370 We also note that Article VIII:4 uses the expression "in connection with" alone, but this provision is
a corollary of Article VIII:1(a).
371 For example, Article I:1 of the GATT 1994 applies to "customs duties and charges of any kind" to
"all rules and formalities" as well as " all matters referred to in paragraphs 2 and 4 of Article III".
Article VIII:1(a) applies to "all fees and charges of whatever character (other than import and export duties and
other taxes within the purview of Article III)."
372 Appellate Body Report on US – Gasoline , DSR 1996:I, page 21. See also the Appellate Body
Reports on: Japan – Alcoholic Beverages II , DSR 1997:I, page 106; Canada – Dairy , para. 133; and US –
Upland Cotton, para. 549.
373 Our conclusion would have been the same even if we were instead faced with the task of choosing
which of the two alternative ordinary meanings of "on" we have identified above at paragraph 7.158 would give
effect to this term as used in the context of Article II:1(b), first sentence, of the GATT 1994.
374 China's first written submission, paras. 63-67.
375 China's first written submission, para. 65.

adhere to inward processing and re-expor t requirements. These are examples of
goods that enter the customs territory subject to a condition, often secured by a bond,
and that can become subject to a different customs treatment after "the time or point
of importation" if the imported goods are not used in accordance with the stipulated
condition."
376
7.181 The complainants, on the other hand, disagree that there exists subsequent practice in support
of China's interpretation of Article II:1(b), first sentence, of the GATT 1994. The European
Communities argues that China's examples are based on the rules in force concerning the post-
clearance recovery of the customs debt that have nothing to do with the ordinary tariff classification
carried out 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.377 The United States disagrees with China's characterization of US
practice because the imposition of customs duties in the United States occurs at the time of
importation of goods that are entered into the Unit ed States. Duties and liability for their payment
accrue upon imported merchandise on arrival of the im porting vessel or other means of transport in
the United States. Additional duty liability does not accrue based upon the usage of the goods after
entering the United States.378 Moreover, with respect to the other examples provided by China 379, the
United States indicates these Members permit a final de termination of duty li ability after the goods
have been imported 380, which is, however, fundamentally different from China's measure, which
changes the level of a charge based on the local content thresholds of an internal manufacturing
operation.381 Canada also replies on the specific examples382 provided by China and indicates that all
of the cited customs authorities follow the practice of examining goods based upon their status at
presentation at the border. Although the duty may be calculated and paid later, liability for customs
duties is based on this assessment.
 383
7.182 The Panel starts by recalling that the Appellate Body has found that to establish "subsequent
practice" within Article 31(3)(b) of the Vienna Convention , the following two elements must be
shown: (i) there must be a common, consistent, di scernible pattern of acts or pronouncements; and (ii)
those acts or pronouncements must imply agreement among WTO Members. 384 Applying this
standard, the Panel fails to observe subsequent practice establishing the agreement of the parties
regarding China's interpretation of Article II:1(b), first sentence, of the GATT 1994. The practices of
other Members described by China are not similar to the Chinese measure and do not support China's

376 China's first written submission, para. 66.
377 The European Communities understands that the same applies for the customs systems of the United
States and Canada. Moreover, the European Communities i ndicates that, even if there was, in the legal system
of an individual WTO Member, a prac tice of classifying goods based on even ts after importation, such practice
would not be "widespread and consistent" and would certainly not fulfil the test of Article 31(3)(b) of the
Vienna Convention. European Communities' response to Panel question No. 32.
378 The United States also indicates that 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 based upon the condition of the goods at the time of
their importation. United States' response to Panel question No. 32
379 In particular, those from Australia, India and the European Communities.
380 Such as retaining the right to verify the accuracy of origin, classification, valuation, and other facts
that may affect the dutiability of goods.
381 United States' response to Panel question No. 32
382 Relating to Canada's own practice as well as to the practice in Australia, New Zealand, India and the
European Communities.
383 Canada's response to Panel question No. 32
384 Appellate Body Report on US – Gambling, para. 192.

interpretation of Article II:1(b), first sentence, of the GATT 1994. We have reviewed the examples of
customs practices from the complainants and othe r Members submitted by China on this issue and
consider, as the United States and Canada correctly argue
385, that these practices, in fact, reinforce the
evidence that WTO Members impose ordinary custom s duties based on the state of the products as
they are presented at the border and that they routinely collect or assess these duties after the products
have entered the customs territory of the importing country. This supports our conclusion above that
the ordinary meaning of "on their importation" in the first sentence of Article II:1(b) of the GATT
1994 indicates a strict temporal element.
7.183 With respect to the "speciali zed circumstances" mentioned by China, these typically apply to
goods that have not entered and are not intended to enter the internal market of a Member. Duties are
applied if the goods eventually enter into the intern al market of the Member in question, not if the
goods are not "used" in accordance with a stipulated c ondition. Typically in these situations products
are not re-classified and new tariff rates do not apply based on anything that occurs inside the territory
of the importing Member. The words China itself uses to describe these circ umstances are prescient:
China refers to goods "in transit"; goods impor ted on a "temporary" basis; and goods imported for
"processing and re-export". None of these concepts imply that the goods are intended for sale or use
in the internal market. In our opinion, the ci rcumstances described by China are therefore not
analogous to the charge under the Chinese measures. This is even supported by Article 30 of the
Decree 125386, which, in contrast with the rest of this measure and similarly to the "specialized
circumstances" cited by China, indicates that Decree 125 does not apply to auto manufacturers located
in a bonded zone, in an export-pro cessing zone, or in other special zones supervised by the customs,
unless they use imported auto parts to assemble motor vehicles that are sold into the domestic market.
Conclusion
7.184 We therefore conclude that the ordinary meani ng of "on their importation" in Article II:1(b),
first sentence, of the GATT 1994, considered in its context and in light of the object and purpose of
the GATT 1994, contains a strict and precise temporal element which cannot be ignored. This means
that the obligation to pay ordinary customs duties is linked to the product at the moment it enters the
territory of another Member.
387 If the right to impose ordinary customs duties – and the importer's
obligation to pay it – accrues because of the importati on of the product at the very moment it enters
the territory of another Member, ordinary customs du ties should necessarily be related to the status of
the product at that single moment.388 It is at this moment, and this moment only, that the obligation to
pay such charge accrues. As stated by the Appellate Body in EC – Poultry , "it is upon entry of a
product into the customs territory, but before the product enters the domestic market, that the
obligation to pay customs duties ... accrues." 389 And it is based on the condition of the good at this

385 Canada's responses to Panel question Nos. 32, 116; United States' response to Panel question
No. 32.
386 See footnote 213 to paragraph 7.40 above.
387 As China acknowledges, "there 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." (China's response to Panel question No. 97).
388 In this regard, we recall our finding above at paragraph 7.155 that the dictionary definitions of
"importation" refer to it as an "action" or an "act" in the singular and not to various "actions" or "acts" in the
plural.
389 Appellate Body Report on EC – Poultry, para. 145 (emphasis added). We note that in this sentence
the Appellate Body also included "internal charges." Without evaluating the merits of including "internal
charges" within the meaning of this sentence, we consider that such inclusion does not diminish the importance
that we attach to this statement as applied to "customs duties".

moment that any contemporaneous or subsequent act by the importing country to enforce, assess or
reassess, impose or collect ordinary custom duties should be carried out.
7.185 This conclusion is in line with our findings above in paragraphs 7.126 to 7.133 on the scope
of "internal tax or charge" under Article III:2 of the GATT 1994. In contrast to ordinary customs
duties, the obligation to pay internal charges does not accrue because of the importation of the product
at the very moment it enters the territory of a nother Member but because of internal factors (e.g.,
because the product was re-sold internally or because the product was used internally), which occurs
once the product has been imported into the territory of another Member. The status of the imported
good, which does not necessarily correspond to its status at the moment of importation, seems to be
the relevant basis to assess this internal charge. The distinction between ordinary customs duties and
internal charges, which is of "fundamental importance"
390, would be blurred if the obligation to pay an
ordinary customs duty could accrue based on the status of the product after importation, rather than on
its status at the moment of importation (i.e., "on ... importation").391
7.186 In this respect, this interpretation serves to guarantee the "security and predictability of the
reciprocal and mutually advantageous arrangements di rected to the substantial reduction of tariffs and
other barriers to trade", which is a recogn ized object and purpose of the WTO Agreement. 392 Indeed,
such predictability and security of tariff concessions would be undermined if ordinary customs duties
were not based on the product at the time of importation but on factors that occur internally.
7.187 In addition, we find support for our view in the Appellate Body's holding in EC – Chicken
Cuts that "in characterizing a product for purposes of tariff classification, it is necessary to look
exclusively at the 'objective characteristics' of the product in question when presented for
classification at the border". 393 We are well aware that this statement relates to the issue of
classification, not the scope of "ordinary customs duty" per se. However, we consider that the same
statement provides some contextual support to the question before us. The complainants referred to
this statement of the Appellate Body in the context of the discussion of whether the charge falls within
the meaning of Article II or III of the GATT 394 and China itself emphasized the link between tariff
classification and this discussion.395

390 See the GATT Panel Report on EEC – Parts and Components, paras. 5.4 and 5.7.
391 For this reason we disagree w ith China's arguments that it is "the completion of the [process of
importation] that marks the turning point between permissible discrimination under Article II and impermissible
discrimination under Article III", and that "imports have been 'cleared through customs' once all customs
formalities are complete and the goods are in free circulatio n within the customs territory." (China's response to
Panel question No. 37). In our analysis above we did not find any basis in Article II:1(b), first sentence, nor in
Article III:2 of the GATT 1994 to support the argument that it is the completion of the process of importation
that marks such turning point. In fact, China's argument seems to be in contradiction with its own explanation
that the charge collected pursuant to Article 29 of Decree 125 on parts im ported by third-party suppliers, which
it considers to be in free circulation in China, free of customs formalities and not su bject to customs control,
nevertheless falls within the scope of II:1(b), first sentence, of the GATT 1994 in that it objectively relates to the
proper classification of the imported parts and components. See paragraph 7.114 above.
392 Appellate Body Report on EC – Chicken Cuts, para. 243.
393 Appellate Body Report on EC – Chicken Cuts, para. 246.
394 European Communities' response to Panel question No. 186; Canada's response to Panel question
No. 187; United States' response to Panel question No. 186.
395 See, for example, China's res ponse to Panel question No. 37: "This brings China to the tariff
classification issue at the heart of the present dispute" and "[t]he 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 establish a customs process to give effect to this interpretation."

7.188 This does not mean, however, that we accept China's argument that the HS, including its
interpretative rules, justify the imposition of the alleged "ordinary customs duties" on auto parts on
the basis of their final internal assembly into moto r vehicles. In our view, China has not explained
why the interpretative rules of another internationa l agreement – the HS – are the determining factor
for the scope of the treaty term at issue under the WTO Agreements. More importantly, even if we
were to base our ruling in the present section of these Reports on the alleged rights under the HS,
which we are not, we would be guided by our dut y not to "add to or diminish the rights and
obligations provided in the covered agreements."
396
7.189 We find support and confirmation in the findings of the GATT Panel EEC – Parts and
Components, which rejected the argument by the EEC that the anti-circumvention duties at issue were
customs duties within the scope of Article II:1(b) and not internal taxes or charges falling under
Article III:2. The GATT Panel stated:
"The Panel noted that the anti-circumvention duties are levied, according to
Article 13:10(a), 'on products that are introduced into the commerce of the
Community after having been assembled or produced in the Community'. The duties
are thus imposed, as the EEC explained befo re the Panel, not on imported parts or
materials but on the finished products assembled or produced in the EEC. They are
not imposed conditional upon the importation of a product or at the time or point of
importation. ... The relevant fact, according to the text of these provisions, is not the
policy purpose attributed to the charge but rather whether the charge is due on
importation or at the time or point of importation or whether it is collected
internally."
397 (emphasis added)
7.190 We also agree with the Panel in EEC – Parts and Components that the mere fact that a charge
is described under domestic law as an "ordinary customs duty", or that the good is considered by the
importing country as not being in free circulation (and consequently under customs control), or even
the policy purpose of the charge , are all not decisive factors to its characterization as a "border
charge" under Article II:1(b) of the GATT 1994 b ecause otherwise Members could determine by
themselves which of the provisions would apply to th eir charges. We also consider, for the same
reason, that the fact that a charge is administered by a customs authority is not determinative of its
nature.398
7.191 Furthermore, China submits that for a charge to be considered an ordinary customs duty under
Article II:1(b), first sentence, of the GA TT 1994 it does not need to be necessarily imposed, collected
or assessed at the border nor at the time goods cross the border into the territory of the importing
country. We see no controversy on this point among the parties to this dispute. Indeed, as the

396 Article 3.2 of the DSU. Further, even if we were to consider China's arguments based on the
classification rules under the HS, as elaborated under pa rt VII.D.2 of these reports, the tariff term "motor
vehicles" is not to be interpreted to include auto parts imported in multiple shipments. China's arguments in this
connection therefore would not ch ange our interpretation, based on the principles of the Vienna Convention, of
the scope of the first sentence of Article II:1(b) of the GATT 1994. In fact, we note that our finding here on the
meaning of "on their importation" in the first sentence of Article II:1(b) of the GATT 1994 and our finding in
Section VII.D.2(a)(ii) on th e meaning of "as presented" in GIR 2(a) s eem not to be in c ontradiction with each
other.
397 GATT Panel Report on EEC – Parts and Components, para. 5.5.
398 See GATT Panel Report on EEC – Parts and Components, paras. 5.6-5.7. See also the Panel Report
on US – 1916 (Japan), paras. 6.53 (and its footnote 464), 6.58 (and its footnote 461), 6.134 (and its
footnote 504) and 6.152(a) (and its footnote 518).

complainants themselves agree, albeit in varying degrees,
399 we note that in practice, WTO Members'
customs authorities routinely collect or assess customs duties after the goods have physically crossed
the border. We are mindful that customs practic e in general, and importa tion in particular, can
frequently be a complex process "during which a number of steps must be completed." 400 T h e
increasing sheer volume of goods that cross the borders of WTO Member countries every day
undoubtedly adds to such complexity. This rea lity, as the complainants themselves recognize, can
make it in certain cases very difficult for a customs authority to execute and finalize all customs acts,
including the final assessment, calcu lation and collection of customs duties at the very time and point
when and where the goods cross the border into the territory of a WTO Member.
401 However, we do
not agree with the proposition that these typical customs practices mean that goods cannot be
considered "imported", and therefore are outside th e protection of the national treatment obligation in
Article III:2 of the GATT 1994, simply because ther e has been a delay in the final assessment,
calculation and/or collection of customs duties. In our view, what is decisive for determining whether
a charge is an ordinary customs duty is whethe r the charge is imposed on products "on their
importation into the territory", as we have established above at paragraphs 7.184 and 7.185.
7.192 In sum, based on its ordinary meaning and its context, we conclude that "ordinary customs
duties" within the meaning of the first sentence of Article II:1(b) refer to duties imposed on goods at
the moment of their "importation" into the customs territory of an importing Member and must be
interpreted more narrowly than "other ch arges and duties" under the second sentence of
Article II:1(b), which are imposed on goods "on or in connection with importation".
7.193 We will now examine the terms "internal charges" and "ordinary customs duties" in the light
of the object and purpose of the WTO Agreement as well as the GATT 1994, in general and that of
Articles II and III of the GATT 1994, in particular.

399 European Communities' first written submission, para. 139; European Communities' first oral
statement, paras. 25-26; United States' response to Pane l question No. 87; Canada's response to Panel question
No. 87.
400 Panel Report on Turkey – Rice , para. 7.127. Additionally, "UNCTAD estimates that the average
customs transaction involves 20–30 different parties, 40 documents, 200 data elements (30 of which are
repeated at least 30 times) and the re-keying of 60–70% of all data at least once."
(http://www.wto.org/english/thewto_e/minist_e/min99_e/english/about_e/15facil_e.htm).
401 Finalizing customs acts in a singl e moment is not necessarily an issue restricted to the question
presented to us under Article II:1(b) of the GATT 1994. We note that other covered agreements seem to
recognize that finalization of certain customs acts is not necessarily cont emporaneous with the reason that
triggered that act. For example, the Agreement on Implementation of Article VII of the GATT 1994 ( Customs
Valuation Agreement), refers to possible necessary delays in the "final determination" of the customs value of
imported goods (Article 13) or the right of customs administrations "to satisfy themselves as to the truth or
accuracy of any statement, document or declaration presented for customs va luation purposes" (Article 17).
Likewise, the SCM Agreement refers to the obligation to "maintain judicial, arbitral or administrative tribunals
or procedures for the purpose, inter alia , of the prompt review of administrative actions relating to final
determinations and reviews of determinations" on countervailing duties (Article 23). Finally, the Agreement on
Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 ( Anti-Dumping Agreement),
states inter alia that the determination of the final liability for payment of anti-dumping duties, when they are
assessed on a retrospective basis, shall take place as soon as possible, normally within 12 months, and in no case
more than 18 months, after the date on which a request for a final assessment of the amount of the anti-dumping
duty has been made (Article 9.3.1).

Object and purpose of the WTO Agreement and the GATT 1994
Arguments of the parties
7.194 The complainants express systemic concerns that if the processing and manufacturing of
products after importation into the territory of a Member could be generally accepted as an
intermediate step before tariff classification, the GATT 1994's core national treatment obligations
under Article III would be rendered a nullity.
402
7.195 The United States further argues that it is not the label that a Member applies to its measure
that determines whether an obligation under a covered agreement applies; rather it is the substance of
the measure that matters. Ot herwise the GATT 1994's core nati onal treatment obligations under
Article III would be eviscerated.403
7.196 Canada submits that by using (selectively and out of context) Members' conducts and the HS
to classify products inappropriately, China would see the scope of the GATT 1994's national
treatment provisions systematically reduced.
404 The Appellate Body has clearly said that the broad
purpose of Article III is to avoid protectionism in the application of internal taxes and regulatory
measures. However, if a Member can extend its consideration of the character of an imported good to
some indefinite point after physical importation, in order to evaluate how or by whom the good is
used, any Article III test becomes an exercise in relativity.
7.197 China argues 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 HS, and in a manner that allows customs authorities to give effect to the
substance of a series of import transactions over their form.
405 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 structure their imports. This arbitrary,
form-over-substance position is the only argument in this proceeding that poses a systemic risk to the
GATT – that is, to the security and predictability of tariff concessions under Article II. 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 would be inconsistent with its
obligations under Article III, Article III does not prohibit Members from taking actions that are
consistent with its rights under Article II.
406 Article II countenances a particular type of
discrimination against imported products – the a pplication of ordinary customs duties 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 limits bound in their
Schedules of Concessions. Once the products are "im ported" however, they become subject to the
basic principles of non-discrimination set forth in Article III.407

402 See. e.g., the European Communities' first writte n submission, para. 140; responses to Panel
question Nos. 78 and 109.
403 United States' first written submission, para. 3.
404 Canada's second written submission, para. 6.
405 China's response to Panel question No. 38.
406 China's response to Panel question No. 37.
407 China's response to Panel question No. 37.

Consideration by the Panel
7.198 The Panel now examines the terms "internal charges" and "ordinary customs duties" in light
of the object and purpose of the WTO Agreement and the GATT 1994 in general.
408 As the Appellate
Body in EC – Chicken Cuts observed, one of the objects and purpose of the GATT 1994 and the
WTO Agreement in general is "the security and predictability of the reciprocal and mutually
advantageous arrangements directed to the substa ntial reduction of tariffs and other barriers to
trade."409 We also recall the Appellate Body's finding that Article 31(1) of the Vienna Convention
does not necessarily exclude taking into account the object and purpose of a particular treaty term, if
doing so assists the interpreter in determining the treaty's object and purpose on the whole.410
7.199 In addressing the issue before us, namely what are the elements that distinguish "internal
charges" under Article III:2 from "ordinary customs du ties" under Article II:1(b), we also find useful
the following statement by the GATT Panel in EEC – Parts and Components:
"The distinction between import duties a nd internal charges is of fundamental
importance because the General Agreement re gulates ordinary customs duties, other
import charges and internal taxes differe ntly: the imposition of 'ordinary customs
duties' for the purpose of protection is allowed unless they exceed tariff bindings; all
other duties or charges of any kind imposed on or in connection with importation are
in principle prohibited in respect of bound items (Article II:1(b)). By contrast,
internal taxes that discriminate against im ported products are prohibited, whether or
not the items concerned are bound (Article III:2)."
 411
7.200 That GATT Panel concluded that one of the basic objectives underlying Articles II and III
was that "discrimination against products from othe r contracting parties should only take the form of
ordinary customs duties ... and not the form of internal taxes ... ." 412 We agree with the GATT Panel
in EEC – Parts and Components.
7.201 As the Appellate Body clarified, a basic object and purpose of the GATT 1994, as reflected in
Article II of the GATT, is "to preserve the value of tariff concessions negotiated by a Member with its
trading partners and bound in that Member's Schedule".
413 At the same time, the broad purpose of
Article III is "to avoid protectionism in the app lication of internal tax and regulatory measures". 414
While serving their own objects and purposes, these two provisions are also interrelated such that the
disciplines contained in these two provisions aim to ensure "the security and predictability of the
reciprocal and mutually advantageous arrangements di rected to the substantial reduction of tariffs and

408 Appellate Body Report on EC – Chicken Cuts, para. 238.
409 Appellate Body Report on EC – Chicken Cuts, para. 243.
410 Appellate Body Report on EC – Chicken Cuts, para. 238.
411 GATT Panel Report on EEC – Parts and Components, paras. 5.4 and 5.7.
412 GATT Panel Report on EEC – Parts and Components, para. 5.7.
413 Appellate Body Report on Argentina – Textiles and Apparel, para. 47.
414Appellate Body Report on Japan – Alcoholic Beverages II , DSR 1996:I, pages 16-17; 109-110
(original footnotes omitted). See also Appellate Body Report on US – FSC (Article 21.5 – EC), para. 204. The
GATT Panel in Italy – Agricultural Machinery also provides insight in the object and purpose of Article III,
stating that "... the intention of the drafters of the Ag reement was clearly to treat the imported products in the
same way as the like domestic products once they had been cleared through customs. Otherwise indirect
protection could be given." GATT Panel Report on Italy – Agricultural Machinery, para. 11).

other barriers to trade."
415 To achieve this overall object and purpose of the WTO Agreement,
Members are obliged to respect the boundaries between Article III and Article II of the GATT 1994.
7.202 Therefore, the Panel will be guided by this obj ective in applying the elements we considered
above as distinguishing "ordinary customs duties" fr om "internal charge" to the charge under the
measures to determine whether it is an "internal charge" or "ordinary customs duty".
Is the charge under the measures an "ordin ary customs duty" within the scope of
Article II:1(b), first sentence, or an "internal charge" within the meaning of
Article III:2?
7.203 The Panel recalls the complainants' argument that the charge on imported auto parts resulting
from the measures is an internal ch arge subject to the first sentence of Article III:2 of the GATT 1994
because it is triggered by the actual use of these pa rts in the assembling of motor vehicles inside
China after importation. We further recall China's r esponse that this charge is instead an ordinary
customs duty because it is imposed as a condition of – that is, by reason of – the importation of a
product (auto part) into China's customs territory and that this charge objectively relates to a duty
liability that arises by reason of the importation of the product. China argues that the charge is a valid
ordinary customs duty because it implements and enforces China's Schedule of Concessions by giving
effect to the provisions of China's Schedule relating to "motor vehicles."
7.204 We have established above, however, if the oblig ation to pay a charge does not accrue based
on the product at the moment of its importation, it cannot be an "ordinary customs duty" within the
meaning of Article II:1(b), first sentence of the GA TT 1994: it is, instead, an "internal charge" under
Article III:2 of the GATT 1994, which obligation to pay accrues based on internal factors.
7.205 Under the measures, the obligation to pay the charge
416 accrues internally after auto parts
enter into the customs territory of China and are assembled/produced into motor vehicles. In this
connection, Article 5 of Decree 125 provides:
"Article 5 The reference to 'automobile parts characterized as complete vehicles' in
these Rules shall mean that the imported auto mobile parts should be characterized as
complete vehicles at the stage when complete vehicles are assembled . The reference
to 'automobile parts characterized as ass emblies (systems)' shall mean that the
imported automobile parts should be char acterized as assemblies (systems) at the
stage when the assemblies (systems) are assembled" (emphasis added).
7.206 Furthermore, Article 28 of Decree 125 states that " after the imported automobile parts have
been assembled into complete vehicles, the autom obile manufacturer shall make a declaration of duty
payable to Customs and Customs shall ... proceed with classification and duty collection."417
7.207 Also relevant to the question before us are (i) the fact that the charge is imposed on
automobile manufacturers, not importers in general (be it manufacturers or suppliers); (ii) the fact that
the charge is determined not based on auto parts as they enter the customs territory of China, but

415 Appellate Body Report on EC – Chicken Cuts, para. 243.
416 The charge under the measures refer to both that imposed under Article 29 of Decree 125 and that
imposed in general under the measures. As we concluded at paragraph 7.115 above, these charges are no
different from each other.
417 Emphasis added. See paragraph 2.4 in the Descriptive Part of these reports for background
information on the translation of Article 28 of Decree 125. See also, more generally on Article 28, parties'
responses to Panel question No. 304.

instead based on what other parts from other countries and/or other importers are used together with
the goods concerned in assembling a vehicle model; and (iii) the fact that identical imported parts
included in the same shipment can be subject to different charge rates depending on which vehicle
model they are assembled into.
418
7.208 Furthermore, we recall China's own explanati on of the charge imposed under Article 29 of
Decree 125 in respect of parts imported by a third- party supplier, which is, as we have concluded
above at paragraph 7.115, not different from the ch arge imposed in general under the measures. As
we have stated above at paragraph 7.108, China has explained that imported auto parts that the auto
manufacturer purchases from a third-party supplie r in China will have completed the necessary
customs formalities and are no longer subject to custom s control and are in free circulation in China.
China also explained that the rules for bonded goods do not apply to auto parts imported by a third-
party supplier. We recall our conclusion above at paragraph 7.190 that factors such as "customs
control" and "free circulation" are not decisive to the characterization of a charge as ordinary customs
duty.
419 We note that China submits that an Article 29 charge is nevertheless an ordinary customs
duty because it "objectively relates to the administra tion and enforcement of China's tariff provisions
for motor vehicles." 420 However, we have already establishe d above that this is not the correct
standard to determine whether a charge falls under Article II:1(b), first sentence, of the GATT 1994.
As we have stated above at paragraph 7.108, the ch arge under Article 29 is subject to the same set of
rules as charges in general under the measures in the sense that the applicability of the Article 29
charge is determined based on the same criteria fo r the essential character determination as set out in
Articles 21 and 22 of Decree 125.
7.209 Finally, we do not believe that our conclusion on the internal elements of the charge is
affected by the fact that, under the measures, auto manufacturers are required to make a declaration at
the moment imported auto parts enter China. 421 This is because such declaration is not based on the
status of these parts at that moment but, instead, on their predicted use internally in the assembly of
motor vehicles.422 Moreover, the information in the declarati on is not decisive to the determination of
the rate of the charge because such determinati on is only made, as explaine d above, internally after
assembly.423 In this respect, China itself acknowledges th at this declaration as well as the bonding
requirement are simply elements of the custom s procedure and are not decisive on the question
whether this is an internal charge or an ordinary customs duty. 424 With respect to the bonding

418 See paragraph 7.117 above for the United States' arguments in this regard.
419 However, even if arguendo these factors would be relevant to render the charge in general under the
measures as an ordinary customs duty, using China's own logic, such factors would not be present in the case of
the charge under Article 29 of Decree 125.
420 China's response to Panel question No. 83.
421 Article 13 Decree 125. See paragraph 7.53.
422 A prediction is made through the self-evaluation and vehicle model registration procedures, as
examined above in Section VI I.A.1(b)(ii). China seems to agree that indeed such a declaration is made on the
basis of the intention of the manufacturer at the moment of importation (See China's first written submission,
para. 7). See also the European Communities' first oral submission, para. 28; European Communities' second
written submission, para. 52; the United States' second oral statement, para. 18; and Canada's second written
submission, paras. 33-36. See also Japan's third party oral statement, para. 14.
423 See China's response to Panel question No. 5, footnote 2.
424 China's response to Panel question No. 79. Howe ver, the Panel observes that in other statements,
China seems to attach considerable relevance to the declaration at the moment of importation to support its
argumentation on the nature of the measures. For exampl e, China argues that it "will demonstrate that, contrary
to complainants’ assertions, the challenged measures impose ordinary customs duties that are conditioned upon
the entry of goods into China. The measures give effect to a declaration that is made at the time of importation ,
based on the demonstrated intention of the auto manufacturer to import and assemble parts and components that

requirement on auto parts characterized as complete vehicles, China indicates that these are required
to ensure that the auto manufacturer abides by all relevant customs rules and can satisfy the customs
liability and that these auto parts remain under customs control.
425 However, the Panel observes that
there is no restriction on the use in the intern al market of these auto parts in bonded status 426 and the
bond requirement thus seems, as indicated by th e complainants, merely a financial guarantee. 427 In
contrast, as the European Communities and Canada correctly argue 428, the auto parts which can
effectively be considered under customs superv ision are those described under the situations
elaborated in Article 30 of Decree 125 (e.g. in a bo nded zone and export processing zones), which are
exempt from the measure unless they are eventually entered into the internal market of China.429
7.210 In sum, based on the above elements considered as a whole, in particular the fact that the
charge under the measures relates to the internal assembly of auto parts into motor vehicles, we
conclude that the charge is an internal charge within the meaning of Article III:2 of the GATT 1994.
7.211 Moreover, as mentioned above, the "security and pr edictability of the reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade ",
which is a recognized object and purpose of the WTO Agreement,430 would be undermined if a charge
were to be considered as an ordinary customs duty even when the obligation to pay the charge accrues
after goods have already entered into the customs territory of China and been assembled into complete
goods of the corresponding kind. We therefore sh are the systemic concerns expressed by the
complainants that if the assembly of the products af ter their importation into the customs territory of a
Member could provide a basis for tariff classifi cation, the tariff classification system would
undermine the national treatment obligation under Artic le III of the GATT 1994, which is one of the
core principles of the WTO Agreements. Such an interpretation would blur the fundamental
distinction between measures falling within the sc ope of Article III:2 and those falling within the
scope of Article II:1(b), first sentence, of the GATT 1994.
(iii) Conclusion
7.212 We therefore find that the complainants have satisfactorily demonstrated that the charge
under the measures431 is an internal charge under Article III:2 of the GATT 1994.
7.213 We now turn to the complainants' specific clai ms that the charge is inconsistent with
Article III:2 of the GATT 1994. In this respect, we recall our statement above at paragraph 7.104 that
the Appellate Body in Canada – Periodicals clarified that the analysis of whether a measure is
inconsistent with this provision of the GATT 1994 i nvolves a two-step test: first, whether imported
and domestic products are like products and, second, whether the imported products are taxed in

have the essential character of a complete motor vehicl e." (China's first written su bmission, para. 7, emphasis
added).
425 China's response to Panel question No. 18.
426 See China's second written submission, para. 116: "... Decree 125 permits the release of auto
parts..." (emphasis added).
427 European Communities' response to Panel question No. 201; United States' response to Panel
question No. 201; Canada's second written submission, para. 38; Canada's response to Panel question No. 201.
428 European Communities' response to Panel question No. 201; Canada's second written submission,
para. 38; Canada's response to Panel question No. 201. See also China's response to Panel question No. 16.
429 See China's response to Panel question No. 16. See also the last sentence of paragraph 7.183 above.
430 Appellate Body Report on EC – Chicken Cuts, para. 243.
431 With exception of the charge levied on the importation of CKD and SKD kits under the optional
provision of Article 2(2) of Decree 125. See paragraphs 7.101 and 7.636-7.638.

excess of the domestic products. If the answers to both questions are affirmative, there is a violation
of Article III:2, first sentence, of the GATT 1994.
432 We will now analyse these two questions.
(c) Are imported auto parts like domestic auto parts?
(i) Arguments of the parties
7.214 The complainants433 argue that, where a WTO Member draws an origin-based distinction in
respect of internal charges, the imported and do mestic products must be like products and a case-by-
case determination of "likeness" between the foreign and domestic products is unnecessary. 434 As the
measures do not distinguish between auto parts b ased on any other criteria than their origin, it
therefore follows that all imported and domestic parts are like products.435
7.215 China's only response is that as the charge under the measures is an ordinary customs duty
under Article II:1(b) of the GATT 1994, this clai m should fail as Article III:2 of the GATT 1994 is
inapplicable.
(ii) Consideration by the Panel
7.216 We recall our conclusion above in the section of these reports dealing with the description of
the measures that the products at issue in this case are all imported auto parts that are potentially
subject to the measure.436 Hence, as under the measures origin is the sole criterion distinguishing the
imported and domestic parts, it is correct to treat su ch products as like products within the meaning of
Article III:2 of the GATT 1994. 437 Similarly to the panel in US – FSC (Article 21.5 – EC II) , "we do
not believe that the mere fact that a good has [Chinese] origin renders it 'unlike' an imported good."438
7.217 The Panel therefore concludes that the complainants have satisfactorily met their burden of
proof439 that auto parts of domestic and foreign origin are like products within the meaning of
Article III:2 of GATT 1994.
(d) Are imported auto parts subject to internal ta xes and charges in excess of those applied to
domestic products?
(i) Arguments of the parties
7.218 The complainants440 claim that under the measures imported auto parts are taxed in excess of
those applied to domestic auto parts because imported auto parts, if they are assembled into vehicles
and characterized as complete vehi cles, are subject to an internal charge that like domestic products

432 Appellate Body Report on Canada – Periodicals, DSR 1997:I, page 468.
433 Supported by Argentina (see Argentina's third party submission, para. 42).
434 European Communities' first written submission, paras. 164-165; United States' first written
435 European Communities' first written submission, para. 166; Canada's first written submission,
paras. 90-91. See also Argentina's third party submission, para. 43.
436 See paragraph 7.86 above.
437 Panel Report on Canada – Autos, para. 10.74; Panel Report on India – Autos, paras. 7.174-7.176.
438 Panel Report on US – FSC (Article 21.5 – EC II), para. 8.133.
439 In Japan – Alcoholic Beverages II , in a finding subsequently not addressed by the Appellate Body,
the Panel stated that "complainants have the burden of proof to show first that products are like and second, that
foreign products are taxed in excess of domestic ones." (para. 6.14).
440 Supported by Argentina (see Argentina's third party submission, para. 44).

are not subject to.
441 In this respect, the European Communities and Canada refer to the holding of
the Appellate Body in Japan – Alcoholic Beverages II clarifying that "even the smallest of 'excess' is
too much."442
7.219 As stated above, China responds that, because the measures are border measures, they do not
result in the imposition of internal taxes or other in ternal charges within the meaning of Article III:2,
first sentence, GATT 1994.443
(ii) Consideration by the Panel
7.220 We start our analysis by recalling that in Japan – Alcoholic Beverages II , the Appellate Body
established a strict standard for the term "in excess of" under Article III:2, first sentence:
"The only remaining issue under Article III:2, first sentence, is whether the taxes on
imported products are 'in excess of' those on like domestic products. If so, then the
Member that has imposed the tax is not in compliance with Article III. Even the
smallest amount of 'excess' is too much. 'The prohibition of discriminatory taxes in
Article III:2, first sentence, is not conditional on a 'trade effects test' nor is it qualified
by a de minimis standard.'"
444
7.221 With this standard in mind, we recall our conclusion above at paragraph 7.212 that the
measures impose an internal charge under Article III:2 of the GATT 1994. We do not believe that the
question of whether the precise amount of this internal charge is equivalent to an ad valorem rate of
25 per cent or only 15 per cent over the imported part is essential to our findings under this claim as
any one of these values would undoubtedly be "in ex cess of those applied to domestic products". In
fact, as domestic products are not subject to the measures they are also not therefore subject to any
charge under the measures at all.
7.222 The Panel therefore concludes that the complainants have satisfactorily met their burden of
proving that imported auto parts are subject to an internal charge in excess of those applied to
domestic products within the meaning of Article III:2 of GATT 1994.
(e) Conclusion
7.223 We therefore find that the charge under the measures
445 is inconsistent with the first sentence
of Article III:2 of the GATT 1994.

441 European Communities' first written submission, para. 163; United States' first written submission,
442 European Communities' first written submission, para. 168; Canada's first written submission,
para. 92, footnote 125.
443 See China's first written submission, para. 170.
444 Appellate Body Report on Japan – Alcoholic Beverages II , page 23. This finding was followed by
the Panel on Argentina – Hides and Leather (See Panel Report on Argentina – Hides and Leather, para. 11.243).
445 With the exception of the "ordinary customs duties" levied under Article 2(2) of Decree 125, which
are addressed under Article II:1 (a) and (b), first sentence, of the GATT 1994 in Part VII.F of these reports,
below.

2. Are the measures consistent with Article III:2, second sentence, of the GATT 1994?
(a) Arguments of the parties
7.224 Should the Panel not find a violation of the first sentence of Article III:2, the European
Communities claims, in the alternative, that the measur es would nevertheless be inconsistent with
Article III:2, second sentence, of the GATT 1994.
446
7.225 China responds that the measures are border not in ternal measures. In any case, they do not
otherwise apply internal taxes or charges in a manner contrary to the principles set forth in
Article III:1 of the GATT 1994, as provided in Article III:2, second sentence, of the GATT 1994.447
(b) Consideration by the Panel
7.226 We recall our finding above at paragraph 7.223 that the charge under the measures, with the
exception of those levied under Article 2(2) of Decree 125, is an internal charge that is inconsistent
with the first sentence of Article III:2 of the GA TT 1994. As the European Communities only makes
its claim under the second sentence of Article III:2 in case we do not find a violation in respect of the
first sentence of this provision, we do not need to make a finding on this claim.
3. Are the measures consistent with Article III:4 of the GATT 1994?
7.227 The complainants argue that the measures are inconsistent with Article III:4 of the GATT
1994.448 In response, China again submits that, as border measures, they do not fall within the scope
of Article III:4 GATT 1994.449
7.228 Article III:4 of the GATT 1994 reads as follows in the relevant part:
"The products of the territory of any contr acting party imported into the territory of
any other contracting party shall be accord ed treatment no less favourable than that
accorded to like products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use. ..."
7.229 The Appellate Body has clarified that three elements must be satisfied to establish a violation
of Article III:4: (1) the imported and domestic produ cts at issue are "like" products"; (2) the measure
at issue is a "law, regulation, or requirement aff ecting their internal sale, offering for sale, purchase,
transportation, distribution, or use"; and (3) th e imported products are accorded "less favourable"
treatment than that accorded to like domestic products.450
7.230 For Article III:4 to apply two things are fi rst required. First the domestic and imported
products must be "like". Second, the law, regulatio n, or requirement must "a ffect" the internal sale,
offering for sale, purchase, transportation, distributio n, or use of the like products. Only once those

446 European Communities' first written submission, paras. 172-185.
447 China's first written submission, para. 170.
448 Supported by Japan and Mexico (See Japan's third party written submission, paras. 13-14 and
Mexico's third party written submission, paras. 5-6).
449 China's first written submission, para. 171.
450 Appellate Body Report on Korea – Various Measures on Beef, para. 133.

two elements are established does the obligati on to afford no less favourable treatment apply.
451 In
this connection, we note China's argument that the measures do not fall within the scope of
Article III:4 because they are "border measures". Th erefore, we will address the question of whether
Article III:4 applies to the contested measures by an alysing whether the domestic and imported auto
parts are "like" and whether the Chinese measures ar e "laws, regulations, and requirements affecting
the internal sale, offer for sale, purchase, transpor tation, distribution or u se" of the imported auto
parts. If found so, we will proceed to determin e whether the contested measures accord "less
favourable" treatment to imported auto parts than to like domestic auto parts inconsistently with
China's obligation under Article III:4 of the GATT 1994.
(a) Are imported auto parts like domestic auto parts?
(i) Arguments of the parties
7.231 Similar to their claim under Article III:2, first sentence, of the GATT 1994, the
complainants452 hold the view that domestic and imported auto parts are like products because origin
is the only basis for their distinction under the measures at issue.453 The United States relies upon the
finding of the panel in Canada – Wheat Exports, which stated that:
"Where a difference in treatment betwee n domestic and imported products is based
exclusively on the products' origin, th e complaining party need not necessarily
identify specific domestic and imported prod ucts and establish their likeness in terms
of the traditional criteria – that is, the ph ysical properties, end-uses and consumers'
taste and habits. Instead, it is sufficien t for the purposes of satisfying the 'like
product' requirement, to demonstrate that th ere can or will be domestic and imported
products that are like."454
7.232 The United States goes on to argue that, because Ch ina's measures at issue apply an internal
charge as well as burdensome administrative requirements on vehicle manufacturers solely on an
origin-based distinction, it follows therefore that foreign and domestic auto parts are "like products"
within the meaning of Article III:4.455
7.233 China responds that as the measures are border measures under Article II:1(b) of the
GATT 1994, this claim should fail as Article III:4 of the GATT 1994 is inapplicable.

451 We find support for this conclusion in the Appellate Body Report on US – FSC (Article 21.5 – EC),
para. 208, where the Appellate Body stated that "it is, therefore, not any 'laws, regulations and requirements'
which are covered by Article III:4, but only those which ' affect' the specific transactions, activities, and uses
mentioned in that provision. Thus the word 'affecting' assist in defining the types of measures that must
conform to the obligation not to accord 'less favourable tr eatment' to like imported produ cts, which is set out in
Article III:4."
452 Argentina, a third party in this case, supports the complainants' view (see Argentina's third party
submission, para. 47).
453 European Communities' first written submission, paras. 145-146; United States' first written
submission, paras. 91-92; Canada's first written submission, para. 96.
454 United States' first written submission, para. 91, citing Panel Report on Canada – Wheat Exports
and Grain Imports, para. 6.164.
455 United States' first written submission, para. 92.

(ii) Consideration by the Panel
7.234 We recall our conclusion above at paragraph 7.217 that, under the measures, auto parts of
domestic and foreign origin are like products within the meaning of Article III:2 of GATT 1994. We
also note that the Appellate Body has found that the scope of "like" in Article III:4 is broader than the
scope of "like" in Article III:2, first sentence, of the GATT 1994.
456
7.235 Because we have found that, under the measures, imported auto parts and domestic auto parts
are "like" within the meaning of Article III:2, first sentence, which has a narrower scope of
application than the term "like" in Article III:4, we also conclude that auto parts of domestic and
foreign origin are like within the meaning of Article III:4 of GATT 1994.
(b) Are the measures a "law, regulation, or requirement" within the meaning of Article III:4?
(i) Arguments of the parties
7.236 The European Communities argues that the measures impose very strict procedural and
administrative rules which apply to all automobile manufacturers unless a vehicle and all its parts are
100 per cent of Chinese origin. 457 The European Communities also maintains that many aspects of
the measures apply after the parts are already used in production and complete vehicles have been
made out of them.458
7.237 Canada claims that case law shows that this phrase has broad application, including
obligations that an enterprise is "legally bound to carry out" and those that an enterprise voluntarily
accepts in order to obtain an advantage from the gove rnment. Canada observes that the measures are
legally binding and, applying the case law, remarks that compliance with them is necessary to obtain
the advantage of avoiding the additional internal charge and, therefore, constitute "laws, regulations or
requirements".459
7.238 China responds that as the measures are border measures under Article II:1(b) of the GATT
1994, this claim should therefore fail as Article III:4 of the GATT 1994 is inapplicable.460
(ii) Consideration by the Panel
7.239 We note that China does not dispute that the contested measures are "laws, regulations, or
requirements" within the meaning of Article III:4; it argues, however, that the measures are "border
measures". Previous panels have found that the term "regulations" is equivalent to "mandatory rules
applying across-the-board."
461

456 Appellate Body Report on EC – Asbestos , para. 99; see also Appellate Body Report on Japan –
Alcoholic Beverages II (finding that the term "like product" evok ed the image of an accordion whose width
would vary depending on the provision under which the term was being interpreted).
457 European Communities' first written submission, para. 149.
458 European Communities' first written submission, para. 151.
459 Canada's first written submission, paras. 97-98.
460 The Panel specifically asked China to address th e complainants' arguments in the event the Panel
were to consider the measures to be subject to Artic le III of the GATT 1994. Instead of answering these
questions, China maintained that it did not consider that th e measures at issue were su bject to the disciplines of
Article III of the GATT 1994 (See China's responses to Panel question Nos. 146, 148).
461 GATT Panel Report on Canada – FIRA, para. 5.5, which was followed by Panel Report on India –
Autos, para. 7.181.

7.240 However, a measure needs not to be mandatory and apply across-the-board to be subject to
the obligations contained in Article III:4.
462 Article III:4 also applies to "requirements", a term which
has been interpreted by previous panels to encomp ass commitments entered into on a voluntary basis
by individual firms as a condition to obtaining an advantage. 463 Examining the term "requirement" in
the context of Article III:4 of the GATT 1994, the panel in India – Autos found that this term
encompasses two distinct situations, (1) obligations wh ich an enterprise is legally bound to carry out;
and (2) those which an enterprise voluntarily acc epts in order to obtain an advantage from the
government.464 We find further support for this interpretation in the Panel Report on Canada – Autos,
where the panel explained:
"Article III:4 applies not only to mandatory measures but also to conditions that an
enterprise accepts in order to receive an advantage, 465 including in cases where the
advantage is in the form of a benefit with respect to the conditions of importation of a
product.466"467
7.241 The measures at issue impose various administrative procedures on any automobile
manufacturers who intend to use imported auto pa rts. These administrative requirements involve
inter alia several obligations before, during and after the importation of the auto parts affected by the
measures, such as self-evaluation, registration of vehicle models with the CGA, placement of duty
bonds and verifications after assembly and re-verifica tions in case of changes in the combinations or
value of parts vis-à-vis domestic parts. Therefore, Policy Or der 8, Decree 125 and Announcement 4
are "laws or regulations" within the meaning of the Article III:4 of the GATT 1994.
7.242 In this connection, although the measures are mandatory for all vehicle manufacturers using
imported parts to assemble motor vehicles, an auto mobile manufacturer can a void the application of
the administrative procedures if it chooses not to use imported parts at all. Therefore, if these
measures were to be considered "voluntary" they would nevertheless be "requirements" within the
meaning of Article III:4 of the GATT 1994.
7.243 Therefore the panel concludes that the measur es are "laws, regulations" in that they are
mandatory for all vehicle manufacturers using imported parts and, to the extent that they might be
considered "voluntary", they also constitute require ments within the meaning of Article III:4 of the
GATT 1994.
468
(c) Are the measures a law, regulation, or requireme nt "affecting the internal sale, offering for
sale, purchase, transportation, distribution, or use" of imported auto parts?
(i) Arguments of the parties
7.244 The complainants observe that the term "affecting" is interpreted broadly in GATT and
WTO case law, going beyond measures which "directly" govern the conditions of sale or purchase, so

462 GATT Panel Report on Canada – FIRA, para. 5.5.
463 GATT Panel Report on Canada – FIRA, para. 5.4; Panel Report on India - Autos, para. 7.174.
464 Panel Report on India – Autos, paras. 7.189-7.191.
465 (footnote original) See e.g. GATT Panel Report on EEC – Parts and Components, para. 5.21.
466 (footnote original) See, e.g., Appellate Body Report on EC – Bananas III, para. 211.
467 Panel Report on Canada – Autos, para. 10.73.
468 See Panel Report on Canada – Autos, para. 10.73, citing GATT Panel Report on EEC – Parts and
Components, para. 5.21.

as to cover measures which might "adversely modify the conditions of competition between domestic
and imported products".
469
7.245 The European Communities relies upon the GATT panel report in Italy – Agricultural
Machinery for the proposition that Article III:4 covers " not only laws and regulations, which directly
govern the conditions of sale and purchase but also any laws or regulations which might adversely
modify the conditions of competition between the domestic and imported produc ts on the internal
market".470
7.246 The United States notes that the Appellate Body has expl ained that the term "affecting" in
Article III:4 of the GATT 1994 should be interpre ted as having a "broad scope of application." 471 In
addition, the panels in EC – Bananas III 472 and India – Autos 473 both concluded that the word
"affecting" covered more than me asures which directly regulate or govern the sale of domestic and
imported like products. In fact, the term "affecti ng" was broad enough to cover measures that might
"adversely modify the conditions of compe tition between domestic and imported products."474 Thus,
in India – Autos, the panel found that a measure "affects" th e internal sale, offering for sale, purchase
and use of an imported product, because it provided an incentive to purchase local products. 475 I n
Canada – Wheat Exports , the panel found that a Canadian measure "affects" internal distribution of
like products, because it created a disincentive to accept and distribute imported grain.476
7.247 With respect to the contested measure, the complainants argue that Policy Order 8,
Decree 125 and Announcement 4 work together to create an incentive to purchase domestic auto
parts. The United States argues that through the combination of internal charges and burdensome
administrative recording requirements "China has established a disincentive to purchase, use and
distribute imported auto parts."477 According to the European Communities, the measures influence
the decision-making of automobile manufacturers and are "bound to adversely modify the conditions
of competition between the domestic and imported products on the internal market."
478 Canada also
argues that the measures affect the sale, purchase or use of imported auto parts because they impose
obligations adversely modifying the conditions of competition as they impose an internal charge when
imported parts are used over a specified threshold and an administrative burden when any imported

469 The following GATT/WTO cases are c ited: Appellate Body Report on US – FSC (Article 21.5) ,
Report on India – Autos, para. 7.196; GATT Panel Report on EEC – Parts and Components, para. 5.21; GATT
Panel Report on Italy – Agricultural Machinery , para. 12; and GATT Panel Report on US – Section 337 ,
para. 5.10.
470 European Communities' first written submi ssion, para. 148, citing GATT Panel Report, Italy –
Agricultural Machinery, para. 12.
471 Appellate Body Report on US – FSC (Article 21.5), para. 210. See also Panel Report on Canada –
472 Panel Report on EC – Bananas III, para. 7.175.
473 Panel Report on India – Autos, para. 7.196.
474 Panel Report on India – Autos, para. 7.196.
475 Panel Report on India – Autos, para. 7.197.
476 Panel Report on Canada – Wheat Exports and Grain Imports, para. 6.267.
477 United States' first written submission, para. 95.
478 European Communities' first written submission, paras. 147-151.

parts are used.
479 Thus, according to the complainants, the me asures at issue "affect" the internal sale,
offering for sale, purchase, distribution, or use of imported auto parts.480
7.248 In response, China submits that "as border measur es, the challenged measures do not
constitute laws, regulations and re quirements affecting the internal sale, offering for sale, purchase,
distribution or use of imported products within the meaning of Article III:4."481
(ii) Consideration by the Panel
7.249 In order for a measure to fall within the sc ope of Article III:4 of the GATT 1994 it must not
only be a "law, regulation, and requirement" but it must also affect the internal sale, offer for sale,
purchase, transportation, distribution or use of the imported products.
7.250 As the Appellate Body in US – FSC (Article 21.5 – EC) clarified, the phrase "affecting the
internal sale, offering for sale, purchase, transportati on, distribution or use" defines, and thus limits,
the types of "laws, regulations, and requirements" th at fall within the scope of Article III:4 of the
GATT 1994. In the words of the Appellate Body:
"the clause in which the word 'affecting' a ppears – 'in respect of all laws, regulations
and requirements affecting their internal sale, offering for sale, purchase,
transportation, distribution or use' – serv es to define the scope of application of
Article III:4. (emphasis added) Within th is phrase, the word 'affecting' operates as a
link between identified types of govern ment action ('laws, regulations and
requirements') and specific transactions, activ ities and uses relating to products in the
marketplace ('internal sale, offering for sale, purchase, transportation, distribution or
use'). It is, therefore, not any 'laws, regulations and requirements' which are covered
by Article III:4, but only those which ' affect' the specific transactions, activities and
uses mentioned in that provision. Thus, th e word 'affecting' assists in defining the
types of measure that must conform to th e obligation not to accord 'less favourable
treatment' to like imported products, which is set out in Article III:4."482
7.251 Therefore, only "laws, regula tions and requirements" which affect "the internal sale offering
for sale, purchase, transportation, distribution or u se" are subject to the disciplines under Article III:4
of the GATT. The Appellate Body has further ex plained that the ordinary meaning of the word
"affecting" implies that a measure also has "an effect on" and thus indicates a broad scope of
application,
483 which is wider in scope than such terms as "regulating" or "governing". 484
Furthermore, the word "affecting" in Article III:4 of the GATT has been interpreted to cover not only
laws and regulations which direc tly govern the conditions of sale or purchase but also any laws or
regulations which might adversely modify the conditions of competition between domestic and
imported products.
7.252 In this respect, we concur with the findings of the panel in India – Autos that:

479 Canada's first written submission, para. 99.
480 See e.g., European Communities' first written submission, paras. 149-150; and Canada's first written
submission, para. 99.
481 China's first written submission, para. 171.
482 Appellate Body Report on US – FSC (Article 21.5 – EC), para. 208.
483 Appellate Body Report on EC – Bananas III, para. 220.
484 Appellate Body Report on EC – Bananas III , footnote 47, para. 220. See also the Appellate Body
Report on Canada – Autos, footnote 56, para. 150 (interpreting the word "affecting" in Article I:1 of the GATS).

"[T]he fact that the measure applies only to imported products need not [be], in itself,
an obstacle to its falling within the purview of Article III.
485 For example, an internal
tax, or a product standard conditioning the sale of the imported but not of the like
domestic product, could nonetheless 'affect' the conditions of the imported product on
the market and could be a source of less favourable treatment. Similarly, the fact that
a requirement is imposed as a condition on importation is not necessarily in itself an
obstacle to its falling within the scope of Article III:4.486"487 (emphasis added)
7.253 Article III:4 thus covers all la ws, regulations and requirement s, including those which only
apply to imported products, that have an effect on "specific transactions, activities and uses relating to
products in the marketplace ('internal sale, offering for sale, pur chase, transportation, distribution or
use')."488 In this regard, we also find the Appellate Body's reasoning in EC – Bananas III relevant,
whereby it rejected the claim that th e measure in that case fell outside the scope of Article III:4 of the
GATT 1994. The Appellate Body held in the relevant parts that:
"At issue in this appeal is not whether any import licensing requirement, as such, is
within the scope of Article III:4, but whet her the EC procedures and requirements for
the distribution of import licences for imported ba nanas among eligible operators
within the European Communities are within the scope of this provision. ... These
rules go far beyond the mere import licence requirements needed to administer the
tariff quota for third-country and non-trad itional ACP bananas or Lomé Convention
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 rules affect "the
internal sale, offering for sale, purchase, ..." within the meaning of Article III:4, and
therefore fall within the scope of this provision."
489
7.254 China holds the view that this reasoning of the Appellate Body in EC – Bananas III confirms
that what matters is whether the aspect of the me asures under scrutiny is an element of administrating
a valid border measure, which is therefore within the sc ope of Article II, or whether this aspect of the
measure serves instead to affect the intern al sale, distribution or use of the product. 490 Given our

485 (footnote original) Article III:1 refers to the application of measures "to imported or domestic
products", which suggests that application to both is not necessary.
486 (footnote original) Thus, the "advantage" to be obtained could consist in a right to import a product.
See for instance, the Report of the second GATT panel on EC – Bananas II as cited and endorsed in EC –
Bananas III , WT/DS27/R/USA, adopted on 25 September 1997, as modified by the Appellate Body Report,
para. 4.385 (DSR 1997:II, 943):

"The Panel further noted that previous panels had found consistently that this obligation
applies to any requirement imposed by a contracting party, including requirements 'which an
enterprise voluntarily accepts to obtain an advantage from the government.' In the view of the
Panel, a requirement to purchase a domestic product in order to obtain the right to import a
product at a lower rate of duty under a tariff quota is therefore a requirement affecting the
purchase of a product within the meaning of Article III:4."

487 Panel Report on India – Autos, para. 7.306.
488 Appellate Body Report on US – FSC (Article 21.5 – EC) , para. 208 (emphasis added). The word
"internal" qualifies all the transactions spelled out in Article III:4. See Appellate Body Report on US – FSC
(Article 21.5 – EC), para. 213.
489 Appellate Body Report on EC – Bananas III, para. 211 (emphasis in the original; footnotes omitted)
490 China's response to Panel question No. 85.

finding above that the charge under the measures is an "internal charge" within the meaning of
Article III:2 of the GATT 1994,
491 the procedures under the measures do not serve, as China argues,
to administer a valid border measure. Our findi ng that the charge applies to imported products
therefore supports a conclusion that the administrative procedures related to the application of the
charge likewise "affect" imported products.492
7.255 Moreover, the complainants argue that the criteria for the determination of the essential
character of a motor vehicle create an incentive to purchase domestic auto parts instead of imported
auto parts and therefore affect the "internal sale, offering for sale, purchase, transportation,
distribution or use."493 China, on the other hand, holds that the incentive to import auto parts instead
of motor vehicles (because of the higher tariff rate for motor vehicles) is a characteristic inherent to
the Schedule of Concessions that China negotiated.
494
7.256 However, in the view of the Panel, China seems to misunderstand the claim of the
complainants. The complainants do not challenge th e fact that China's tariff structure creates an
incentive to import auto parts instead of motor vehicles but, instead, they challenge the alleged
incentive created by the criteria under the measures to use domestic auto parts instead of imported
auto parts.495 Applying the reasoning develope d by the Appellate Body in US – FSC (Article 21.5 -
EC) to the present dispute 496, any auto manufacturer/importer that seeks to avoid the charge at issue
must ensure that imported auto parts used in the assembly of a given vehicle model do not meet any of
the criteria set out in the measures. 497 Under the measures, whether imported auto parts meet any of
the criteria set out in the measures is assessed based on the final assembly of auto parts in China,
which consequently requires the examination of auto parts imported in "multiple shipments". In our
view, this aspect of the measures inevitably infl uences an automobile manufacturer's choice between
domestic and imported auto parts and thus affects the internal use of imported auto parts.498

491 See paragraph 7.212 above.
492 Panel Report on Mexico – Taxes on Soft Drinks, para. 8.109.
493 European Communities' first written submission, para. 150; United States' first written submission,
494 China's response to Panel question No. 275. China states that "whatever incentives or disincentives
arise from the difference in duty rates in China’s Schedule of Concessions are characteristics that are inherent to
the Schedule of Concessions that China negotiated. One function of ordinary customs duties is to regulate
access to markets. They do so, in part, through the incentives and disincentives that are created by the
establishment of duty rates at different levels. No party di sputes that the higher tariff rate for motor vehicles in
China’s Schedule of Concessions creates some degree of incentive to assemble motor vehicles in China from
auto parts and components, as compared to importing finished motor vehicles."
495 It is, thus, also not the incentive to use domestic auto parts instead of imported auto parts that results
from the customs duty inscribed in China's Schedule which is at issue here. In this respect, we do agree with
China's statement that "the discrimination inherent in a customs duty that a Member validly imposes is not a
form of discrimination that is prohibited under Article III" (China's response to Panel question No. 85). See also
footnote 498, below.
496 Appellate Body Report on US – FSC (Article 21.5 – EC), para. 212.
497 See paragraphs 7.32 and 7.33 above, for the relevant criteria under the measures.
498 If the same criteria were applied to imported auto parts at the moment of importation only, however,
it would not necessarily influence the automobile manufacturer's choice between domestic and imported auto
parts in the same way. In that case, the relevant ques tion would be whether auto parts considered at the time of
their importation satisfy any of the criteria. In the Panel's understanding, this is what the United States
explained in its second oral statement concerning the difference between China's measures and the
discrimination inherent in a customs duty: "The same type of discrimination does not apply to customs duties
regularly imposed by WTO Members. That is, the level of charges on other imported products does not depend
on how an imported part is used within the Member's te rritory." (United States' second oral statement, para. 12,

7.257 The Panel thus concludes that the admini strative procedures imposed on any auto
manufacturer using imported auto parts as well as the criteria set out in the measures, combined with
the assessment of the charge which is based on th e final assembly internally , create an incentive for
auto manufacturers to use domestic auto parts instead of imported auto parts. The Panel, therefore,
finds that the measures affect "the internal sale, offering for sale, purchase, transportation, distribution
or use" of imported auto parts, within the meaning of Article III:4 of the GATT 1994.
7.258 In conclusion, because the measures apply to im ported auto parts which are "like" domestic
auto parts and are laws, regulati ons, and requirements affecting the internal sale, offering for sale,
purchase, transportation, distribution or use of the imported auto parts, we find that Article III:4 of the
GATT 1994 is applicable to the measures.
(d) Do the measures accord less favourable treatment to impor ted auto parts than to domestic
auto parts?
7.259 As noted above, we have found that the domestic and imported products are "like" and that
the measures are laws, regulations, or requirements wh ich "affect" the internal sale, offering for sale,
purchase, transportation, distribution, or use, of th e relevant products. The question which remains to
be answered under this claim is therefore whether the measures afford imported products "less
favourable" treatment than the like domestic products.
(i) Arguments of the parties
7.260 The European Communities and Canada
499 cite the Appellate Body report in Korea –
Various Measures on Beef to contend that a finding on whether there is "less favourable treatment"
requires an examination of "whether a measure modifies the conditions of competition in the relevant
market to the detriment of imported products." 500 They claim that, as GATT case law also has
clarified, a Member must provide effective equality of opportunities for imported products.501
7.261 Moreover, Canada and the United States recall the observation of the Appellate Body in US
– FSC (Article 21.5) that a measure could still be inconsistent with Article III:4 even if unfavourable
treatment did not arise in every instance.502
7.262 The complainants then submit that the measures fundamentally modify the conditions of
competition in the Chinese market to the detr iment of imported auto parts in two ways. 503 First, only
imported parts may become subject to an internal charge in case their input exceeds the level

emphasis in the original). Our reasoning in the context of Article III:4 does not rule on the question of whether
the criteria, if assessed solely on the basis of auto parts imported in a single shipment, would be in violation with
Article II of the GATT 1994. We address this question in Section VII.D.3 of these reports.
499 European Communities' first written submission, para. 152; Canada's first written submission,
para. 100.
500 Emphasis in the original. Moreov er, "(a) formal difference in tr eatment between imported and like
domestic products is thus neither necessary, nor sufficient, to show a violation of Article III:4." Appellate Body
Report on Korea – Various Measures on Beef, para. 137.
501 GATT Panel Report on US – Section 337 , para. 5.11, as cited by the European Communities in its
first written submission, para. 152 and by Canada in its first written submission, para. 100.
502 Appellate Body Report on US – FSC (Article 21.5 - EC) , para. 221. United States' first written
503 European Communities' first written submission, paras. 153-157; United States' first written
submission, paras. 97-102; Canada's first written su bmission, paras. 101-102. Argentina, a third party
participant, supports the complainants' view (see Argentina's third party submission, paras. 49-51).

specified in the measures. Consequently, this cr eates an incentive for manufacturers to use domestic
parts rather than imported parts. Se cond, only imported parts are subject to administrative
procedures. In the words of Canada, "a vehicle manufacturer using any imported auto parts is
subjected to a burdensome administrative regime."
504 The only way to avoid the administrative
requirements spelled out in the measures 505 is for a vehicle manufacturer to use solely domestic auto
parts.506 Moreover, Canada indicates that auto parts manufacturers, while not directly subject to the
measures, are also affected by their application.507
7.263 China responds that what the complainants have characterized as a "burdensome
administrative regime" is the customs process that China has established to determine whether an auto
manufacturer imports and assembles a collection of au to parts that, in its entirety, has the essential
character of a motor vehicle. China does not consid er that the process it has established for this
purpose is any more "burdensome" than the cust oms processes that Members have adopted to deal
with other complex issues of customs administra tion, such as inward processing and duty drawback
regimes. Article VIII:1(c) of the GATT 1994 expl icitly recognizes that customs processes can be
complex. The mere fact that these processes can be complex does not mean that they are subject to
the disciplines of Article III.508
(ii) Consideration by the Panel
7.264 Before we can examine whether the Chinese m easures afford "less favourable" treatment to
imported auto parts, we must first recall the standa rd of what qualifies as "less favourable" treatment
within the meaning of Article III:4 of the GATT 1994.
7.265 In this regard, the Appellate Body in Korea – Various Measures on Beef states:
"A formal difference in treatment between imported and like domestic products is
thus neither necessary, nor sufficient, to show a violation of Article III:4. Whether or
not imported products are treated 'less fa vourably' than like domestic products should
be assessed instead by examining whether a measure modifies the conditions of
competition in the relevant market to the detriment of imported products."509
7.266 Following the Appellate Body's guidance, we will examine whether the measures at issue
modify the conditions of competition in China's market to the detriment of imported auto parts.
7.267 First, as described in Section VII.A.1 above , the measures impose certain administrative
procedures on automobile manufacturers who use im ported auto parts in the assembly of motor

504 Canada's first written submission, para. 102.
505 These include, inter alia, performing self-verifications of domestic content; applying for an import
licence; registering a vehicle model with Customs; and being subject to additional review and verification
procedures. See Canada's first written submission, para. 102. Further details as well as an example are provided
by the United States (See United States' first written submission, paras. 100-102).
506 Canada's first written submission, para. 102.
507 Canada submits that "[i]n using imported parts, [auto part manufacturers] risk financial penalties
through contractual terms with downstream manufacturers that wish to avoid the brunt of the additional internal
charge" and they have "the risk of being found to violate the Measures or general Customs law if their record-
keeping concerning the use of imported parts is not satisfactory." (citing Article 36 of Decree 125). See
Canada's first written submission, para. 102.
508 China's response to Panel question 104.
509 Appellate Body Report on Korea – Various Measures on Beef, para. 137.

vehicles before, during and after imported auto parts enter China.
510 The complainants submit that
these administrative procedures are burdensome a nd add costs to the assembly operations of
automobile manufacturers.511
7.268 In particular, the European Communities argues that the considerable complexity of the
measures in itself delays the launching of a new model in the Chinese market by two to three years.
Further, according to the Europ ean Communities, establishing the self-verification report required
under Article 7 of Decree 125 may take an additiona l six months for a team of 10-15 highly skilled
experts and afterwards, it can take over one year be fore all the procedures are finalized. The United
States also explains that to perform a self-evalua tion, a manufacturer must catalogue all the parts of
each model it manufactures, determine whether, under the measures, the parts are foreign or domestic,
and calculate the thresholds for each assembly system and the overall price percentage of imported
parts in the model. Furthermore, as the United St ates submits, if an automobile manufacturer uses
imported parts imported by a third party supplier, th e manufacturer is required to maintain records
regarding the actual importer of record, and any evidence of duties and value-added taxes paid.
512
China has not provided any response to these speci fic arguments by the European Communities and
the United States. We also recall our observation a bove in paragraphs 7.65 and 7.66 that the sample
of pending applications for review and verification, submitted by the European Communities, shows
that the period for review and verification by th e Verification Centre can take from 30 days to a
couple of years.
7.269 Therefore, in our view, by subjecting imported auto parts to the administrative procedures not
faced by like domestic products, which could cause a substantial delay throughout the entire assembly
operations from the launching of a new model to the verification by the Verification Centre, the
measures modify the conditions of competition in Chin a's market to the detriment of imported auto
parts.
7.270 Furthermore, we found above that whether im ported auto parts meet the criteria for the
essential character determination under the measures is assessed based on the final assembly of auto
parts, and it inevitably influences an automob ile manufacturer's choice between domestic and
imported auto parts if it wishes to avoid the administrative procedures at issue.513 In other words, auto
manufacturers must ensure that imported auto part s used in the assembly of motor vehicles do not
meet any of the criteria under the measures to avoi d being subject to the administrative procedures
imposed under the measures.514 In sum, the criteria for the essential character determination set out in
the measures and the application of the criteria af ter the final assembly of motor vehicles not only
draw a formal distinction between imported auto pa rts and like domestic auto parts, but this formal
difference also has a substantive importance in that it creates a disincentive for auto manufacturers to
use imported auto parts.515

510 The measure thus creates a formal distinction betwee n imported auto parts and domestic auto parts.
The administrative procedures do not a pply if an auto manufacturer uses on ly domestic auto parts. Auto
manufacturers using at least one imported auto part are however subject to the administrative procedures under
the measures.
511 European Communities' response to Panel question No. 8; United States' first written submission,
paras. 44-66, 99-104; Canada's first written submission, para. 102; Canada's response to Panel question No. 8.
See also paragraph 7.65 above.
512 See Articles 9 and 29 of Decree 125.
513 In this respect, we refer to the elaboration of the specific thresholds in paras. 7.31-7.33.
514 This applies to both auto parts imported by auto manufacturers themselves and those purchased
from a third-party supplier.
515 Appellate Body Report on US – FSC (Article 21.5 - EC), paras. 217 and 218.

7.271 This "careful analysis of the contested measures and of its implications in the marketplace"
516,
shows that the administrative procedures as well as the application of the criteria for the essential
character determination as defined by China base d on the final assembly, accord less favourable
treatment to imported auto parts than to domestic auto parts.
(e) Conclusion
7.272 In light of the foregoing, the Panel finds that China's measures, which fall within the scope of
Article III:4, are inconsistent with its obligations under Article III: 4 of the GATT 1994 to afford no
less favourable treatment to like imported products.
4. Are the measures consistent with Article III:5 of the GATT 1994?
(a) Arguments of the parties
7.273 The complainants submit that the measures violate Article III:5, first sentence, of the
GATT 1994. In the alternative, the European Communities and the United States argue that the
measures violate Article III:5, second sentence, of the GATT 1994.517
7.274 China argues in response that the challenged measu res constitute border measures subject to
Article II of the GATT 1994 and, therefore, do not fa ll within the scope of Article III:5, first and
second sentences, of the GATT 1994. China does not a dvance any further arguments in response to
this claim.518
(b) Consideration by the Panel
7.275 We note that the complainants have slightly different positions on the necessity of proceeding
with their claims under Article III:5 of the GATT 1994 in case the Panel finds the measures are
inconsistent with Article III:2 and III:4 of the GATT 1994. At least one of the co-complainants left to
the discretion of the Panel the decision to exerci se judicial economy with respect of its claim under
Article III:5 of the GATT 1994. 519 Indeed, we do not believe that making a finding on the claims

516 Appellate Body Report on US – FSC (Article 21.5 - EC), para. 215.
517 European Communities' first written submission, paras. 186-187; United States' first written
submission, paras. 3, 110-111, footnote 141; United States' first oral statement, paras. 4, 18-19; United States'
second written submission, para. 3; United States' second oral statement, para. 5; Canada's first written
submission, paras. 87, 104-115. Canada's second oral statement, paras. 2, 23.
518 China's first written submission, paras. 42-48, 169- 171, 174. See also China's first oral statement,
paras. 16-19, 40; China's second written submission, pa ras. 123-124, 127; China's response to Panel question
No. 85.
519 The United States indicates that insofar as the findings of the Panel are sufficient to resolve the
dispute, it views the exercise of judici al economy in respect of the other claims as a matter to be left to the
discretion of the Panel. More specifica lly, it says that "a breach of Article III:4 would also indicate a breach of
Article III:5". The United States made the following statement, stating that it considers:

"the most essential claims in this dispute as the breach of Article III:4 and/or the TRIMs
Agreement, because 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 Article 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 [sic] findings are made that

under Article III:5 would "enhance the ability of the DSB to make sufficiently precise
recommendations and rulings in this dispute."
520 In reaching this conclusion we are guided by the
following statement of the Appellate Body:
"Nothing in this provision or in previous GATT practice requires a panel to examine
all legal claims made by the complaining party. Previous GATT 1947 and WTO
panels have frequently addressed only tho se issues that such panels considered
necessary for the resolution of the matter be tween the parties, and have declined to
decide other issues. Thus, if a panel found that a measure was inconsistent with a
particular provision of the GATT 1947, it gene rally did not go on to examine whether
the measure was also inconsistent with other GATT provisions that a complaining
party may have argued were violated. In recent WTO practice, panels likewise have
refrained from examining each and every cl aim made by the complaining party and
have made findings only on those claims th at such panels concluded were necessary
to resolve the particular matter.
Although a few GATT 1947 and WTO panels did make broader rulings, by
considering and deciding issues that were not absolutely necessary to dispose of the
particular dispute, there is nothing anywhere in the DSU that requires panels to do
so."521
7.276 Therefore, in view of our findings above that China has acted inconsistently with
Articles III:2 and III:4 of the GATT 1994, and guided by the above statement of the Appellate Body,
we consider that we have made the findings that are necessary for the resolution of the dispute raised
by the complainants. We therefore exercise j udicial economy in respect of the complainants'
respective claims under Article III:5 of the GATT 1994.
5. Are the measures justified under Article XX(d) of the GATT 1994?
7.277 As set forth above, the Panel found that the in ternal charge imposed on imported auto parts
under the measures was inconsistent with Article III:2 of the GATT 1994 and that the measures were
also inconsistent with III:4 of the GATT 1994.
7.278 China submits that the challenged measures as a whole, or particular aspects of the measures,
are justified under Article XX(d) of the GATT 1994 if the measures are found inconsistent with one
or more provisions of the GATT 1994. 522 The complainants argue that the measures are not justified
under Article XX(d).523

are necessary for the resolution of the dispute." (United States' response to Panel question 151.
See also United States' response to Panel question No. 152).

On the other hand, the other two co-complainants, the European Communities and Canada, are of
the view that a finding on Article III:4 of the GA TT 1994 would not render a finding on Article III:5
unnecessary (see their respective responses to the Panel question No. 152).
520 Appellate Body Report on US – Lamb, para. 194.
521 Appellate Body Report on US – Wool Shirts and Blouses, pages 18-19 (original footnotes omitted).
522 China's first written submission, para. 202.
523 European Communities' second written submission, paras. 136-148; European Communities' second
oral statement, paras. 33-38, United States' second oral statement, paras. 29-36; Canada's second written
submission, paras. 75-103; Canada's second oral statement, paras. 34-52.

7.279 Because a Member invoking Article XX(d) as a justification of its measure – China in this
case – has the initial burden of proof for its affirmative defence
524, the Panel will examine whether
China has discharged its burden of proving that th e measures satisfy the requirements of, and thus are
justified under, Article XX(d).
7.280 For a measure, otherwise inconsistent with GA TT 1994, to be justified under Article XX, two
elements must be proved: first, the measure fall s under one or more of the exceptions provided in
Article XX; and, second, the measure satisfies th e requirements under the chapeau of Article XX. 525
As China claims that the measure s are justified under Article XX(d), we will commence our analysis
with the first element – whether the measures fall under Article XX(d).
7.281 Article XX(d) provides:
"Nothing in this Agreement shall be construed to prevent the adoption or enforcement
by any contracting party of measures:
(d) necessary to secure compliance with laws or regulations which are not
inconsistent with the provisions of this Agreement, including those relating to
customs enforcement, the enforcement of monopolies operated under paragraph 4 of
Article II and Article XVII, the protection of patents, trade marks and copyrights, and
the prevention of deceptive practices."
7.282 The Appellate Body clarified in Korea – Various Measures on Beef that two elements must be
shown in order for a measure to be justified provisionally under paragraph (d) of Article XX:
"First, the measure must be one designed to 'secure compliance' with laws or
regulations that are not themselves incons istent with some provision of the GATT
1994. Second, the measure must be 'necessary' to secure such compliance."526
7.283 Before commencing our analysis of whether the measures at issue are designed to 'secure
compliance' with laws or regulations that are not themselves inconsistent with the GATT 1994, the
Panel observes that, initially, China did not disti nguish its justification of the measures under
Article XX(d) in respect of the Panel's possible findi ng of the measures' inconsistency with Article III
of the GATT 1994 from that with Article II. In its written submissions, Ch ina provided a general
defence under Article XX(d) against the Panel's po ssible findings against the measures "under one or
more provisions of the GATT 1994". 527 The relevant heading (Sec tion IV.G) in China's first
submission in this regard reads " Any Inconsistency with the GATT 199 4 Is Subject to the General
Exception Under Article XX(d)", and the relevant heading (Section VI) in China's second written
submission reads "The Challenged Measures Would Be Justified Under Article XX(d) If The Panel
Were To Identify Any Violation of the Covered Agreements" (emphasis added).

524 Appellate Body Report on Korea – Various Measures on Beef, para. 157, also citing Appellate Body
Reports on US – Gasoline, footnote 98, at 21 and US – Wool Shirts and Blouses , at 335-337 and GATT Panel
Report on US – Section 337, footnote 69, para. 5.27.
525 Appellate Body Report on US – Gasoline, page 21. The Appellate Body also found that the proper
sequence of steps is to first assess whether a measure can be provisionally justified as one of the categories
under paragraphs (a)-(j), and then, to further appraise the same measure under the chapeau of Article XX.
According to the Appellate Body, this sequence of steps in the analysis of a claim of justification under
Article XX reflects, not inadvertence or random choice, but rather than fundamental structure and logic of
Article XX (Appellate Body Report on US – Shrimp, paras. 119-120).
526 Appellate Body Report on Korea – Various Measures on Beef, para. 157.
527 China's first written submission, para. 202; China's second written submission, para. 164.

7.284 In a written response to a question from the Pa nel after the second substantive meeting,
however, China indicated a change in its position and clarified that the Article XX(d) analysis would
be different depending on whether a viola tion is found under Article III or Article II.
528 C h i n a
submits that if the challenged measures were to be found inconsistent with Article III, the measures
could be justified under Article XX(d) on the grounds that the charge and measures are necessary to
secure compliance with "a valid interpretation of China's tariff provisions for motor vehicles".529
7.285 Specifically, China submits as follows:
"[T]he Article XX(d) analysis would be different in respect of a finding of a violation
of Article III. … In these circumstances, the charges and measures could be justified
under Article XX(d) as charges and measures that are necessary to secure compliance
with a valid interpretation of China's tari ff provisions for motor vehicles, i.e. an
interpretation that encompasses parts and components in multiple shipments that have
the essential character of a motor vehicle. That is, the Panel could find that China's
interpretation of its tariff provisions is not inconsistent with the interpretive rules of
the Harmonized System, and is not otherwi se inconsistent with the meaning of the
relevant terms of China's tariff schedule, but that China has adopted impermissible
'internal' charges and measures as a means of securing compliance with that
interpretation.
While China would not agree with the finding of violation of Article III, it would
seem to be exactly the circumstance in which Article XX(d) would apply. The
reference to customs enforcement in Ar ticle XX(d) presupposes that Members may
need to take actions that are inconsiste nt with its GATT obligations (and thus
requiring the invocation of a general exception), but that are otherwise necessary to
secure compliance with its customs law. Th e adoption of charges and measures that
violate the disciplines of Article III, but th at are necessary to secure compliance with
a customs measure that the Member is a llowed to impose in accordance with its
Article II commitments, would seem to be the paradigmatic case in which
Article XX(d) would apply. If Article XX(d) did not apply in this circumstance, it is
hard to see when it would ever apply.
... For the reasons that China has explaine d, China believes that Decree 125 falls
within the scope of China's rights and obliga tions under Article II. However, if the
Panel were to find that one or more aspect of the measure constitutes an
impermissible measure or charge within the scope of Article III, China considers that
any such internal measure or charge is justified under Article XX(d) to secure
compliance with duties that China is allowe d to collect by reason of the importation
of parts and components that have the essential character of a motor vehicle."
530

528 China's response to Panel question No. 282.
529 China's response to Panel question No. 282.
530 China's response to Panel question No. 282. China's statement quoted above in paragraph 7.285 was
in response to the Panel question whether, and if so, how the Panel's analysis of China's defence under
Article XX(d) in respect of an Article II violation shou ld be different from that in respect of an Article III
violation.
In respect of a possible finding of a violation of Article II, China submits that the measures could still
be justified under Article XX(d) since Article XX(d) provi des an authority for China to give effect to China's
tariff provisions for motor vehicles to the extent that the rules of the HS, when reviewed in the context of
Article II, do not provide an unambiguous legal basis for China (China's response to Panel question No. 282).

7.286 In its comments on China's response above, the European Communities submits that since
China's explicit arguments relating to Article XX(d ) are very cursory in both its first and second
submissions and fall short of satisfying China's obligations on the burden of proof, the Panel's analysis
should stop there.
531 The European Communities further subm its that China has not demonstrated
that the measures are necessary to secure compliance with its tariff schedule provisions for motor
vehicles, and instead, China formulates its hope that "it would seem to be exactly the circumstance in
which Article XX(d) would apply", or "[i]f Article XX(d) did not apply in this circumstance, it is hard
to see when it would ever apply".
532 The European Communities argu es that such wishful thinking,
however, cannot replace a proper defence under Article XX(d).
7.287 As noted by the Panel above in paragraph 7.279, China, as the party putting forward an
affirmative defence under Article XX(d), bears the burden to prove, based on factual and legal
arguments supported by specific evidence, how its me asures are justified under Article XX(d). The
fact that China has not distinguished its Article XX(d) arguments from the possible violation of one
provision of the GATT 1994 (i.e. Article III) from that of an entirely different provision of the GATT
1994 (i.e. Article II) until specifically asked by th e Panel, makes us question from the outset the
validity of China's defence under Article XX(d). It is not for the Panel to advance or presume specific
arguments or analysis for a claim made by a party to the dispute. 533 The burden to prove an
affirmative claim based on supporting arguments and evidence rests on the party asserting the claim.
Having said that, we will move on to examine whether China has proved that the measures satisfy the
first element necessary to justify a measure under Article XX(d).
(a) What is the law or regulation that the measur es at issue secure compliance with within the
meaning of Article XX(d)?
(i) China's interpretation of the tariff provisions for motor vehicles
7.288 The Appellate Body stated in Mexico – Soft Drinks that the term "laws or regulations" within
the meaning of Article XX(d) refers to rules that form part of the domestic legal system of a WTO
Member invoking the provision, including rules deri ving from international agreements that have
been incorporated into the domestic legal system of a WTO Member or have a direct effect according
to that WTO Member's legal system.
534
7.289 To determine whether the measures at issue ar e justified under Article XX(d), the Panel first
needs to examine whether China has identified a domestic law or regulation that is not itself
inconsistent with the GATT 1994.
7.290 In the course of this dispute, China has interchangeably referred to various items as the law or
regulation the measures are securing compliance with. For example, China has made references to

531 European Communities' second oral statement, para. 34.
532 European Communities' comments on China's response to Panel question No. 282.
533 The Appellate Body states in US – Gambling: "In the context of affirmative defences, then, a
responding party must invoke a defence and put forward evidence and arguments in support of its assertion that
the challenged measure satisfies the requirements of the defence. When a responding party fulfils this
obligation, a panel may rule on whether the challenged m easure is justified under the relevant defence, relying
on arguments advanced by the parties or developing its own reasoning. The same applies to rebuttals. A panel
may not take upon itself to rebut the claim (or defence) where the responding party (or complaining party) itself
has not done so" (emphasis added) (Appellate Body Report on US – Gambling, para. 282).
534 Appellate Body Report on Mexico – Taxes on Soft Drinks, paras. 69, 79.

China's customs laws and regulations
535; China's customs laws, including its tariff provisions for
motor vehicles 536; China's tariff schedule 537; the tariff provisions for motor vehicles provided in
China's tariff schedule538; an allegedly valid interpretation539 of the tariff provisions for motor vehicles
on the relationship between motor vehicles and part s of motor vehicles as advocated by China; and
duties540 that China is allowed to collect by reason of the importation of parts and components that
have the essential character of a motor vehicle. 541 In this regard, China was of the view that it did not
perceive a distinction between its tariff provisi ons for motor vehicles "as such" and its tariff
provisions for motor vehicles as interpreted in accordance with the rules of the HS.542
7.291 As noted above in paragraph 7.285, however, China clarified its Article XX(d) arguments
specifically with respect to the Panel's possible fi nding against the measures under Article III only in
response to a question from the Panel.
7.292 In that response, as cited above in paragraph 7.285, China indicated that the law or regulation
that the measures at issue secure compliance with is China's alleged "valid in terpretation of its tariff
provisions for motor vehicles". According to China, this valid interpretation encompasses parts and
components in multiple shipments that have the essen tial character of a motor vehicle. China argues
that the charge and the administrative requireme nts under the measures are thus a customs measure
that the Member is allowed to impose in accordance with its Article II commitments.
7.293 The European Communities and Canada consider that the alleged GATT consistent law or
regulation in this case is China's Schedule as such, as implemented under China's domestic law.543

535 China's first written submission, paras. 203-204; China's second written submission, paras. 7, 164;
China's response to Panel question No. 13.
536 China's first written submission, para. 205; China's response to Panel question No. 84.
537 China's response to Panel question No. 287.
538 China's first written submission, paras. 202-204, 207, 212, China's second written submission, paras.
168-169, 172, 176, 182-183, 186, 187; China's responses to Panel question Nos. 13, 281, 282, 283, 286.
539 China's responses to Panel question Nos. 9, 282.
540 China's response to Panel question No. 282; China's first written submission, para. 205.
541 China argues that measures ar e necessary to secure compliance with China's customs laws and
regulations by preventing the importation and assembly of auto parts as a means of circumventing China's tariff
provisions relating to motor vehicles (China's first written submission, paras. 203-204). China explains that
Article 3 of China's Import/Export Tariff Regulation (Exhibit CHI-32) incorporates China's Schedule of
Concessions into Chinese law (China's first written subm ission, footnote 140). China also submits that the
measures secure compliance with Ch ina's tariff provisions for motor ve hicles by ensuring the effective
enforcement of China's tariff provisions for motor vehicl es since the measures defi ne and enforce the boundary
between a motor vehicle and parts of a motor vehicle, without regard to the manner in which the importer
structures or documents its import transactions (China's second written submission, paras. 168, 169). At the
same time, China also argues that the measures are necessary to secure compliance with a valid interpretation of
China's tariff provisions for motor vehicles, i.e. an interpretation that encompasses parts and components in
multiple shipments that have the essential character of a motor vehicle (China's responses to Panel question Nos.
9, 282). In China's view, the measures should be justified under Article XX(d) to secure compliance with duties
that China is allowed to collect by reason of the importation of parts and components that have the essential
character of a motor vehicle (China's response to Pa nel question No. 282; China's first written submission,
para. 205). According to China, China must be able to interpret its tariff provisions for motor vehicles in a
manner that gives them meaningful eff ect, and to adopt measures to secure compliance with this interpretation
(China's second written submission, para. 169).
542 China's response to Panel question No. 281.
543 Parties' responses to Panel question No. 281.

7.294 The Panel thus notes that the law or regulation th at China claims the measures secure
compliance with is its interpretation of the tari ff provisions for motor vehicles in China's domestic
tariff schedule. While not conceding that the law or regulation that is "not inconsistent" within the
meaning of Article XX(d) includes an interpreta tion of certain tariff provisions of a Members'
Schedule, the complainants submit that even if Chin a's interpretation of its tariff provisions for motor
vehicles were to be considered as the law or regulation under Article XX(d), China has not proved
that the measures meet the requirements under Artic le XX(d) because China's interpretation of the
tariff provisions for motor vehicles is in fact inconsistent with the GATT 1994.
544
7.295 China's tariff provisions, including those for motor vehicles, are contained in and are thus part
of China's domestic tariff schedule, which repr oduces China's commitments in China's Schedule of
Concessions with respect to goods from other Memb er countries. In turn, China's Schedule of
Concessions is part of China's Accession Protocol and thus an integral part of the WTO Agreement. 545
In this connection, we recall th e Appellate Body's reasoning in EC – Computer Equipment that
common intentions cannot be ascertained on the basis of the subjective and unilaterally determined
'expectations' of one of the parties to a treaty.546 We thus do not consider that China's interpretation of
its concessions with respect to motor vehicles ca n form part of China's tariff schedule itself. 547
Finding otherwise would lead to an absurd situa tion where a WTO Member's own interpretation of a
treaty term is considered as constituting part of such a treaty itself. This is particularly so in the
present case where China's interpretation of its tariff provisions for motor vehicles is contested by the
complainants in their alternative claim under Article II of the GATT 1994.
7.296 In any event, as set out below in Section VII.D with respect to the complainants' alternative
claim under Article II of the GATT 1994, we find that China's interpretation of the tariff provisions
for motor vehicles is inconsistent with China's commitment under its Schedule of Concessions and,
consequently, with China's obligations under Article II:1(a) and (b) of the GATT 1994. Accordingly,
if we were to accept China's position that the law or regulation that the measures secure compliance
with is China's interpretation of its tariff provision s for motor vehicles, we conclude that China has
failed to prove that the measures are justified under Article XX(d) because the measures do not secure
compliance with the law or regulation that is "not inconsistent" with the GATT 1994 within the
meaning of Article XX(d).

544 European Communities' comments on China's response to Panel question No. 281; United States'
second oral statement, paras. 31-32; United States' response to Panel question No. 280; Canada's second
written submission, para. 79.
545 See paragraph 7.740 below.
546 See paragraph 7.740 below.
547 Appellate Body Report on EC – Computer Equipment , para. 84, also referred to by the Appellate
Body Report on EC – Chicken Cuts, para. 250.
Furthermore, we note that under Article IX:1 of th e WTO Agreement, the exclusive authority to adopt
interpretations of the WTO Agreement and the Multilatera l Trade Agreements is granted to the Ministerial
Conference and the General Council. Specifically, Article IX:1 of the WTO Agreement provides:

"The Ministerial Conference and the General Co uncil shall have the exclusive authority to
adopt interpretations of this Agreement and of the Multilateral Trade Agreements. In the case
of an interpretation of a Multilateral Trade Agreement in Annex 1, they shall exercise their
authority on the basis of a recommendation by the Council overseeing the functioning of that
Agreement. The decision to adopt an interpretation shall be taken by a three-fourths majority
of the Members..."

(ii) China's tariff schedule
7.297 Having found that China failed to prove that the law or regulation China's measures seek to
secure compliance with is not itself inconsistent with the GATT 1994, the Panel does not need to
proceed with its examination of the rest of the re quirements under Article XX(d). However, if the
Panel were to consider, arguendo, that China's "tariff schedule" is the law or regulation the measures
secure compliance with, such a law or regulation w ould be "not inconsistent" with the GATT 1994 to
the extent China's tariff schedule reproduces Chin a's concessions contained in its Schedule as such,
which is an integral part of the WTO Agreement.
548 Therefore, for the purpose of completeness of our
analysis, we will proceed to examine whether, if the law or regulation that the measures secure
compliance with is China's domestic tariff sche dule, China's measures are justified under Article
XX(d).
(b) Are the measures designed to secure compliance with the law or regulation?
7.298 The Panel recalls the Appellate Body's statement in Mexico – Taxes on Soft Drinks
concerning the terms "to secure compliance with" under Article XX(d):
"[T]he terms 'to secure compliance' speak to the types of measures that a WTO
Member can seek to justify under Article XX(d). They relate to the design of the
measures sought to be justified. There is no justification under Article XX(d) for a
measure that is not designed 'to secure compliance' with a Member's laws or
regulations. Thus, the terms 'to secure co mpliance' do not expand the scope of the
terms 'laws or regulations' to encompass the international obligations of another WTO
Member. Rather, the terms 'to secure compliance' circumscribe the scope of
Article XX(d)."
549 (original footnote omitted and emphasis added)

548 See paragraph 7.295 above. China's Schedule of Concessions is incorporated into China's domestic
law in the form of a tariff schedule pursuant to Artic le 3 of China's Import/Export Tariff Regulation (China's
first written submission, footnote 140 (Exhibit CHI-32)). Article 3 provides:

"Article 3 The State Council formulates th e Import/Export Tariff Code of the People's
Republic of China (hereinafter referred to as the 'Tariff Code') and the Code of Import Tariff
on Entrance of Articles of the People's Republic of China (hereinafter referred to as the 'Tariff
Code for Entrance of Articles') as integral parts of this Regulation, which set forth dutiable
items, tariff numbers, and tariff rates" (Exhibit CHI-32) (emphasis in original).

See also Panel Report on EC – Chicken Cuts, paras. 7.5-7.8; GATT Panel Report on EEC – Parts and
Components, para. 5.13. The complainants do not dispute that China's tariff schedule is a reproduction of
China's Schedule of Concessions, and thus, to that extent, not itself inconsistent with the GATT 1994.
In this regard, we note China's statement that China's tariff provisions for motor vehicles are
incorporated into the GATT, and are therefore not inconsistent with the GA TT (China's second written
submission, para. 169). We do not consider this is a legally and factually correct statement. China's Schedule
of Concessions is an integral part of the WTO Agreem ent, and China's Schedule is incorporated into China's
tariff schedule (domestic nomenclature), not the other way around. In any event, a Member's tariff schedule can
be assumed to be consistent with the WTO Agreement to the extent the domestic nomenclature is a reproduction
of that Member's Schedule of Concessions. Based on such understanding, we are assuming for the purpose of
the present proceeding that China's tariff schedule is "not inconsistent" with the GATT 1994.
549 Appellate Body Report on Mexico – Taxes on Soft Drinks , para. 72, also citing its Report on Korea
– Various Measures on Beef, para. 157. See also Panel Report on Korea – Various Measures on Beef ,
paras. 655-658. In particular, the Panel stated:

7.299 The Panel considers that the Appellate Body's analys is in the statement above shows that the
requirement "to secure compliance" with the concer ned law or regulation under Article XX(d) can be
examined in two parts: (i) whether the challenge d measure is "designed" to secure compliance with
the law or regulation concerned; and (ii) whether the measure in fact "secures compliance with" the
law or regulation. In this connection, we find further support for our understanding of the terms "to
secure compliance" in the analysis of the Panel in EC – Tariff Preferences where the Panel
determined that, to examine whether the measure in that dispute was designed to achieve the stated
health objectives under Article XX(b), it needed to consider not only the express provisions of the
measure, but also the design, architecture and structure of the measure.
550 Although the Panel's
analysis in EC – Tariff Preferences was made in the context of paragraph (b) ("necessary to protect
human...life or health") of Article XX, not paragr aph (d) ("necessary to secu re compliance..."), we
consider that the same type of analysis is also re levant to the question before us, i.e. whether China's
measures are designed to secure compliance with China's tariff schedule.
7.300 We will, therefore, first examine whether th e measures concerned in this case are "designed"
to secure compliance with the laws or regulations, which are "not inconsistent" with the GATT 1994.
If so found, we will then turn to the question of whether the measures in fact "secure compliance"
with the GATT-consistent laws or regulations.
(i) Whether the measures are "designed" to secure compliance with the law or regulation
7.301 China argues that the measures implement and en force the provisions of China's tariff
schedule (incorporating China's Schedule of Concessi ons) relating to imports of "motor vehicles" by
preventing the importation and assembly of auto pa rts as a means of circumventing China's tariff
provisions relating to motor vehicles. 551 According to China, the measures achieve this objective by
establishing an administrative process to ensure th at auto parts having the essential character of a
complete vehicle are classified for customs purposes as the importation of a motor vehicle, regardless
of whether the parts enter China in one shipment or in multiple shipments. China submits that
Chapter XI of Policy Order 8, the chapter concer ning the administration and enforcement of China's

"However, despite the troublesome aspects, the Panel accepts that the dual retail system was
put in place, at least in part, in order to secu re compliance with the Korean legislation against
deceptive practices to the exte nt that it serves to preven t acts inconsistent with the Unfair
Competition Act . First, the system was established at the time when, ..., acts of
misrepresentation were widespread in the beef sector. Second, it must be conceded that the
dual retail system does appear to reduce the opportunities and thus the temptations for
butchers to misrepresent foreign beef for dom estic beef, .... The Panel notes that its
interpretation of the words "measure ... to secure compliance with laws or regulations" is not
inconsistent with the approach taken by the panel on EEC – Parts and Components and later
followed by the panel on Canada - Periodicals". (Panel Report on Korea – Various Measures
on Beef, para. 658) (original footnote (footnote 363) omitted).

550 Panel Report on EC – Tariff Preferences, para. 7.200, citing the Appellate Body Report on Japan –
Alcoholic Beverages II : the Appellate Body stated that "the aim of a measure may not be easily ascertained,
nevertheless, its protective application can most often be discerned from the design, the architecture and the
revealing structure of a measure" (Appellate Body Reports on Japan – Alcoholic Beverages II , page 29 and
Argentina – Textiles and Apparel , para. 55). The Panel also cited the Appellate Body Report on US – Shrimp.
In US – Shrimp, the Appellate Body stated, "we must examine the relationship between the general structure and
design of the measure here at stake, …, and the policy goal it purports to serve, that is, the conservation of sea
turtles" (Appellate Body Report on US – Shrimp, para. 137).
551 China's first written submission, paras. 203-204.

tariff provisions for motor vehicles and vehicle parts, gave rise to the customs enforcement procedures
embodied in Decree 125 and Announcement 4.
552
7.302 The European Communities argues that nothing in the m easures indicates that they are
intended to secure compliance with China's tariff schedule, but rather the actual purpose of the
measures is "to develop the Chinese automotive i ndustry into a pillar industry of the national
economy by 2010" as indicated in the preamble of Policy Order 8. 553 According to the European
Communities, China's allegation that the measures ar e designed to secure compliance with its tariff
schedule is an ex post facto rationalization by China which is not supported by any evidence. The
European Communities points to the fact that Chin a appears to apply its multiple shipments theory
exclusively in the automobile sector, and only since 2004, which happens to coincide with the
moment in which China decided to "[n]urture a group of relatively strong auto parts manufacturers" as
stated in Article 4 of Policy Order 8. 554 Furthermore, there is not a single reference, let alone more
detailed justification in the measures that would ev en remotely point to GIR 2(a) or its language. 555
The European Communities considers that the silence in the measures about GIR 2(a) is because the
objective of the measures is to nurture the domestic automotive industry, which is not related to GIR
2(a).556 The measures, in particular Chapter XI of Policy Order 8, which even China admits as
motivating Decree 125 and Announcement 4, explic itly refer to the objective of nurturing the
domestic automobile industry.
7.303 The United States submits that although statements of in tent contained in legislation may not
be determinative because laws are often adopted for more than one reason, the statements of intent
contained in China's laws are relevant and should be considered by the Panel. 557 The United States
refers the Panel to the statement in China's measures that they are intended to promote the
development of China's domestic auto parts indus try, and the fact that China's measures make no
mention of any goal of preventing "tariff evasion" or "tariff circumvention".
7.304 Canada also submits that when read collectively, pa rticularly in the light of Policy Order 8,
the measures are not designed to enforce customs ob ligations by preventing so-called tariff evasion,
but to promote China's domestic auto parts industry. 558 In Canada's view, the measures do not secure
compliance with China's tariff provisions for motor ve hicles since, first, the purpose of the measures
is to provide protection and support to the domestic auto parts industry, and, second, the measures are
not designed to enforce China's tariff schedule because, on their face, they conflict with it by
imposing an additional 15 per cent charge on foreign au to parts, which is not listed in China's tariff
schedule and therefore cannot be applied.
559

552 China's response to Panel question No. 49.
553 European Communities' second written submission, paras. 99, 144. The European Communities
also refers to Articles 3 and 4 of Policy Order 8 and the corresponding provisions in Decree 125 and
Announcement 4.
554 European Communities' second written submission, para. 99.
555 European Communities' second written submission, para. 121.
556 European Communities' second written submission, para. 122.
557 United States' response to Panel question No. 292.
558 Canada's second written submission, paras. 87, 88, also citing its first written submission, Part D.2
of the factual background section submitted jointly by the complainants. Specifically, to show that the measures
are designed to promote the Chinese do mestic auto parts industry, Canada refers to the preamble and the policy
objectives of Policy Order 8, Article 52 (Chapter XI) of Policy Order 8, the preamble and Article 1 of
Decree 125 and Article 1 of Announcement 4.
559 Canada's response to Panel question No. 280.

7.305 Following the approach adopted by previous pa nels as well as the Appellate Body as noted
above, the Panel will examine the express provisions as well as the design, structure and architecture
of the measures (i.e. Policy Order 8
560, Decree 125, and Announcement 4) to determine whether the
measures are designed to enforce China's tariff schedul e. With respect to Policy Order 8, which is a
legal instrument that provides the legal basis fo r the introduction of Decree 125 and Announcement 4,
the complainants argue that its preamble, policy objectives (in particular, Articles 3 and 4) and
Article 52 show that the measures are designed to protect and promote China's domestic auto parts
industry. China, on the other hand, submits that Ch apter XI of the Policy, as the only chapter in the
Policy relevant to the measures at issue, reveals th e rationale behind the measures, which is to enforce
China's tariff schedule.
7.306 First, we note that the title of Policy Order 8 – "the Policy on Development of the Automotive
Industry" – refers to the development of China' s automotive industry, not enforcement of China's
tariff provisions for motor vehicles or vehicle part s. Further, as submitted by the complainants, the
text of the preamble of Policy Order 8 also shows th at the main reason for introducing the Policy is to
further develop China's automotive industry. The preamble of Policy Order 8 provides:
"The Policy on Development of the Automotive Industry is formulated in order to
meet the need to continuously improve the socialist market economy system as well
as the new circumstances for the development of the automotive industry at home and
abroad following accession to the World Trade Organization; in order to promote the
structural adjustment and upgrading of the automotive industry, and comprehensively
improve the international competiti veness of the automotive industry ; and in order to
satisfy the ever-increasing demand from consumers for automotive products, and
foster the healthy development of the automotive industry . Through the
implementation of this Policy, our country's automotive industry is to develop into a
pillar industry of the national economy by 2010 , and to make greater contributions
toward realizing the objective to comprehe nsively build a fundamentally prosperous
society." (emphasis added)
7.307 The preamble thus makes no reference to the need to enforce China's tariff provisions as
claimed by China.
7.308 We further observe similar la nguage in the Policy objectives 561 as well as other provisions of
the Policy, including those of Chapter VIII 562 addressing China's auto parts industry. We also recall

560 The Panel recalls its statement above in paragra ph 7.9 that it would refer back to the provisions
contained in Policy Order 8 as necessary in its legal analysis.
561 "Article 2. ...By 2010, our country is to become a major global automotive
manufacturing country, with automotive products th at are able to satisfy most of the domestic
market's demand and that have entered the international market in large volumes.

Article 3. ...In 2010, vehicle manufacturers shall have forged a number of well-known
brands in automobile, motorcycle and parts products.

Article 4. Promote structural adjustments and restructuring in the automotive industry,
... Through market competition, form severa l internationally competitive large vehicle
manufacturers, and strive to make them into the list of the world's top 500 enterprises by 2010.
... Nurture a group of relatively strong auto -parts manufacturers to achieve large-scale
production such that they are able to participate in the global auto parts supply chain as well as
be internationally competitive."

that Article 52 of Chapter XI, which is the ch apter on import management and gives rise to the
implementation of Decree 125 and Announcement 4, mentions the development of automobile
manufacturers and vehicle manufacturers giving impetus to the technological progress of auto parts
manufacturers.
7.309 In response to a request from the Panel to expl ain the specific situation leading up to China's
decision to introduce the measures at issue in 2004, China submits that there was a significant issue
concerning the evasion of higher tariff rates that apply to motor vehicles, including parts and
components that have the essential character of a motor vehicle.
563 China argues that the dramatic
increase in the value of imported parts and com ponents between 2001 and 2004 , greatly outstripping
the rate of motor vehicle production in China 564, proves the existence of the alleged problems relating
to circumvention of ordinary customs duties for motor vehicles, particularly since this increase
occurred at a time when automobile manufacturer s were introducing a large number of new vehicle
models into the Chinese market. According to Ch ina, these figures strongly suggest that there were
issues of tariff classification concerning motor vehicles and parts of motor vehicles that warranted
examination.
7.310 We are not convinced, however, that these partic ular statistics showing an increase in auto
parts imports between 2001-2004 alone can prove th at the alleged problem relating to evasion of
higher tariff rates applicable to motor vehicles ex isted prior to the introduction of the measures. 565 As
pointed out by the European Communities and Cana da, numerous factors could explain this increase

562 For example, Chapter VIII of Policy 8 provides:

"Article 30. Auto parts manufacturers should adapt to international industrial
development trends and actively participate in product development word done by the
manufacturers of complete vehicles and assembles. In the field of key auto parts, systematic
development capabilities should progressively be formed, while in the field of general
autoparts, capabilities for the development and manufacturing of advanced products should be
formed, so as to meet domestic and foreign market demand and to strive to enter the
international purchasing system for auto parts.

Article 31. Formulate specific development plans for parts, give different guidance and
support depending on the category of auto parts, bring it about that capital in society is
invested in the filed of auto parts production, impel auto parts manufacturers that have
comparative advantages to form the capability to specialize, mass-produce and modularize
supply. Auto parts manufacturers capable of supplying several independent manufacturers
that undertake the production of whole vehicles and of entering the international purchasing
system for auto parts shall be given priority support by the State with respect to introduction
of technology, technological upgrading, financing and merging and restructuring.
Manufacturers that undertake the production of whole vehicles should progressively procure
parts from the open market by adopting e-commerce and online purchasing methods. ..."

563 China's response to Panel question No. 12(a).
564 China's response to Panel question No. 12(a), re ferring to its first written submission, para. 21.
China submits that between 2001 and 2004, the value of imported parts and components increased by 300 per
cent, which is nearly three times the rate of total motor vehicle production in China (China's first written
submission, para. 21, citing Exhibit CHI-1). China also refers to the fact 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. According to China, these indicators confirm that
auto manufacturers were importing motor vehicles in pa rts and assembling them dome stically, thereby evading
tariff rates applicable to motor vehicles.
565 Parties' responses to Panel question No. 14(a).

in auto parts imports, including factors such as foreign supply, trade regulations, currency rates,
investment flows, tax policies, and the increased demand for automobiles produced in China, which
consequently could have increased the demand for au to parts imports. We share the complainants'
view that China has not explained why and how th e import data for complete vehicles submitted by
China, which shows a slowing rate of increase fo r imported motor vehicles in 2003 and 2004, reflects
China's notion of circumvention, namely that this data reflects auto manufacturers' decision to change
their business practices to avoid the higher duty rates on motor vehicles.
566
7.311 Nor has China explained why the increased value of auto parts imports cannot simply be a
direct consequence of China's commitment to the lower tariff rates for auto parts. 567 In fact, China
itself acknowledges that the incentive to import auto parts instead of motor vehicles (because of the
higher tariff rate for motor vehicles) is a character istic that is inherent to China's Schedule of
Concessions that China negotiated.568
7.312 Therefore, the language of Policy Order 8, wh ich is a legal authority giving rise to the
implementing measures at issue (Decree 125 and Announcement 4), as well as the circumstances
leading up to the introduction of the measures as explained by China cast doubt on China's claim that
the measures are "designed" to address the evasion or circumvention of higher tariff rates that apply to
motor vehicles under China's tariff schedule.
7.313 Nonetheless, we note that the remaining provisions in Chapter XI of Policy Order 8 refer to
issues relevant to the importation of auto parts, including Articles 55, 56 and 57
569, which are also

566 United States' comments on China's response to Panel question No. 14(b). The United States
submits that rather, the data reflects China's own concerted efforts to discourage imports of motor vehicles by
manufacturing an already restrictive quota regime, while promoting imports of CKD/SKD kits and parts. In its
comments on China's argument that a slowing rate of increase for imported motor vehicles in 2003 and 2004
was abnormal considering that China's import quotas on motor vehicles were being "substantially loosened"
during this period, the Untied States contends that China's response is not convincing because China was doing
everything in its power to limit imports of motor vehicles during the years 2001, 2002 and 2003. The United
States submits that 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).
567 European Communities' response to Panel question No. 14(a). The European Communities argues
that China's Schedule of Concessions or the HS und er Chapters 84 and 87 do not provide for the anti-
circumvention measures argued by China, and hence, there is no need to consider trade statistics provided by
China. However, in the European Communities' view, such statistics could at most demonstrate that after WTO
accession, trade has increased in imported parts and components as a direct consequence of China's commitment
to reduce the tariff rate for parts and components to a bound level of 10 per cent or less. According to the
European Communities, if the expected effect of a commi tment could serve as a justification for not respecting
this commitment any longer, this would entirely undermine the legal value of WTO commitments.
568 China's response to Panel question No. 275.
569 For example, Articles 55 and 56 of Chapter XI of Policy Order 8 provide:

"Article 55. The following part s are characterized as complete vehicles: the body
(including driver's cabin) assembly, the engine assembly, the transmission assembly, the drive
axle assembly, the non-drive axle assembly, th e frame assembly, the steering system and the
brake system.

Article 56. Auto parts shall be determined to have the character of a complete assembly
in the following cases: complete assemblies imported in their constituent parts (completely
knocked-down), or assemblies and/or system s imported dismantled into several key parts

reflected in Decree 125 and Announcement 4. Also, Article 54 of Chapter XI states, inter alia, that
"[c]ustoms duties will be levied strictly in accordance with the tariff rates for imported whole vehicles
and parts, to prevent any loss of customs duties . ..." Furthermore, Decree 125 and Announcement 4,
introduced pursuant to Policy Order 8, provide sp ecific rules relating to the importation of auto
parts.
570 Setting aside whether these rules do secure comp liance with China's tariff schedule, an issue
the Panel will address next, Decree 125 and Announcement 4, except for a general remark in Article 1
of Decree 125571, do not make any reference to the developm ent or promotion of automobile or auto
parts industries in China.
7.314 Taken together, the elements comprising the st ructure of the measures reveal the drafters'
mixed intentions as regards the purpose of the introducti on of the measures. This is particularly so in
light of the tone of the language prevalent througho ut Policy Order 8. Nevertheless, we do not have
sufficient evidence to conclude that the measures are not per se designed to secure compliance with
China's tariff schedule, namely to prevent the pr oblems relating to circumvention of the tariff
provisions for motor vehicles, as advanced by China. Therefore, we will now turn to the question of
whether the measures do in fact "secure compliance with" China's tariff sched ule within the meaning
of Article XX(d).
(ii) Whether the measures "secure compliance" with the law or regulation
7.315 In examining whether the measures at issue secure compliance with China's tariff schedule
within the meaning of Article XX(d), we find an approach adopted by the Panel in Korea – Various
Measures on Beef useful. The Panel in that case, having firs t identified the law or regulation within
the meaning of Article XX(d), proceeded to determ ine the inconsistent actions under that regulation
the measure at issue aimed to prevent to analyse whether the subject measure secured compliance
with that regulation.572 Following the same approach, we first recall our finding above that the law or

(semi-knocked down). Whenever imported key pa rts attain or exceed the stipulated quantity
they shall be characterized as Imported Assemblies."

570 Concerning the legal relationship among the measures, China submits that there is no legal
hierarchy between Policy Order 8 and Decree 125 and that Policy Order 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 (China's
response to Panel question No. 48). See also Section VII.A.1(a). China further su bmits that Chapter XI of
Policy Order 8 addresses the administration and enforcement of China's tariff rates for motor vehicles and
vehicles parts. Article 60 of Policy Order 8 directed the CGA jointly with other relevant departments to
promulgate the specific administrative rules to give effect to the general principles set forth in Chapter XI, and
that the CGA did so through the promulgation of Decree 125. Afterwards, in order to detail the procedures for
the verification of evaluation by automobile manufacturers, the CGA formulated Announcement 4 to provide
further details concerning the verification process.
571 Article 1 of Decree 125 provides:

"These Rules are formulated in accordance with re levant laws and regulations with a view to
formalizing and strengthening the administration of the importation of automobile parts, and
promoting the healthy development of the automobile industry." (emphasis added)

572 Panel Report on Korea – Various Measures on Beef , paras. 655, 658. Specifically, the Panel
identified that the practices that Korea considered deceptive and aimed to prevent through the measure at issue
in that case were the misrepresenta tion of the origin of beef, i.e. se lling imported beef as domestic beef.
Whatever is the cause of such fraudulent practices, the Panel acknowledged that selling imported beef as
domestic beef constitutes misrepresentation as to the origin of beef contrary to the specific provisions of the
Unfair Competition Act (i.e. the alleged GATT-consistent law).

regulation with which China's measures allegedly secure compliance is China's tariff schedule.
Accordingly, to show that the measures do in fact "secure compliance with" China's tariff schedule,
China must first demonstrate specific obligations th at the measures at issue try to enforce and/or
actions considered inconsistent under China's tariff schedule that the measures at issue aim to prevent.
7.316 China submits that the challenged measures secure compliance with China's tariff schedule
by preventing the importation and assembly of auto parts as a means of circumventing China's tariff
provisions relating to motor vehicles.
573 Specifically, China alleges that this so-called
"circumvention" occurs when manufacturers evad e the higher duty rate for motor vehicles by
structuring their imports of auto parts and co mponents in multiple shipments so that no single
shipment has the essential character of a motor vehi cle, even if those parts and components would
have been classified as a motor vehicle had they entered China in a single shipment.574 By structuring
the importation of auto parts and components in this manner, auto manufacturers deprive China of the
revenue and market access benef its that it negotiated when it obt ained a higher bound duty rate for
motor vehicles as compared to parts and compone nts of motor vehicles. According to China,
therefore, the question is whether importers should be able to evade the lin e that customs authorities
have drawn by importing parts and components in multiple shipments. 575 China considers that such
an action by auto parts importers is contrary to the interpretation of its tariff schedule based on the
interpretative rules of the HS. China submits that a Member's ability to adopt measures to interpret its
tariff schedule in accordance with the rules of HS is co-extensive with those rules since any such
measure must comport with the requirements of the HS.576
7.317 On the contrary, the complainants do not even acknowledge th e existence of "circumvention
of customs duties" as a concept. The complainants submit that notions of "tariff arbitrage", "tariff
evasion" or "tariff circumvention", mentioned during the course of this Panel's proceeding to describe
the "circumvention" of tariff duties as defined by China, do not exist in the WTO Agreement.
7.318 The European Communities submits that China has not even shown that there is in reality a
problem of tariff evasion that needs to be addressed.577 The European Communities submits that in its
customs law, the concept of "circumventing a customs duty" does not exist, although there are
situations in which operators try to avoid paying th e ordinary customs duties, for example, by falsely
declaring that the goods they are importing co me from a country that has a preferential trade

The GATT Panel in EEC – Parts and Components also considered that the term "to secure compliance
with laws or regulations" under Article XX(d) cover measures preventing actions inconsistent with the
obligations set out in laws or regulations. In sum, th e Panel in that case concluded that Article XX(d) covers
only measures related to the enforcement of obligations under laws or obligations consistent with the GATT
(GATT Panel Report on EEC – Parts and Components, paras. 5.14, 5.18).
We also note a similar analytical elemen t in the context of Article XX(b). In EC – Asbestos, the Panel
considered it necessary first to determine the existence of a health risk to address the question of whether the
policy in respect of the measures for which Article XX(b) was invoked fell within the range of policies designed
to protect human, animal or plant life or health. The Panel stated that "the use of the word 'protection' implies
the existence of a risk ". (Panel Report on EC – Asbestos , paras. 8.170, 8.184, also cited in Brazil – Retreaded
Tyres, para. 7.42). Likewise, we also consider the te rms "to secure compliance" implies the existence of
obligations under the law or regulation.
573 China's first written submission, para. 204.
574 China's response to Panel question No. 13. Chin a argues that the measures exist as an anti-
circumvention measure for China's tariff schedule (China's first written submission, paras. 207, 210).
575 China's second written submission, para. 32.
576 China's response to Panel question No. 9.
577 European Communities' second written submission, para. 146; response to Panel question No. 280.

agreement with the European Communities and th erefore such goods are subject to zero per cent
customs duty.
578
7.319 The United States submits that it cannot accept the assumption advocated by China that it
amounts to "circumvention" when automobile manuf acturers use normal channels of trade to source
bulk shipments of parts for assembly purposes. 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.
579 Nor does the United States
investigate whether a manufacturer may be arrangi ng multiple shipments in order to obtain lower
tariff duties, and does not consider such practice to constitute "circumvention". 580 In the United
States, an importer is not entitled to misrepresent the condition of the goods when imported in order to
obtain a lower rate of duty. In this context, the United States submits that an importer would be
entitled to obtain the rate of duty applicable to th e parts (and not complete motor vehicles) if auto
parts that were previously imported together on the same conveyance are now shipped in multiple
conveyances on multiple dates to multiple ports, presuming that none of the parts so imported
separately has the essential character of a complete motor vehicle.
7.320 Canada submits that China does not explain wh y the so-called tariff evasion (avoiding
paying one tariff rate in favour of another, by spl itting shipments that otherwise would have arrived at
the border together and properly be classified as motor vehicles into multiple shipments), which is the
"problem" alleged by China, is a problem and why im porters cannot take advantage of tariff rates that
are mutually agreed to by Members. 581 Canada argues that there is no legal foundation for the claim
that tariff arbitrage is improper. Moreover, Chin a has not even presented a ny evidence that tariff
evasion actually occurs with any frequency, let alone with any intent. The measures simply presume
that there is tariff avoidance in all instances wh ere imported parts meet the thresholds under the
measures.
582

578 European Communities' response to Panel question No. 142.
579 United States' response to Panel question No. 142.
580 United States' response to Panel question No. 216(d). The United States' statement was provided in
response to a Panel question whether the United States believes that it would be proper for customs authorities
to investigate whether a manufacturer is splitting a CKD shipment into two or more separate boxes, thereby
evading the higher tariff rate that woul d apply to the complete article. The United States emphasizes again that
under both the WTO Agreement and the HS, a good should be classified in its condition as imported.
Therefore, assuming that an imported CKD is a complete vehicle unassembled, it would be classified differently
than the auto parts included in such kits if such auto pa rts were to be imported separately. Therefore, when an
imported auto part is specifically described by a heading of the tariff schedule, it is classifiable under that
heading notwithstanding that, post importation, the auto part may be used in the assembly of a complete motor
vehicle, in accordance with GIR 1. Any measures that compel an auto manufacturer to provide proof of the
post-importation assembly of many different imported parts, in their entirety, into a complete vehicle do not
retroactively confer to those parts at the time of importation the "essential character" of a motor vehicle.
581 Canada's second written submission, paras. 93-97; Canada's response to Panel question No. 237.
The Panel notes that Canada's argument in this regard is made in the context of the "necessity" test (specifically,
the contribution element of the test). In this respect, the Appellate Body in EC – Hormones stated, "...Panels are
inhibited from addressing legal claims falling outside their terms of reference. However, nothing in the DSU
limits the faculty of a panel freely to use arguments submitted by any of the parties – or to develop its own legal
reasoning – to support its own findings and conclusions on the matter under its consideration" (Appellate Body
Report on EC – Hormones, para. 156). See also, Appellate Body Report on US – Certain EC Products ,
para. 123.
582 Canada emphasizes that there is no evidence that evasion of the tariff commitments is occurring, or
even that such evasion is improper (Canada's second written submission, paras. 87, 88, also citing its first
written submission, Part D.2 of the factual background section submitted jointly by the complainants).

7.321 In light of the above, the Panel understands that the action alleged by China to be inconsistent
with China's tariff schedule that the measures aim to prevent is "circumvention" of the tariff
provisions for motor vehicles. China has referred to the following as examples of actions considered
to be "circumventing" China's tariff provisions for mo tor vehicles: (i) removing parts of the vehicle,
such as tyres and wiper blades, and declaring them as auto parts; (ii) importing parts and components
that have the essential character of a motor vehicle, and documenting them as "separate" shipments
even if they arrive on the same ship, at the same port, on the same day; or (iii) importing parts and
components that have the essential character of a motor vehicle in multiple shipments and arranging
imports so that they arrive on different sh ips, at different ports, or on different days.
583 China argues
that if China has no means of looking past the above described ploys, importers would never have to
pay the tariff rates applicable to motor vehicles.584
7.322 Given these examples of actions and China's position that this circumvention takes place by
importing auto parts above the thresholds set out in the measures, with or without an intention to
avoid higher tariff rates for motor vehicles, and ass embling them into motor vehicles in China, we
consider that the actions allegedly circumventi ng China's tariff schedule encompass the following
three types of actions: (i) importing auto parts for domestic assembly without any intent to avoid or
evade higher duty rates applicable to motor vehicles; (ii) importing auto parts for domestic assembly
with the intent to avoid or evade higher tariff rat es applicable to motor vehicles; and (iii) importing
"motor vehicles", but breaking them into parts so as not to be subject to higher tariff rates applicable
to motor vehicles when presented to the customs, and declaring and/or documenting their imports as
auto parts inconsistently with the actual content of what is being imported.
7.323 As noted above, the complainants contest that th e so-called "circumvention" of China's tariff
provisions for motor vehicles through the above-men tioned types of actions is inconsistent with
China's tariff schedule. To establish its claim, therefore, China must explain why the "circumvention"
of the tariff provisions for motor vehicles is inconsis tent with the obligations under its tariff schedule,
and thus needs to be prevented through the measures.
7.324 First, according to China, the concept of "circu mvention of customs duties" is broad in that
the intention of an auto parts importer to evade the higher duty rates on motor vehicles is not required
to constitute the circumvention of tariff duties.
585 China considers that the importation and assembly

583 China's second written submission, para. 166 (emphasis added).
584 In this connection, the United States submits that China presents two scenarios in which China
believes that importers are not entitled to obtain the lower tariff rates for auto parts instead of paying the high
tariff rates for complete motor vehicles: first, the scenario where importers restructure their importations of parts
and components, in the sense that parts previously imported together on the same conveyance are now shipped
in multiple conveyances on multiple dates to multiple ports, with none of the parts having the essential character
of a complete motor vehicle; and second, the scenario where an importer s ubmits paperwork claiming that parts
imported together are separate shipments, although the contents of the paperwork itself do not turn such a
collection of auto parts into multiple importations (United States' response to Panel question No. 237).
585 In this regard, we note China's argument in the c ontext of tariff classification under Article II that
the charge imposed under the measures relates back to the condition attached at the time of importation; when
the auto manufacturer fulfils its stated intention to import and assemble parts and components that have the
essential character of a motor vehicle, it will be obliged to pay the applicable duty rate for motor vehicles. At
the same time, China argues that the intention of importers to assemble parts and components into the finished
article is irrelevant to the classifi cation determination under GIR 2(a) ( China's response to Panel question No.
108(d)). 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 re placement parts, this intention is irrelevant to the
classification determination and the customs authorities should classify the entry as a complete motor vehicle in
accordance with GIR 2(a). We do not c onsider that China's arguments are cohe rent: if intention is in principle

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.
7.325 If one were to follow China's logic, therefore, an automobile manufacturer who imports auto
parts in the normal course of its business operation, without any specific intent to avoid the higher
tariff rates applicable to motor vehicles, and u ses imported auto parts in the assembly of motor
vehicles in China would be regarded as circumvent ing China's tariff provision s for motor vehicles.
China has not demonstrated any legal basis for such a position.
7.326 The term "circumvention" can be defined as "the action or an act of circumventing
someone".
586 The word "circumvent" is in turn defined as "1. verb trans. Deceive, outwit, overreach;
find a way around , evade (a difficulty); .. 3 verb trans Go round; enclose; make the circuit of"". 587
As the European Communities submits, the dictionary definitions of the term "circumvention" appear
to contemplate both situations where criminal or fraudulent intent behind the action exists and
situations where such intent is not necessarily pr esent and where actions amounting to circumvention
would not be per se illegal. Although not necessar ily requiring criminal or fraudulent intent, the
ordinary meaning of the term "circumvent" (i.e . "find a way around" or "go around ") implies the
presence of a will or intent necessary to avoid a certain thing or situation. Thus, to circumvent one
tariff duty for another as claimed by China, an importer at least needs to have the intent to do so. In
light of this, to the extent the action China subm its as inconsistent under its tariff schedule includes
the importation and assembly of auto parts without any intention to avoid the higher tariff duties
imposed on motor vehicles, China has not explained wh y and how such an action is inconsistent with
its tariff schedule.
7.327 Second, assuming then, arguendo, that some importers do intentionally structure their imports
so as to avoid the higher tariff rates applicable to motor vehicles, China has to demonstrate why such
an action is inconsistent with China's tariff schedule.
7.328 The United States argues that an importer would be entitled to obtain the tariff rate
applicable to parts (and not complete motor vehicles) in such a situation, given that the identity of the
imported good must be demonstrable by the good in its condition "as presented" for entry into the
customs territory, that is, at the time of importation.588

irrelevant for the purpose of tariff classification under GIR 2(a), the importers' intention to import and assemble
parts and components into motor vehicles should also be considered irrelevant under the measures, which China
argues is related to the correct classification of certain tariff provisions. China's position is puzzling in that the
same intention (to import and assemble auto parts) is irrelevant to tariff classification under GIR 2(a), but
relevant under the measures, which allegedly give effect to China's tariff provisions for motor vehicles, as the
condition of imposing the tariff rates applicable to motor vehicles. See also the United States' comments on
China's response to Panel question No. 108(d).
586 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 1, page 414.
587 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 1, page 414. The term "circumvent"
is also defined as "2. To go around; bypass. 3, To avoid or get around by artful manoeuvring" ( The American
Heritage College Dictionary, Third Edition (1993), page 255). See also the European Communities' response to
Panel question No. 13(a).
588 The United States submits that separate importations 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 and the other parts and components at the time that the good
is imported. Activities occurring after the imported goods have entered the country's customs territory are not a
basis for classification under the HS (United States' response to Panel question No. 237).

7.329 The European Communities also submits that in the ab sence of any conditions in the
applicable tariff schedules, importers are entitled to structure their impor ts according to their
preferences and the priorities of their manufact uring plans and the goods so imported must be
classified in accordance w ith the objective characteristics of th e product in question when presented
for classification at the border.
589 The United States and Canada also agree with the European
Communities: they would not find circumvention of the customs classification rules if a manufacturer
were to order all of individual auto parts from one company and then separate them into different
containers and make separate entry of each shipment in order to obtain a lower tariff duty.
590
7.330 Canada further submits that if vehicle manuf acturers shipped all the parts necessary to
assemble a vehicle in two or more shipments to avoid paying the tariff rates applicable to motor
vehicles as asserted by China, it could be character ized neutrally as "tariff arbitrage", or "tariff
avoidance", or more negatively as "tariff evasion" or "tariff circumvention". 591 According to Canada,
if there were evidence that this were happening, an d if the measures were targeted to address this
practice, then the legal issue for the present disput e would be whether Article XX(d) is available to
counter such a practice.
7.331 China argues that the complainants' position allo ws form to prevail over substance in the
classification of parts and components. If an im porter had complete discretion to structure and
document its imports as it saw fit, there would be no purpose in defining the circumstances under
which customs authorities may classify unassemb led or disassembled parts and components as
equivalent to the complete article. Any set of tari ff provisions that established different tariff rates for
a complete article and the parts and components of that article would be inherently unenforceable,
because any rational importer would simply organize its containers so as to benefit from whichever
tariff rate was lower. The tariff provision with the higher rate of duty would be automatically
inutile.
592
7.332 The Panel will first examine whether there is any reference in the WTO Agreements to the
notion of "circumvention" in relation to the situation where importers intentionally structure their auto
parts imports so as to use lower tariff rates a pplicable under a Member's schedule. The term
"circumvention"593 is defined in the Dictionary of Trade Policy Terms as follows:

589 European Communities' response to Panel question No. 237, also referring to the Appellate Body's
statement in EC – Chicken Cuts that "in characterizing a product for pu rposes of tariff classification, it is
necessary to look exclusively at th e 'objective characteristics' of the pr oduct in question when presented for
classification at the border" (Appellate Body Report on EC – Chicken Cuts, para. 246).
590 Complainants' responses to Panel question Nos. 216(b) and (c).
591 Canada's response to Panel question No. 229.
592 Further, China submits that the complainants' pos ition is antithetical to the function that GIR 2(a)
serves within the HS to distinguish between complete articles and parts of those articles. Such a form-over-
substance position sharply highlights the complainants' failu re to articulate and substantiate an interpretation of
GIR 2(a) and the term "as presented".
593 The European Communities submits that the EC law defines "circumvention" in the context of anti-
dumping duties as follows: "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 th e prices and/or quantities of the like product, and where
there is evidence of dumping in relati on to the normal values previously established for the like product, if
necessary in accordance with the provisions of Article 2." (European Communities' response to Panel question
No. 13(a), referring to Article 13(1) of Regulation 384/96 as amended by Regulation 461/2004). See the

"Measures taken by exporters to evade anti-dumping measures or countervailing
duties. It can refer also to the evasion of rules of origin, etc. Circumvention consists
of disguising the true origin of th e product, sometimes through manufacturing
operations whose sole purpose is to pr ovide sufficient evidence to meet the
requirements of an agreement. These some times fall into the category of screwdriver
operations. The Agreement on Agriculture seeks to prevent circumvention of
commitments to rein in export s ubsidies. Circumvention in the textile trade refers to
avoiding quotas and other restrictions by a ltering the country of origin of a product.
[See also anti-circumvention.]"
594 (emphasis added)
"The avoidance of trade restrains in export markets, by, for instance, transhipments
through other states subject to more advant ageous terms of entry. In the WTO the
issue of 'anti-circumvention' figures in negotiations and agreements related to textiles
and clothing, anti-dumping and agriculture."595 (emphasis added)
7.333 Further, "anti-circumvention" is defined in the Dictionary of Trade Policy Terms as follows:
"[m]easures by governments to prevent circumvention of measures they have
imposed, such as definitive anti-dumping duties. Sometimes firms seek to avoid such
duties through, for example, assembly of parts and components either in the
importing country or in a third country, or by shifting the source of manufacture and
export to a third country. The term as used in the WTO does not refer to cases of
fraud. These would be dealt with under normal legal procedures of the countries
concerned. The Agreement on Agriculture contains an anti-circumvention provision.
It stipulates that export subsidies not listed in the Agreement must not be used to
circumvent export subsidy commitments. Nor must non-commercial transactions be
used in this way. [See also anti-dumping measures , carousel effect, dumping and
screwdriver operations.]"
596 (emphasis added)
7.334 The definitions of the word "circumvent" in the context of international trade, as observed
above, show that the notions of "circumvention" and "anti-circumvention" are not contemplated in the
relation to ordinary customs duties. In the co ntext of the WTO Agreement, "circumvention" is
recognized concerning anti-dumping duties, rules of origin, the Agreement on Agriculture and the
textile trade. 597 Further, it is only in the Agreement on Agriculture that the notion of "anti-

complainants' responses to Panel question No. 141 for the description of their domestic procedures determining
circumvention by importers of anti-dumping duties.
594 WTO, W. Goode, Dictionary of Trade Policy Terms , Fourth Edition, 2003, pages 61-62. The
Dictionary defines "screwdriver operations" as follows: "a pejorative term for manufacturing operations
concerned mainly with the assembly of components. Th is often involves little or no transfer of technology.
Screwdriver operations are more likely to be found where there is an adequate supply of comparatively
inexpensive labour. They are partly a cause and a result of globalization driv en by the need to find the most
efficient production arrangement. They can also be due to preferential rules of origin which encourages firms to
establish operations inside free-trade areas to get around market access impediments. …" ( Dictionary of Trade
Policy Terms, page 303).
595 Agency for International Trade Information and Cooperation (AITIC), Glossary of Commonly Used
International Trade Terminology with Particular Reference to the WTO , 2003, Part International Trade and
WTO Terms, page 15.
596 Dictionary of Trade Policy Terms, W. Goode, WTO Fourth edition, 2003, pages 19-20.
597 The European Communities notes that under WTO law, anti-circumvention measures are explicitly
contemplated in Article 10 of the Agreement on Agriculture . In the context of anti-dumping duties, the

circumvention" is explicitly recognized: Article 10 of the Agreement on Agriculture , entitled
"prevention of circumvention of export subsidy commitments", stipulates that export subsidies not
listed in the Agreement must not be used to circumvent export subsidy commitments. The WTO
Members are also in the process of negotiating an ti-circumvention issues in the context of anti-
dumping duties.
598
7.335 Moreover, the concepts such as "evasion" and "avoidance" do not appear to exist in relation to
customs duties, at least not in a legal context. In comparison, we observe that such concepts are
relatively well defined in the context of domestic tax law. For example, Black's Law Dictionary
provides the following definitions: "tax avoidance" is defined as "the act of taking advantage of
legally available tax-planning opportunities in order to minimize one's tax liability"; and "tax
evasion" is defined as "the wilful attempt to defeat or circumvent the tax law in order to illegally
reduce one's tax liability; tax evasion is punishable by both civil and criminal penalties – also termed
as tax fraud".599
7.336 Furthermore, in fact, China's tariff schedule e xplicitly provides different tariff rates for motor
vehicles and auto parts, the first with the higher tariff rate of 25 per cent on average and the latter with
the lower tariff rate of 10 per cent on average. Under this circumstance, any importer, automobile
manufacturers in this case, would, in the normal operation of their business, decide to import auto
parts and assemble them into motor vehicles, to the extent allowed under their business requirements.
As noted earlier, China itself has also acknowledged th at the incentive to import auto parts instead of
motor vehicles (because of the higher tariff rate for mo tor vehicles) is a characteristic that is inherent
to China's Schedule of Concessions that China negotiated.
600
7.337 Therefore, to the extent that by the notion of "circumvention", China is referring to importers'
decision to import auto parts for domestic assembly rather than importing complete motor vehicles,
which are subject to higher tariff rates, China h as neither provided evidence showing such practices
by importers 601, nor proved to our satisfaction why such actions are inconsiste nt with importers'
obligations under China's tariff schedule. In this regard, we are not saying that specific evidence of
any steady pattern of import practices accused by China as circumventing its tariff schedule must be
shown to prove that such practices are inconsistent under China's tariff schedule, because, in our view,
there is nothing that prevents WTO Members from having a "preventive" measure, as opposed to a
"responsive" measure, against actions consider ed inconsistent under their domestic laws or
regulations. In our view, such evidence would be useful in proving that a certain measure is
"designed" to secure compliance with the concerned domestic law or regulation. However, to show
that the measures at issue "do in fact secure compliance with" its tariff schedule, which is contested by
the complainants in this case, Ch ina must at least demonstrate why the types of actions as described
by China are inconsistent under China's tariff sched ule and thus need to be prevented through the
measures.

European Communities refers to the Ministerial Decision on Anti-Circumvention adopted by the Trade
Negotiations Committee on 15 December 1993 (European Communities' response to Panel question No. 13(b)).
598 See paragraphs 7.498-7.499 for an explanation on the WTO Members' negotiations on
circumvention of anti-dumping duty measures.
599 Black's Law Dictionary , Seventh Edition, 1999, pages 1473 and 1474, respectively (emphasis
added).
600 China's response to Panel question No. 271. See also paragraph 7.310 above.
601 See paragraphs 7.309-7.310 above for the discussion on China's arguments relating to the existence
of the alleged problems relating to circumvention of ordinary customs duties.
Also see footnote 572 above for the relevant finding by the Panel on Korea – Various Measures on
Beef, paras. 655, 658.

7.338 Finally, we now turn to the situation where automobile manufacturers import "motor
vehicles", but break them into parts before importation so as not to be subject to the higher tariff rates
applicable to motor vehicles when presented to th e customs, and declare and/or document their
imports as auto parts inconsistently with the actual content of what is being imported.
602
7.339 According to the European Communities, such false declarations can give rise to sanctions
and penalties, applied at the national level in th e European Communities, and are more related to
fraud than to circumvention.
7.340 The United States submits that an importer is not entitled to misrepresent the condition of the
goods when imported in order to obtain a lower tariff rate. 603 Where there is a suspicion that an
importer is attempting to avoid the payment of th e proper amount of ordinary customs duties owing
on imported merchandise by, for example, undervalui ng the goods, providing fraudulent certification
of eligibility for duty-free treatment under a free trade agreement, or misclassifying goods under an
incorrect tariff heading with a lower tariff rate, the United States may initiate an audit of its records or
initiate a criminal investigation. 604 The United States submits that depending on the outcome of such
an investigation, penalties can be imposed or criminal charges can be filed against the importer.
7.341 Canada submits that there is no ev idence to suggest that any co mpanies are or ever have
sought to obtain a lower tariff rate merely by documenting their imports as "separate" shipments. 605
Furthermore, customs authorities determine appropriate classification of goods based upon their state
as they arrive at the border, which includes (but is not limited to) the declaration. Canada has no
procedures for determining whether an ordinary customs duty is being circumvented.
606
7.342 The Panel notes that the European Communities a nd the United States at least acknowledge
that importers' false declaration or documentation of goods could be consid ered illegal under their
respective domestic legal systems. The complainants contest, however, that these are types of issues
that are addressed under a Member's tariff schedule itself as China claims.
7.343 In this connection, China's response to a Pa nel question informs us that, similar to the
complainants' domestic legal systems as described above, China has provisions within its "regular
customs laws" that regulate the situation where importers falsely declare imported goods or provide
incorrect information. China submits that the Regulation of the People's Republic of China on the
Implementation of Customs Administrative Punishment defines various types of customs violations,
including the submission of untruthful declarations or actions that violate customs control of goods.
607
Therefore, this type of actions that China asserts is inconsistent with China's tariff schedule and thus
needs to be prevented through the measures is already defined in and dealt with by China's
Implementation of Customs Administrative Punishme nt, a legal instrument separate from China's
tariff schedule.

602 See paragraph 7.322 above.
603 United States' response to Panel question No. 237 (emphasis added).
604 United States' response to Panel question No. 142.
605 Canada's response to Panel question No. 237.
606 Canada's response to Panel question No. 142. Canada explains that the CBSA's furniture
classification case provided specific guidance relating to furniture purchased as one unit at the retail level and
shipped separately. According to Canada, there are no situations where attempts to evade customs duties by
separate shipments of parts result in those separate shipments being treated separately for purposes of increasing
duty beyond the applicable tariff commitments in Canada's Schedule of Concessions. Further, Canada notes
that there are no instances where activities taking place after presentation at the border are taken into account in
increasing duty beyond the applicable tariff commitments in Canada's Schedule.
607 China's response to Panel question No. 30.

7.344 Further, as the Dictionary of Trade Policy Terms explains
608, the notion of circumvention as
used in the WTO context does not include cases of fraud, which are rather addressed under normal
domestic legal procedures of the countries concerned.
7.345 Therefore, we conclude that China has not demonstrated that a false declaration or
documentation of goods imported is an action incons istent with the obligations under China's tariff
schedule that needs to be prevented through the measures.
(iii) Conclusion
7.346 In sum, we conclude that China has not di scharged its burden to prove that the measures
"secure compliance" with its tariff schedule, becau se China has not explained to our satisfaction how
the types of actions that China claims amount to "circumvention" of the tariff provisions for motor
vehicles (i.e. importing and assembling auto parts in China, with or without any intention to
avoid/evade the higher tariff duties for motor vehicles ) are inconsistent with the obligations under its
tariff schedule and hence need to be prevented through the measures.
(c) Are China's measures "necessary" to secure compliance with China's tariff schedule?
7.347 The Panel has found above that the measures do not secure compliance with China's tariff
schedule. Accordingly, the measures cannot be co nsidered as "necessary" to secure compliance with
China's tariff schedule. 609 However, even if the measures we re to have been found to secure
compliance with China's tariff schedule, we do not find, for the following reasons, that China has
proved that the measures are "necessary" to secure compliance with its tariff schedule.
7.348 We recall the Appellate Body's statement in Korea – Various Measures on Beef, with respect
to the necessity of a measure within the meaning of Article XX(d):
"[d]etermination of whether a measure, which is not 'indispensable', may nevertheless
be 'necessary' within the contemplation of Article XX(d), involves in every case a
process of weighing and balancing a series of factors which prominently include the
contribution made by the compliance measu re to the enforcement of the law or
regulation at issue, the importance of the common interests or values protected by
that law or regulation, and the accompanyi ng impact of the law or regulation on
imports or exports."
610
7.349 We will follow the guidance provided by the Appellate Body in examining whether China has
proved the "necessity" of the measures within the meaning of Article XX(d).
7.350 China submits that the prevention of tariff circumvention is clearly an important interest to
WTO Members.611 Relying on the Appellate Body's finding in Dominican Republic – Cigarettes that
the collection of tax revenues (which would include customs revenues) is an important interest for
WTO Members, and especially for developing countr y Members, China argues that the enforcement

608 See paragraph 7.333.
609 The Appellate Body in Mexico – Taxes on Soft Drinks stated that "[A] measure that is not suitable or
capable of securing compliance with the relevant laws or regulations will not meet the 'necessity' requirement"
(Appellate Body Report on Mexico – Taxes on Soft Drinks, para. 74).
610 Appellate Body Report on Korea – Various Measures on Beef, para. 164.
611 China's first written submission, paras. 210-211.

of negotiated tariff concessions, including whatever effect they have on market access commitments,
is also an important objective for Members, and especially for developing country Members.
612
7.351 China contends that in comparison, the measures at issue have little or no restrictive impact
on international trade: as their only purpose is to en sure that the correct tariff rates are collected, the
measures do not materially affect imports of automobil es or auto parts, other than in the respect that
importers must pay the higher tariff rates for motor vehicles when they import collections of parts
having the essential character of a motor vehicle.
613 China argues that the only auto manufacturers
who are affected are those who assemble moto r vehicles in China from imported parts and
components that have the essential character of a motor vehicle.
7.352 China submits that the measures undoubtedly co ntribute to realizing China's legitimate
interest in ensuring the enforceability of its tariff pr ovisions for motor vehicles. China argues that the
measures do so by ensuring that tariff classifica tions are based on the substance of what a
manufacturer imports and assembles, not the form of the shipments.614

612 China's first written submission, para. 210, citing the Appellate Body Report on Dominican
Republic – Cigarettes, para. 71; China's second written submission, para. 171. Regarding the level of
enforcement China seeks with respect to its tariff schedule, China submits that it seeks to ensure the uniform
classification of parts and components that have the essential character of a motor vehicle, without regard to
whether they enter China in one shipment or in multiple shipments (China's response to Panel question No.
295). In this regard, the European Communities notes that China's reference to "uniform" and "proper
classification" is an attempt to distract from the fact that China has not yet demonstrated the proportionality of
its measures (European Communities' comments on China's response to Panel question No. 295, referring to its
second written submission, para. 146).
According to China, proper classification of import entries is an objective that, by its nature, customs
authorities seek to achieve in respect of all similar entries.
613 China's first written submission, para. 213; Chin a's second written submission, para. 175. To
support its position, China refers to a news report that major auto manufacturers and auto parts manufacturers
have noted that the measures have had little or no impact on their operations in China (China's first written
submission, para. 213; China's second written submission, para. 175, citing a news report by Reuters, "Fang
Yan, Big car parts makers unfazed by China tax row , Reuters (15 May 2006)" (Exhibit CHI-33)). Based on
import statistics for auto parts from 2004 and 2006, which show that the total value of imported auto parts
increased by 19.8 per cent, China submits that the lack of any adverse impact on trade is evidenced most directly
by this continued rapid growth of the import of auto parts into China (China's response to Panel question No.
294, referring to the data obtained from the China Automotive Industry Yearbook).
614 China argues that the example of a vehicle model X illustrates both the importance of the interests
furthered by the challenged measures, as well as the contribution that these measures make toward the
realization of those interests (China's first writte n submission, paras. 211-212; China's second written
submission, paras. 172-174); also referring to other motor vehicle models that are assembled in China from
imported parts and components that have the essential char acter of a motor vehicle, a nd that are imported into
China in multiple shipments (China's first written submission, para. 19; China's response to Panel question
No. 116)). China further submits that in the absen ce of the measures, auto ma nufacturers would evade the
higher duty rates that apply to motor vehicles because of the manner in which they have structured their imports
of parts and components for these and other vehicle models. China also points to a specific circumstance, as
referred to by the United States, in which a manufacturer previously imported parts in the form of CKD kits, but
now imports nearly all of the same parts and compone nts in the form of multiple shipments, which China
considers is a situation of "splitting a CKD shipment into two or more separate boxes" (China's second written
submission, para. 173. China refers to its response to Panel question No. 160 in which China provided the
example of a vehicle model Y: Acco rding to China, an automobile manu facturer Z previously assembled in
China almost exclusively from imported CKD kits, but beginning in 2004, the number of CKD kits that the
company Z imported for the model Y dropped dramatically, while its imports of auto parts surged. By 2005, the
company Z produced 38,600 automobiles of the model Y, and imported only 24 CKD kits for the model Y in

7.353 The European Communities submits that China has not demonstrated that its measures
serve to protect such interests and values as "preve ntion of tariff circumvention", "collection of tax
revenues" and "enforcement of negotiated tariff concessions".
615 In the European Communities' view,
China has not demonstrated there is in reality a pr oblem of tariff circumvention or that its measures
serve the collection of tax revenues or the enforc ement of negotiated tariff concessions. Automobile
manufacturers who import auto parts for their asse mbly into a motor vehicle in China do not
circumvent any tariffs. On the contrary, the meas ures disregard the negotiated tariff concessions by
imposing charges in excess of what is provided in China's tariff schedule.616
7.354 The European Communities argues that the adop tion of Policy Order 8 in 2004 was followed
by a dramatic fall of EC exports of auto parts to Ch ina: in just a few months, exports dropped to 53
per cent, and then to as low as 33 per cent of their May 2004 level. Thereafter, exports of parts began
to grow slowly and appear to have now stabilized at the level of May 2004 617, which, according to the
European Communities, must be considered ag ainst the booming Chinese demand and production of
vehicles and the much steadier growth rates of EC exports observed before May 2004. The European
Communities argues that a comparison between EC exports of auto parts and Chinese production of
motor vehicles suggests that the adoption of Policy Order 8 prompted auto manufacturers to switch as
quickly as possible to domestic parts suppliers in order to adapt to the local content requirements
imposed by the measures.618 In comparison, recent industry analysis suggests that Chinese companies
are becoming increasingly aggressive and there are growing fears that with government support and
incentives, foreign companies will eventually be sidelined.619

that year. China submits that as verified under the provisions of Decree 125, the company Z continues to import
seven out of the eight major assemblies for the production of the model Y). China considers that while this is
not the only circumstance in which customs authorities can respond to the evasion of higher duty rates that
apply to a complete article, it is certainly a circumstance that is addressed by the challenged measures.
615 European Communities' response to Panel questio n No. 293, also referring to its second written
submission, para. 146.
616 The European Communities points ou t that according to the negotiate d tariff concessions laid down
in China's tariff schedule, imported auto parts should be charged at 10 per cent, and not – as the measures
provide – at 25 per cent for the mere reason that they are ma nufactured into vehicles with imported auto parts
exceeding the thresholds set out under the measures.
617 European Communities' response to Panel question No. 294, referring to the graphics provided in
Exhibit EC-37: the European Communities submits that the statistics for Chinese production of motor vehicles
have been obtained from the website of the National Bureau of Statistics of China
(http://www.stats.gov.cn/english/statiscaldata/index.htm).
618 The European Communities submits that this resulted in a reduction of EC auto parts' market share,
which now seems to have become permanent as evidenced by the steady gap between the two curves. China
submits in its comments on the complainants' responses to Panel question No. 294 that the European
Communities' claim that the measures have had an impact on its exports of auto parts to China suffers from a
basic flaw of logic and causation: Policy Order 8, by itself, did not impose any obligations on auto
manufacturers, or have any impact on the classification and assessment of duties on motor vehicles or parts of
motor vehicles. Rather, it was not until the adoption of Decree 125 in April 2005 that the measures could have
had any conceivable impact on sourcing decisions. China further argues that the European Communities'
exports of auto parts to China, however, resumed their upward trend in early 2005, as the European
Communities' own data illustrate, just as Decree 125 took effect (referring to European Communities' second
written submission, para. 146). Since that time, the value of EC auto part exports to China has reached record
heights, reaching its highest point as recently as March 2007, according to the European Communities' own
data. China submits that this is hardly consistent with the proposition that the challenged measures have had an
adverse impact on trade.
619 Referring to an article entitled "Asian Automotiv e Industry Forecast Report , Volume I" by Global
Insight (August 2006, Exhibit EC-38), in particular the last bullet point in page 3, the European Communities

7.355 The European Communities submits that the measures can only be justified under
Article XX(d) if they are necessary to secure comp liance with the 25 per cent tariff duty on complete
vehicles.
620 However, the measures are not suitable to enforce China's tariff schedule since they in the
overwhelming majority of cases impose a 25 per cent duty where there is no import of a complete
vehicle, which is at variance with China's tariff schedule.
7.356 The United States argues that the asserted rationale of the measures does not match the scope
of the measures. 621 Instead, the measures sweep broadly to cover all imports of bulk parts for
manufacturing purposes, not just instances of CKDs sp lit into two separate shipments. Therefore, in
the United States' view, the measures are not necessa ry to secure compliance with China's provisions
for motor vehicles because they are drastically broa der in scope than measures intended to stop such
types of "evasion" alleged by China.
7.357 Canada submits that the measures do not protect important common interests or values
because there is no known concept of "circumven tion" as it applies to ordinary customs duties. 622
According to Canada, even if China could show ev idence of tariff arbitrage, and even if such a
practice were improper, the vital interest at stake would be some limited amount of revenue that China
claims it should receive. China has not, for example, indicated any safety concerns with foreign auto
parts, only that those parts are escaping higher duties.
7.358 According to Canada, the measures are significan tly trade-restricting, in that they do not
target isolated incidents, but impose blanket cove rage on all imported auto parts based on arbitrary
thresholds that presume tariff arbitrage in all instances. 623 Canada argues that both the internal charge
and the administrative burden placed on vehicle and pa rts manufacturers that use imported auto parts
discourage the importation of such parts because vehicle manufacturers cannot risk using imported

submits that the risks for foreign investors are growing. Furthermore, the European Communities contends that
China's choice of reference pe riods (i.e. 2004-2006) in its response to the Panel question No. 294 is vitiated by
the fact that Policy Order 8 was announced in May 2004, which was followed by a dramatic reduction of EC
exports of parts to China as shown in Exhibit EC-37 (-60 per cent between May and December 2004) (European
Communities' comments on China's response to Panel question No. 294). The European Communities argues
that the 19.8 per cent growth of imports of parts should be compared with the growth of Chinese production of
automobiles (i.e. an increase of 46.8 per cent between 2004 and 2006) (European Communities' comments on
China's response to Panel question No. 294: the European Communities explains that according to the
calculations based on data from China's Statistics bureau, China produced 5,186,400 cars in 2004, and
7,611,500 cars in 2006, which gives an increase of 46.8 per cent, more than double the growth in parts imports.
The European Communities submits that these figures were obtained by adding the monthly figures contained in
Exhibit EC-36 ("Percentage in the value of a complete vehicle of combination of imported parts representing 60
per cent of the value of an assembly"). The European Communities further adds that as explained in the exhibit,
data for January and December 2006 ar e not available and were inferred as the average of the values for the
previous and following months. Even limiting production of cars in 2006 to the 10 months for which data are
available (February to November 2006), this would add up to 6,361,300 units, i.e. an increase of 22.7 per cent
compared to 2004), which shows that more and more pa rts are sourced from local suppliers. The European
Communities submits that a more detailed analysis of the effects of the measures on the basis of monthly data,
considering the relation between imported parts and Chinese production of cars, shows that Chinese production
of cars grew between the announcement of Policy Order 8 and the last comparable figures (March 2007) by 101
per cent, while EC exports of auto parts grew only by 18 per cent (European Communities' comments on
China's response to Panel question No. 294, referring to the second graph of Exhibit EC-37).
620 European Communities' second written submission, para. 146.
621 United States' response to Panel question No. 293, referring to its response to Panel question
No. 280.
622 Canada's second written submission, paras. 98-99.
623 Canada's second written submission, para. 100; response to Panel question No. 294.

parts over the arbitrary thresholds under the meas ures due to the price sensitivity of the Chinese
market.
624 This factor forces companies to carefully plan to avoid importing parts at levels that
approach the threshold limit and also requires auto parts manufacturers that import auto parts to sign
contracts with vehicle manufacturers guaranteeing that only domestic parts are supplied.625
7.359 Canada argues that the measures make little or no contribution to the objective of complying
with China's tariff schedule and China has failed to show that there is even a problem that needs
enforcing.626 In Canada's view, the problem alleged by China is that importers are evading tariff
commitments, namely avoiding paying one tariff rate in favour of another, by splitting shipments that
otherwise would have arrived at th e border together and properly be classified as motor vehicles into
multiple shipments. China does not explain why impor ters cannot take advantage of tariff rates that
are mutually agreed to by Members and that in any event, China has presented no evidence that this is
happening. Instead, the measures simply presume that there is tariff avoidance in all instances where
imported parts (including those imported by third parties) pass the thresholds under the measures. 627
Canada submits that since there is no legal foundation to the claim that tariff arbitrage is improper and
there is no real evidence that this arbitrage, even if styled as "tarif f evasion", actually occurs with any
frequency, let alone with any intent, the measures ca nnot contribute to rectifying a problem that does
not exist.
7.360 The Panel recognizes that yielding revenues by collecting legitimate tariff duties imposed on
imported goods is an important interest for WTO Members. In fact, tariff duties imposed under a
Member's schedule serve to, inter alia, raise revenues for the importing government. In our view, the
importance of a fiscal interest pursued by a Member, such as the interest (revenue collection) pursued

624 Canada submits that to the extent the Panel n eeds to make a factual finding on the trade impact
brought by the measures, it is an inference that can ea sily be drawn (Canada's response to Panel question No.
294); Canada also refers to the Appellate Body's statement in Canada – Aircraft , "[C]learly, in our view, the
Panel had the legal authority and the discretion to draw inferences from the facts before it…" (Appellate Body
Report on Canada – Aircraft , para. 203). With respect to the eff ect on parts manufacturers outside China,
whose imports are those discriminated against by the measures, Canada notes that the Canadian Auto Parts
Manufacturers' Association specifically indicated its concern about the measur es, reflecting the effect they have
had on trade ( Automotive Parts Manufacturers' Association News, "President's Message: Driving Canada's
Future", page 2, November 2006 (Exhibit CDA-45)).
625 Canada also refers to statements by Chinese bu siness people after the entry into force of the
measures to support its position: For example, a director of China Automotiv e System, a Chinese-owned
company and one of the largest auto parts suppliers in China, referred to one of the pillars supporting the growth
of auto parts production in China being the government policy that requires local content (i.e. the measures),
noting that "[t]hey really boost the sales for China auto part markers" ("China Automotive Systems, Roth
Capital Conference, Presentation Tran script, 21 February 2007 (http://chi na.seekingalpha.com/article/277000)
(Exhibit CDA-46)," referred to in Canada's response to Panel question No. 294); and, an analyst from Global
Insight, in a July 2006 article discussing the auto industry in China, noted that the measures have already had a
big impact on some luxury brands with low production volumes, citing a stop in production of Cadillacs by GM
in particular, and stating that other vehicle manufacturers "may follow in its footsteps" ( Assembly Magazine,
"The Great Race", 1 July 2006 (Exhibit CDA-47), referred to in Canada's response to Panel question No. 294).
626 Canada's second written submission, paras. 93-97.
627 Canada's second written submission, para. 93 and footnote 106: In Canada's view, China is required
to show, not assume, large-scale evasion of tariffs by importers of auto parts to justify the measures, rather than
presume that any time imported parts are shipped separately the purpose is to evade duties (Canada's second
written submission, para. 95, referring to the company Z and other examples submitted by China in China's first
written submission and China's responses to Panel question Nos. 12(a), 77 and 160. Canada submits that these
examples simply show general import statistics and refer to the number of cases where parts have been
characterized as complete vehicles under the measures).

by China in the present case, must be carefully we ighed against its impact on trade and the degree of
contribution the measures make to the achievement of that interest.
7.361 In this regard, logically speaking, given our finding above that China has not proved specific
actions considered inconsistent under its tariff schedule that n eed to be prevented through the
measures, the measures cannot be considered as c ontributing to the achievement of the objective
allegedly pursued by the measures. However, even if we were to assume for a moment that the
measures could be considered as enforcing its tariff provisions for motor vehicles, for example, by
preventing importers from falsely declaring or documenting their imports
628, the scope of the
measures is too broad to be viewed as necessary for th e prevention of such an action. As examined in
the previous section, the measures encomp ass even a situation where automobile
manufacturers/importers use imported auto parts for their assembly into motor vehicles in the normal
course of their business operations without any inten tion to avoid the higher tariff duties imposed on
motor vehicles, let alone any intention to falsely declare or document the specific content of
importation. In our view, this is far more than what is necessary to enforce China's tariff provisions
for motor vehicles.629
7.362 The evidence before us also shows that the time necessary for some of the administrative
procedures required for the imposition of the charge can take up to a couple of years. 630 In addition,
we are also of the view, based on the availabl e evidence on the record, that the measures do not
necessarily correspond to the commercial realities of the modern automobile and auto parts industries.
The evidence overall illustrates that the economic rea lity of the automotive industry is that auto parts
have become more standardized and thus can be interchangeably used among different vehicle
models. In particular, by sharing platforms 631, parts, and components for various vehicle models,
automobile manufacturers appear to have increas ed the number of vehicle models produced from
common parts and components and thereby realize ec onomies of scale. For example, one approach
widely adopted by automobile manufacturers is th e platform strategy in which common components

628 We recognize in our finding above that China has not proved that this is an action considered
inconsistent under China's tariff schedule. However, if this were to be considered as an action inconsistent with
China's tariff schedule, the measures would seem to prevent such an ac tion, not because the measures are
designed specifically to prevent such an action, but because the broad scope of the measures happens to
encompass various types of actions described by China, including importers' false declaration and
documentation of imported goods. In this regard, we note a finding by the Panel in Canada – Periodicals
useful: "Tariff Code 9958 cannot be regarded as an enforcement measure for Section 19 of the Income Tax Act.
It is true that if a government bans imports of foreign periodicals with advertisements directed at the domestic
market, as does Canada in the present case, the possibility of non-compliance with a tax provision granting tax
deductions for expenses incurred for advertisements in domestic periodicals will be greatly reduced. It would
seem almost impossible for an enterp rise to place an advertisement in a foreign periodical because there would
be virtually no foreign periodical available in which to place it. Thus, there would be no way for the enterprise
legally to claim a tax deduction therefore. However, that is an incidental effect of a separate measure distinct
(even though it may share the same policy objective) from the tax provision which is designed to give an
incentive for placing advertisements in Ca nadian, as opposed to foreign, periodicals. ..." (para. 5.10) (original
footnote omitted).
629 As Canada submits, the measures do not target isolated incidents, but impose a blanket coverage on
all imported auto parts based on arbitrary thresholds that presume tariff arbitrage in a ll instances (Canada's
second written submission para. 100).
630 The European Communities' responses to Panel question Nos. 8 and 171; Exhibit EC-26. See
paragraphs 7.62-7.65 above.
631 Initially, a platform referred to a shared chassis, but now refers to a shared set of components
common to a number of different automobiles, in pa rticular the chassis, the steering mechanisms and
suspensions (Wikipedia, the free encyclopedia, "Automobile platform", http://en.wikipedia.org/wiki/Automobile
platform (Exhibit EC-12)).

are shared whenever possible between different vehicles models.
632 Automotive industry reports also
indicate that platforms can be used with a variety of automobiles in the same family resulting in a 60
per cent to 70 per cent share of common parts. 633 Regarding China's argument that the degree of
commonality among auto parts and components is very lo w, we agree to the exte nt that evidence also
shows that the interchangeability of some auto parts remains limite d because of the specific function
or performance such parts are used for. 634 However, based on the evaluation of the evidence
presented by the parties, we conclude that not withstanding some variance in the degree of
interchangeability, auto parts have been sufficiently standardized so that identifying a specific vehicle
model into which certain auto parts will be incorporated would prove unnecessarily trade restrictive.
7.363 Further, the European Communities submits that China has failed to consider less
burdensome means to secure compliance with its tariff schedule, although China could have
employed many reasonably available alternatives, for example, by investigating only individual
instances of alleged evasion under its customs laws, instead of imposing charges under the measures
on all imported auto parts that are assembled into vehicles that do not satisfy the thresholds set out
under the measures.635 China argues that the question of tariff evasion, in the present context, is one
of ensuring the correct classification of what is imported, and one important objective of customs
classification is to achieve the same classification of an article whenever it is imported. 636 To achieve
this uniformity of classification, the same classificat ion results should apply in all like circumstances,
not only in those cases in which customs authoriti es dedicate the necessary resources to investigate
specific import entries. According to China, this is why the measures cannot be limited to "individual
instances", as the objective of the measures is to ensure the consistent classification of parts and
components that have the essential character of a motor vehicle, in all cases.637

632 The exhibits before us show that numerous automobile manufacturers have implemented platform
standardization: (i) Ford, for example, uses its EUCD platform on which five different current models and five
future models (Volvo, Ford, Jaguar) are based (Exhibit EC-15); (ii) Ford implements a globally-used engine
series in module production for Ford North America, Fo rd Europe, Matsuda and Jaguar (Exhibit CDA-33); (iii)
GM and Ford developed jointly a new six-speed automatic transmission for use in models produced by both
companies (Exhibit CDA-34); and (iv) Volkswagen has used its D platform for large luxury automobiles under
the Volkswagen, Audi, and Bentley brands (Exhibit EC-21).
633 Exhibits EC-24, 25.
634 China's reference to the lack of interchangeability of strut suspension system for a derivative of the
VW Passat B6 and for the VW Sagitar refers to the dis tinct performances and sizes of the vehicles (Exhibit
CHI-46).
635 European Communities' second written submission, para. 146.
636 China's second written submission, para. 176; China's response to Panel question No. 296.
637 China's response to Panel question No. 296. Further, China submits that in the absence of the
measures, China would have essentially no mechanism for determining whether multiple shipments of parts and
components are related to each other through their common assembly into a single article. In other words, there
is no basis to investigate and determine whether any given shipment of auto parts and components results in the
evasion of China's tariff provisions for motor vehicles. It is this lack of transparency into the commercial reality
of what an auto manufacturer is importing that the challenged measures seek to remedy.
The European Communities submits in its comments on China's response to Panel question No. 296,
that "acts of customs evasion, the danger of which China has still not demonstrated, would by their nature be
individual acts. Therefore, it would be possible for China to ensure the 'uniform classification' of vehicles and
parts through individual investigation. China's reference to the possibly limited resources of its customs
authorities cannot justify otherwise disproportionate measures. Furthermore, China has not demonstrated why it
needs a 'mechanism for determining wh ether multiple shipments of parts an d components are related to each
through their common assembly into a single article'. In the view of the EC, a 'mechanism' creating fictions
such as the ones contained in the measur es is not suitable, necessary or proportionate to further the objective of
uniform customs classification."

7.364 As the European Communities submits
638, however, China's arguments relating to the
availability of other WTO-consistent alternative measures are premised on its own definition of the
actions considered inconsistent unde r its tariff schedule, which China has failed to prove. To that
extent, we agree that China has not explained why investigating individual cases as the need arises
cannot serve as an alternative to the measures, if, as we assumed above, the measures were to be
considered as securing compliance with China's tari ff schedule in certain limited circumstances.
Therefore, considered against the trade-restrictiven ess of the measures with respect to imported auto
parts as well as an alternative measure seemingly av ailable to China, we conclude that China has
failed to prove that the measures are "necessary" to secure compliance with China's tariff schedule.
(d) Conclusion
7.365 In light of the foregoing, we find that Chin a has not demonstrated that the measures are
justified under Article XX(d). Therefore, it is not necessary for the Panel to examine whether the
measures satisfy the requirements under the chapeau of Article XX.
C. TRIMS AGREEMENT
7.366 The complainants argue that the measures are in violation of Article 2 of the TRIMs
Agreement, which prohibits the use of trade-relate d investment measures inconsistent with Articles
III:4 and/or XI:1 of the GATT 1994.639
7.367 China responds that because the measures are border measures, they fall outside of the scope
of Articles III:4 and XI:1 of the GATT 1994 and con sequently also outside the scope of the TRIMs
Agreement.
7.368 We recall our findings above at paragraph 7.2 72 that China has acted inconsistently with
Article III:4 of the GATT 1994. We consider that these findings are sufficient for the resolution of
the dispute brought before us by the complainants. Consistent with previous panels which have faced
similar claims, in particular those on Canada – Autos and India – Autos
640, we also take the view that
bringing the measures into conformity with China' s obligations pursuant to our findings under Article
III:4 of GATT 1994 would also remove any incons istency of those measures with the TRIMs
Agreement. We therefore exercise judicial economy in respect of the complainants' claims under the
TRIMs Agreement.
D. ARTICLE II OF THE GATT 1994
7.369 We found in Section VII.B.1 that China's measure s impose an internal charge inconsistently
with Article III:2 of the GATT 1994.

638 The European Communities submits that China's position that no other alternatives are available to
achieve the objective under its tariff schedule is based on its mistaken belief that a mechanism such as one under
the measures is necessary for determining whether multi ple shipments of parts and component are related to
each other through their common assembly into a moto r vehicle (European Communities' comments on China's
response to Panel question No. 296).
639 All three complainants have made their claims un der Article 1(a) of the Illustrative List of the
TRIMs Agreement, and the European Communities and the United States have also made claims under Article
2(a) of the Illustrative List. However, the United States clarified in response to a question from the Panel that
the United States was not pursuing its claim under Article 2(a) of the Illustrative List (United States' response to
Panel question No. 165).
640 Panel Report on Canada – Autos, para. 10.91 and Panel Report on India – Autos, para. 7.324.

7.370 The complainants have made an alternative claim under Article II of the GATT 1994 in the
event the Panel finds that the charge under the me asures constitutes an ordinary customs duty. The
complainants submit that even if the charge were to be considered as an ordinary customs duty, the
charge is still in violation of Article II:1(b) because it is imposed in ex cess of the concessions made
by China under the relevant tariff headings for au to parts of China's Schedule of Concessions. China
argues that the charge is an ordinary customs dut y imposed in accordance wi th China's commitments
under its Schedule of Concessions.
7.371 In this section, we will examine the complain ants' alternative clai m under Article II with
respect to the charge imposed under the measures on auto parts imported in multiple shipments for the
assembly of motor vehicles in China and charact erized as motor vehicles based on the criteria
provided in the measures.
641
7.372 For the purpose of this consideration, we w ill first examine the multiple shipment aspect of
the measures, i.e. whether, under China's Sche dule of Concessions, the tariff provisions for motor
vehicles include in their scope auto parts imported separately in multiple shipments that are found to
have the essential character of a motor vehicle b ased on their assembly into a motor vehicle. Then,
we will examine whether the criteria set out in the measures, mainly Articles 21 and 22 of
Decree 125, for the essential character of a motor vehicle are compatible with China's concessions
under its Schedule of Concessions. In this rega rd, the criteria for the essential character
determination, if applied to importe d auto parts in a single shipment, can be considered as an element
that would make the charge under the measures fall within the scope of Article II:1(b) of the GATT.
1. Treatment of auto parts under China's Schedule CLII
7.373 China's Schedule of Concessions in relevant part provides as follows:642

641 For the same reasons the Panel identified in Canada – Dairy, we note that the following elements
support our analysis of the complainants' alternative claim: (i) all the complainants made an alternative claim under
Article II of the GATT 1994; (ii) the complainants and China disagree on whether the measures are consistent with
Article II of the GATT 1994 in the event the charge would fall within the scope of Article II of the GATT 1994;
(iii) the precise borderline between Articles III:2 and II of the GATT 1994 may not always be clear-cut; (iv) if our
finding under Article III:2 would be reversed, the Appellat e Body could be called upon to examine the claims
made under Article II, which would require a complex factual assessment and the weighing of evidence submitted
by the parties to this dispute, an exercise which could go beyond the jurisdiction of the Appellate Body and make it
impossible for the DSB to provide recommendations and rulings on all legal claims within the time-frame
prescribed by the DSU; ( v) if the DSB adopts our findings on Article III, the DSU's declared objectives of
"prompt settlement" of disputes (Article 3.3 of the DSU), of a "satisfactory settlement of the matter in
accordance with the rights and obligatio ns under [the DSU] and the covered agreements" (Article 3.4 of the
DSU), of "a positive solution to a dis pute" (Article 3.7 of the DSU) and of "effective resolution of disputes to
the benefit of all Members" (Article 21.1), may be facilitated if the parties would have at their disposal the
Panel's examination of the matter under Article II of the GATT 1994.
642 China submits that it is sufficient, for purposes of this proceeding, to assume that the tariff rate
applicable to motor vehicles is 25 per cent, and that th e tariff rate applicable to parts and assemblies of motor
vehicles is 10 per cent (China's first written submission, para. 15). The complainants submit that the final bound
rate for auto parts is 10 per cent, while it is generally 25 per cent for whole vehicles, and the 25 per cent charge
is effectively a payment of the 10 per cent bound parts rate plus an additional 15 per cent. In certain cases the
amount may be as much as 12 ½ times more, such as for the HS code 84099991 (parts for engines with an
output of greater than 180 hp), where the Schedule commits China to a bound rate of 2 per cent, but a 25 per
cent charge could be imposed if the measures apply (Part D.1 of the Factual Background Section jointly
submitted by the complainants; also Exhibit JE-2).

 Tariff headings for motor vehicles Bound tariff rates
87.02 Motor vehicles for the transport of ten or more persons,
including the driver
Final bound rate of 25% 643
87.03 Motor cars and other motor vehicles principally designed
for the transport of persons, other than those under
heading 87.02, including station and racing cars
Final bound rate of 25%
87.04 Motor vehicles for the transport of goods Final bound rates of 6%, 15%,
20%, 25%
87.06 Chassis fitted with engines, for the motor vehicles of
headings Nos. 8701 to 8705
Final bound rates of 10%, 20%
87.07 Bodies (including cabs), for the motor vehicles of
headings Nos. 8701 to 8705
Final bound rate of 10%
87.08 Parts and accessories of the motor vehicles of headings
Nos. 8701 to 8705
Final bound rates of mostly
10%644
84.07 Spark-ignition reciprocating or rotary internal combustion
piston engines (Reciprocating piston engines of a kind
used for the propulsion of vehicles of Chapter 87)
Final bound rate of 10%645
84.08 Compression-ignition internal combustion piston engines
(diesel or semi-diesel engines) (Engines of a kind used for
the propulsion of vehicles of Chapter 87)
Final bound rates of 5%, 5.4%646

7.374 China's Schedule of Concessions, as summarized in the table above with respect to the most
relevant tariff headings in this case, provides separ ate tariff headings for motor vehicles, intermediate
categories (so-called assemblies) of auto parts, and parts and components of motor vehicles: the tariff
rates applicable to auto parts and components a nd assemblies (10 per cent on average) are lower than
those applicable to complete motor vehicles (25 per cent on average). China's Schedule does not
contain any specific terms or qualifications concerning the tariff headings at issue. The complainants
claim that China's measures impose ordinary custom s duties on imported auto parts in excess of those
set forth in China's Schedule inconsistently with the obligations under Article II:1(a) and (b) of the
GATT 1994.
7.375 Article II:1 of the GATT in relevant part provides:
"(a) Each contracting party shall accord to the commerce of the other contracting
parties treatment no less favourable than that provided for in the appropriate Part of
the appropriate Schedule annexed to this Agreement.
(b) The products described in Part I of the Schedule relating to any contracting
party, which are the products of territories of other contracting parties, shall, on their

643 In China's Schedule CLII, a final bound tariff rate of 4 per cent is indicated in tariff heading
9802.1020 (Exhibit JE-2).
644 A final bound tariff rate of 15 per cent is indicated for tariff heading 8708.6020 and 25 per cent for
tariff headings 8708.9920 and 8708.9940.
645 A final bound tariff rate of 8 per cent is indicated for tariff headings 8407.2100 and 8407.2900.
646 Also, for certain tariff headings and sub-headings, 9-25 per cent are indicated as bound rates at date
of accession.

importation into the territory to which the Sc hedule relates, and subject to the terms,
conditions or qualifications set forth in that Schedule, be exempt from ordinary
customs duties in excess of t hose set forth and provided therein. Such products shall
also be exempt from all other duties or charges of any kind imposed on or in
connection with the importation in excess of those imposed on the date of this
Agreement or those directly and mandator ily required to be imposed thereafter by
legislation in force in the importing territory on that date."
7.376 The ultimate question before us is therefore whether under the measures, imported auto parts
are subject to an ordinary customs duty in excess of China's concessions contained in the relevant
tariff headings of China's Schedule so as to vi olate the first sentence of Article II:1(b), and
consequently Article II:1(a) of the GATT 1994 fo r according less favourable treatment to imported
auto parts than China's concessions under China's Schedule.
647
2. Treatment of auto parts under China's measures – multiple shipments
7.377 Under the measures, auto parts are classified and assessed at the tariff rates applicable to
motor vehicles once they are assembled into a motor vehicle in China and meet certain thresholds set
out in the measures, even if such auto parts are imported separately in multiple shipments. 648 T h e
complainants argue that the measu res are in violation of Article II:1(b) of the GATT 1994 since they
impose on auto parts imports ordinary customs du ties (25 per cent on average) that exceed China's
concessions for auto parts (10 per cent on average) unde r its Schedule. China argues that it must be
able to interpret the tariff headings for motor vehi cles in a manner that gives them meaningful effect
and collect duties applicable to motor vehicles. Auto parts imported in multiple shipments therefore
must be counted together for the assessment of wh ether they have the essential character of a motor
vehicle. The question before us is therefore whether the tariff provisions for motor vehicles of
China's Schedule of Concessions are interpreted to include auto parts imported separately in multiple
shipments for domestic assembly, if such parts woul d have the essential character of a motor vehicle
had they been imported in a single shipment.649
(a) Interpretation of China's Schedule of Concessions
7.378 Pursuant to Article 3.2 of the DSU and follow ing the approach adopted by panels and the
Appellate Body in previous cases 650, we will interpret China's Sche dule of Concessions in accordance
with the interpretive rules under the Vienna Convention.
(i) Ordinary meaning of the tariff term "motor vehicles"651
7.379 As examined in Section VII.E concerning the pa rties' claims with respect to CKD and SKD
kits, the ordinary meaning of "motor vehicles" is limited in providing guidance on the interpretation
of the tariff headings at issue: the dictionary defi nitions of the terms do not indicate whether the tariff
headings for motor vehicles are interpreted to in clude auto parts and components imported in multiple

647 Also see Panel Report on EC – Chicken Cuts (Brazil) , paras. 7.54, 7.79-7.80, 7.87-7.94. We agree
with the interpretative task as framed by the Panel in EC – Chicken Cuts regarding a Member's commitment
contained in its Schedule of Concessions and consequently its obligations under Article II:1 of the GATT 1994.
648 See paragraphs 7.67-7.69 above.
649 As noted above in paragraph 7.371, we examine th e essential character test under China's measures,
i.e. Article 21(2) and (3), in Section VII.E below.
650 See paragraph 7.652 below.
651 See paragraphs 7.653-7.657 below.

shipments that can be considered as having the essen tial character of a motor vehicle had they been
imported altogether. Thus, we turn to the context of the tariff term "motor vehicles".
(ii) Context
652 for the tariff term "motor vehicles"
Other terms in the tariff headings for motor vehicles and other tariff headings in Chapter 87
7.380 The European Communities submits that when examined in the context of other terms in the
tariff headings for motor vehicles (87.02, 87.03 and 87.04) 653 as well as other terms under the tariff
headings such as 87.06, 87.07, 84.07 and 84.08, there is nothing that supports the view that parts or
some parts for motor vehicles could be classified under the relevant headings covering complete
motor vehicles.
654 The European Communities submits that th ere is a very clear distinction between
the terms of the headings for complete motor vehi cles, parts thereof and the intermediate categories
between motor vehicles and parts under Chapter 87 of China's Schedule. 655 According to the
European Communities, there is nothing in the tariff headings for motor vehicles (e.g. 87.02-87.04) or
headings for parts (87.06-87.08, 84.07-84.09 and 85.03) that would even remotely suggest that auto
parts for complete motor vehicles should be classified under the tariff headings for motor vehicles.656
7.381 China has not provided any direct counter arguments in this regard. Instead, China submits
that the context of GIR 2(a) is required in interpre ting the term "motor vehicles" and that Explanatory
Note (VII) to GIR 2(a) provides further context.
7.382 The Panel observes that other terms under tariff headings 87.02, 87.03 and 87.04 describe the
purpose of vehicles falling under each heading, such as the transport of "persons" or "goods". Nothing
in the terms of these headings suggests, however, th at parts of complete motor vehicles are classified
under the same headings for motor vehicles. If anyt hing, these terms appear to confine the scope of
the headings to complete motor vehicles, since part s and components of motor vehicles, by definition,
cannot perform the functions described under each heading such as transporting persons or goods.
Harmonized System657
General Interpretative Rules for the HS: relationship between GIRs 1 and 2
7.383 At the outset, we note that China's position concerning the interpretation of the tariff term
"motor vehicles" hinges upon the application of GI R 2(a) – namely, that GIR 2(a) allows parts
imported in multiple shipments and assembled later in to a motor vehicle to be classified as a motor
vehicle if they have the essential character of a motor vehicle.
7.384 The complainants do not dispute the fact that the GIR is one of the rules comprising the HS
and thus could be in principle relevant to the inte rpretation of China's tariff schedule, but emphasize
that GIR 2(a) can be relevant only after applying GIR 1.658

652 See paragraphs 7.662-7.667 below.
653 Although the European Communities has submitted th at other terms in the relevant tariff headings
are relevant context for the term "motor vehicles", it has not provided specific arguments regarding other terms
in these headings to support its position that the meaning of motor vehicles as provided in China's concessions
does not include anything other than complete motor vehicles.
654 European Communities' first written submission, para. 250.
655 European Communities' second written submission, paras. 78-79.
656 European Communities' second written submission, paras. 81-89.
657 See paragraphs 7.663-7.667.

7.385 GIR 1 provides:
"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 Chapter Notes and provided such headings or
Notes do not otherwise require, according to the following provisions."
7.386 The Secretariat of the World Customs Organization ("WCO Secretariat")
659 explains
that based on the language of GIR 1, all the rules in GIR should be consulted when classifying articles
in the HS.660 This means that GIR 2 must always be considered, in conjunction with GIR 1, provided
the headings and legal notes do not otherwise require . The WCO Secretariat further explains that
"provided the headings and legal notes do not ot herwise require" means that a heading providing
specifically for a collection of unassembled parts or an incomplete article would prevail by
application of GIR 1 because GIR 2 would not appl y (that is, because such headings or Notes ...
otherwise require). The WCO Secretariat consider s that tariff headings 87.06 and 87.07 would be
examples of such an understanding.
7.387 Further, according to the WCO Secretariat, this principle is expounded in Explanatory Note
(V) to GIR 1:
"In provision (III)(b), the expression "provi ded such headings or Notes do not
otherwise require" is intended to make it quite clear that the terms of the headings and
any relative Section or Chapter Notes are paramount, i.e., they are the first
consideration in determining classification. For example, in Chapter 31, the Notes
provide that certain headings relate only to particular goods. Consequently those

658 Reponses of the European Communities and Canada to Panel question No. 114; complainants'
responses to Panel question No. 208. Canada's response to the Panel question No. 114 is based on a caveat that
GIR 2(a) is broadly relevant to the extent it may apply, in certain limited instances, within the HS to interpreting
China's Schedule and that GIR 2(a) is not context on its own, but can be taken into consideration after applying
GIR 1. Canada agrees that Members have the discretion to classify parts which have the essential character of
the finished good either as parts or as the finished good, in accordance with the rules of the HS, including GIR
2(a) (Canada's response to Panel question No. 208, also referring to its second written submission, footnote 77).
The European Communities submits that the overwhelming majority of tariff classification situations are
decided on the basis of GIR 1, which is the backbone of the application and interpretation of the HS and hence
the tariff schedules of most WTO Members such as China. The European Communities is of the view that there
is a clear hierarchy between the rules, and that if the cl assification can be determined according to the terms of
the headings and any relative Section and Chapter notes, other rules are simply not applicable. The European
Communities submits that the classification of auto parts can be determined on the basis of the terms of
headings. There is a very clear distinction between the terms of the headings for complete motor vehicles, parts
thereof and the intermediate categories be tween motor vehicles and parts. The United States submits that
China's measures are directly contrary to GIR 1, in par ticular because China under its measures classifies auto
parts as whole vehicles when the HS has headings specific to auto parts (United States second written
submission, para. 39).
659 In these reports, our reference to the comments provided by the WCO means those provided by the
WCO Secretariat, not the WCO Members. To that extent , the Panel is not relying on or incorporating the WCO
Secretariat's comments as the official view of the WCO Members.
660 WCO's letter of 30 July 2007, page 1. The WCO Secretariat explains that the words "and...,
according to the following provisions" in GIR 1 requires that all the GIRs be consulted when classifying articles
in the HS.

headings cannot be extended to include goods which otherwise might fall there by
reason of the operation of Rule 2(b)".
661
7.388 The WCO Secretariat advises that although the application of the GIR is commonly explained
as sequential, to be precise, when classification is by GIRs 1 and 6, it does not mean that other GIRs
have not been consulted. Rather, it merely means that application of the text of GIR 1, in particular
the phrase, "provided such headings or Notes do not otherwise require," makes GIR 2 inapplicable.662
7.389 The Panel first notes that the text of GIR 1 indicates that the Contracting Parties to the HS are
obliged to classify goods in accord ance with the terms of the headi ngs and any relevant Section or
Chapter Notes and according to the provisions following GIR 1 (i.e. GIRs 2-6), provided the relevant
tariff headings or Section or Chapter Notes do not otherwise require. Based on the ordinary meaning
of GIR 1, we consider that all the rules under the GIR, starting with GIR 1, are relevant for
classification of goods. This means, in our view, GIRs 2-6 should not be ignored simply because a
good can be classified by applying GIR 1. Such an understanding would render the existence of other
rules under the GIR and the phrase "and provided such headings or Notes do not otherwise require,
according to the following provisions" inutile. As commented by the WCO Secretariat and pointed
out by the complainants, classification should be based , first, on the terms of the headings, relevant
Section or Chapter Notes pursuant to GIR 1 and provided such headings or Notes do not otherwise
require, according to the provisions of GIRs 2-6.
7.390 The tariff headings concerned in the present case (87.02-87.05) do not have language that
would make GIR 2(a) irrelevant for the classifi cation of auto parts under Chapter 87. We also
observe that the Notes to Section XVII to which Chapter 87 belongs do not contain any requirements
that would restrict the Contracting Parties' reliance on other provisions in the GIR for classification.
Further, the General Explanatory Notes to Chapter 87 provide that "[a]n incomplete or unfinished
vehicle is classified as the corresponding complete or finished vehicle provided it has the essential
character of the latter (see Interpretative Rule 2(a))...".
663 The explicit reference in the General
Explanatory Notes to the application of GIR (2)(a) shows that GIR 2(a) is applied, as necessary, for
the classification of goods under the tariff headings in Chapter 87.
7.391 Accordingly, we find that both GIR 1 and GIR 2 can constitute part of the context for the
interpretation of the term "motor vehicles" in the present case. We will examine how these
interpretative rules under the HS are applied to the interpretation of the tariff term "motor vehicle",
bearing in mind that GIR 2(a) can only be applied in conjunction with GIR 1.664
Application of GIR 2(a), in conjunction with GIR 1, to the tariff headings for "motor
vehicles"
7.392 As we have examined above, the terms of th e tariff headings under Chapter 87 do not suggest
that the term "motor vehicles" must be interp reted to include auto parts imported in multiple

661 WCO's letter of 30 July 2007, pages 1 and 2.
662 The WCO Secretariat further comments that a classification opinion promulgated by the HS
Committee includes a statement of applicable GIRs, and the Committee now includes GIR 1 in every statement
of applicable GIRs (other Section or Chapter Notes are sometimes also cited).
663 The General Explanatory Notes to Chapter 87 further provide some examples of incomplete or
unfinished vehicles that would be classified as the corresponding complete or finished vehicles by applying
GIR 2(a). These examples are (A) A motor vehicle, not yet fitted with the wheels or tyres and battery and (B) A
motor vehicle not equipped with its engine or with its interior fittings.
664 WCO Secretariat's letter of 20 June 2007, page 3.

shipments for domestic assembly. Nor do the Notes to Section XVII provide any guidance that would
support such an interpretation. We now turn to the principle of GIR 2(a).
7.393 GIR 2(a) provides:
"Any reference in a heading to an article sha ll be taken to include a reference to that
article incomplete or unfinished, provided that, as presented , the incomplete or
unfinished article has the essential character of the complete or finished article. It
shall also be taken to include a reference to that article complete or finished (or
falling to be classified as complete or finished by virtue of this rule), presented
unassembled or disassembled." (emphasis added)
7.394 China submits that the interpretive rules of GIR 2( a) result in a continuum of circumstances
under which parts and components of an article will be classified as the complete article and that there
is no clear separation between tariff headings for a complete article and tariff headings for the parts
and components of that article. Relying on GIR 2( a), China submits that the importation, in multiple
shipments, of the parts necessary to assemble a co mplete motor vehicle is also the importation of a
motor vehicle, not the parts of a motor vehicle, provided that the imported parts, when assembled,
have the essential character of a motor vehicle.
7.395 In particular, China argues that the term "as presented" in GIR 2(a) allows customs authorities
to base a classification determination upon eviden ce that a shipment of parts and components is
related to other shipments of parts and compone nts through their common assembly into a single
article.
665 China is of the view that if the term "as pr esented" were limited to the contents of a single
shipment, there would be no scope for the HS Contr acting Parties to apply the principles of GIR 2(a)
to goods assembled from multiple shipments.
7.396 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, the conclusion th at the term "as presented" does not preclude the
application of GIR 2(a) to multiple shipments of parts and components arises as a necessary
implication of the interpretation of th e HS Committee Decision adopted in 1995.
666 China considers
that in finding that the situations in paragraph 10 of the HS Committee Decision are applications of
GIR 2(a) to be determined by each country in acco rdance with its national laws and regulations, the
HS Committee must have considered that the term "as presented" does not preclude these applications
of GIR 2(a). 667 The fact that the HS Committee has f ound that members of the HS may apply the

665 China's second written submission, paras. 34, 38, China's response to Panel question No. 110.
666 China's response to Panel question No. 210(a). China submits that "both of the circumstances
referred to in paragraph 10 of the HS Committee Decision necessarily entail an applicati on of GIR 2(a) to
classify parts and components that arrive in more than one shipment." The HS Committee decision referred to
by China is "Decision of the Harmonized System Committee, HSC 39.235 (HSC/15), Interpretation of General
Interpretative Rule 2(a) (Annex IJ/7 to Doc. 39.600 E (HSC/16/Nov. 95)" as provided in Exhibit CHI-29.
Paragraph 10 of this decision states:

"10. The [HS] Committee decided, by 12 votes to none, to include the Nomenclature
Committee's decision in its Report. Thus, the Committee decided that the questions of split
consignments and the classification of goods assembled from elements originating in or
arriving from different countries are matters to be settled by each country in accordance with
its own national regulations."

667 China's response to Panel question No. 210(a).

principle of GIR 2(a) to goods assembled from multip le shipments can only mean that the term "as
presented" is not limited to a single shipment.
7.397 China submits that the HS Committee has interp reted GIR 2(a) specifically as it pertains to
"the classification of goods assembled from elements originating in or arriving from different
countries."
668 Given the interpretation adopted by the WC O, "as presented" should therefore be read
to include "as presented in a customs declaration or other documentary evidence," or "as presented in
light of the facts and circumstances surrounding the import transaction".669
7.398 The European Communities submits that when goods are classified in the HS, it is always
done on the basis of the objective characteristics of th e product at the time of importation, that is, as
imported and presented to customs on a shipment-by-shipment basis. 670 According to the European
Communities, the intentions of the importer and differing duty rates are irrelevant.
7.399 Because there is no ambiguity on where complete vehicles, intermediate products and parts of
complete vehicles should be classified under Chin a's tariff schedule, the European Communities
argues that the other rules, in particular GIR 2(a) , on which China bases its entire defence strategy are
simply not applicable at the level of the tariff headings and without considering a very specific
shipment as presented to customs at the border. 671 Specifically, the European Communities contends
that GIR 2(a) is of extremely limited relevance for the present case, and recourse to GIR 2(a) can only
be relevant in very specific individual cases "as presented" to customs where a given incomplete or
unfinished article as presented to customs appears to have the essential character of the complete
article, and not at the level of China's tariff schedules generally as China submits.
672 Further, the
General Notes to Chapter 87 contain a specific applica tion of GIR 2(a) in the context of Chapter 87 (a
"lex specialis"), namely the two examples provided therein. 673 The European Communities considers
China's interpretation of GIR 2(a) concerning multip le shipments and essential character of a motor
vehicle as an unprecedented reading of GIR 2(a).674
7.400 Regarding the term "as presented" in GIR 2(a), the European Communities submits that
China's position amounts to nothing less than tariff classi fication at will and that there is no basis for
the interpretation advanced by China.675 The European Communities is of the view that the words "as

668 China's response to Panel question. No. 110.
669 China's second written submission, para. 41; Chin a's responses to Panel question Nos. 110, 112.
China submits that the HS Committee Decision falls within the scope of Article 31(3)(a) of the Vienna
Convention – namely the scope of "any subsequent agreement between the parties regarding the interpretation of
the treaty or the application of its provisions". We under stand that this is related to China's view that the WCO
has adopted the HS Committee's interpretation of GIR 2(a), including paragraph 10, pursuant to Articles 7 and 8
of the HS Convention.
670 European Communities' second written submission, para. 73. The European Communities submits
that all parties and third parties to the dispute, except for China, who have submitted their arguments on
Article II of the GATT 1994 share this view. The European Communities also refers to the Appellate Body's
statement in EC – Chicken Cuts that "[w]e agree with the Panel that, in characterizing a product for purposes of
tariff classification, it is necessary to look exclusively at the 'objective characteristics' of the product in question
when presented for classification at the border" (Appellate Body Report on EC – Chicken Cuts, para. 246).
671 European Communities' second written submission, paras. 90, 94.
672 European Communities' second written submission, para. 94.
673 European Communities' second written submission, paras. 95, 96; and responses to Panel question
Nos. 115, 139.
674 European Communities' second written submission, para. 98.
675 European Communities' second written submission, paras. 100, 104.

presented" mean literally what they say and ar e merely a reflection of the basic principle
676 behind
customs classification. 677 In the European Communities' opi nion, it is clear from the ordinary
meaning of the words and the reply from the WCO Secretariat that the concept does not and cannot
cover "several moments" and "several places" , which are necessary preconditions for China's
position.678 According to the European Communities, Ch ina's interpretation of GIR 2(a) renders the
good "as presented" to mean, not the good presented to Customs, but the good that will be later
manufactured in the customs territory on the basis of elements that are imported at different times, in
different places and from different countries.679
7.401 Furthermore, the European Communities argues that the HS Committee Decision referred to
by China does not support an interpretation that it al lows the Members to apply the principle of GIR
2(a) to multiple shipments of parts and component s, when the words "mu ltiple shipments" do not
even appear in the concerned Decision. 680 According to the European Communities, the situations 681
referred to in the Decision are inter-related and concer n trade facilitation issues in the context of some
very large goods or goods that are otherwise diffi cult to transport and where in some instances the
manufacture has been completed in two or more different countries and where the shipping of the
good into its final destination needs to be split into two or more consignments.682
7.402 The United States submits that both importers and customs authorities are legally obligated
to classify imported merchandise pursuant to GIR 2(a) when applicable to importations of incomplete,
unfinished, unassembled, or disassembled goods. 683 Furthermore, for the purposes of GIR 2(a), "as
presented" refers to the condition of the good at the time of its importation. 684 The United States
interprets the term "as presented" as explicitly precluding the application of GIR 2(a) to shipments of
goods that are not imported together. 685 As the legal basis for its position, the United States submits
the following four grounds: (i) the obligation under the HS Convention to apply GIR 1 and the
relevant Section and Chapter Notes, which requir es the Contracting Parties to the HS to base
classification on the physical condition of the good, and not what processes the good will
subsequently undergo; (ii) the plain meaning of "as presented"; (iii) the fact that "as presented"

676 The European Communities refers to the basic principle of tariff classification that goods are
classified on the basis of the objectiv e characteristics of the product at the time of importation, as imported and
presented to Customs on a shipment-by-shipment basis. The European Communities also emphasizes that the
Appellate Body has confirmed this (European Communities' response to Panel question No. 210(b), citing the
Appellate Body Report on EC – Chicken Cuts, para. 246). According to the European Communities, the notion
of multiple shipments of product goes directly against this formulation of the Appellate Body as multiple
shipments denotes several products that are presented to customs at different times and at different places.
677 European Communities' second written submission, paras. 109, 110.
678 European Communities' response to Panel question No. 210(b).
679 European Communities' second written submission, para. 111.
680 European Communities' second written submission, para. 105.
681 The situations here refer to "split consignments" and "the classification of goods assembled from
elements originating in or arriving from different countries". See paragraph 7.425 below for the text of
paragraph 10 of the HS Committee Decision concerned.
682 European Communities' second written submission, paras. 105-107, response to Panel question
No. 138.
683 United States' response to Panel question No. 224. The United States submits that in applying
GIR 2(a), customs officials can see the en tire article at the time of entry and th at if an article is not classifiable
by GIR 2(a), then GIR 1 requires the separate classification of the components (United States' response to Panel
question No. 112).
684 United States' response to Panel question No. 110. The United States submits that under US
customs law, it is well settled that classification is based on the condition of goods at the time of importation.
685 United States' response to Panel question No. 210(b).

replaced "as imported," and is intended to have the same meaning; and (iv) the object and purpose of
the HS Convention of ensuring consistency of import and export statistics and of facilitating trade.
686
7.403 The United States argues that the HS Committee Decision does not address the questions of
multiple shipments and the phrase "as presented".687 Rather, paragraph 10 of the discussion by the HS
Committee was about the treatment of split c onsignments and the treatment of goods for origin
purposes, not about the interpretation or application of GIR 2(a).688
7.404 The United States also elaborates that as the d ecision was only reflected in the report of the
Committee and no amendments were made to the E xplanatory Notes nor was a classification adopted,
paragraph 10 has little weight. Moreover, the Unite d States submits that the HS Committee Decision
does not mean that a member customs administration can abrogate the requirements of the GIR by
regulation at the domestic level.
689
7.405 Canada is of the view that GIR 2(a) permits customs authorities to determine whether a
good, based upon its state as it arrives at the borde r, has the essential character of a finished
product.690 According to Canada, this involves elements such as visual inspection, reference to
documents, and if necessary further testing or an alysis (based upon the state of the good as it passes
the border). Canada submits that the term "as pr esented" in GIR 2(a) means that the assessment of
whether an incomplete or unfinishe d 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 presented to customs officials at the border (i.e. the "snapshot").
691 No consideration is to be
given to separate consignments arriving at different times, end-use or value of the article, but simply
to objective characteristics of the product as presented at the border.692
7.406 Recalling that the interpretative weight to be given to the HS Committee Decision in
interpreting China's WTO commitments is affected by its legal nature, its temporal relation to the
conclusion of China's accession, and the awareness Me mbers had of that statement, Canada submits
that the HS Committee Decision at issue is irrelevant for the following reasons 693: (i) no reference is
made to split shipments in the Explanatory Notes to GIR 2(a) and the Nomenclature Committee that
developed GIR 2(a) specifically considered and rejected the inclusion of the concept of split shipment

686 United States' response to Panel question No. 210(b).
687 United States' comments on China's response to Panel question No. 110; comments on China's
response to Panel question No. 210(c).
688 United States' comments on China's response to Panel question 215(b). The United States also
submits that the HS Committee Decision removed the re ference to "simple assembly" from the Explanatory
Notes to GIR 2(a) and that as an explanatory note can neither expand no r restrict the terms of the HS, US
Customs believes that the interpretation of GIR 2(a) has been unaffected (United States' response to Panel
question No. 112).
689 United States' comment on China's response to Panel question No. 110, response to Panel question
No. 210(c).
690 Canada's responses to Panel question Nos. 139, 224.
691 Canada's response to Panel question No. 110, also referring to the Appellate Body's statement in EC
– Chicken Cuts . Canada submits in the context of the term "on their importation" in Article II:1(b) that "the
ordinary meaning of 'on their importation' in Article II:1(b ), read in the context of Articles I, III and XI, and as
evinced by Member practice, demonstrates clearly that ordinary customs duties must be imposed based upon the
state of a product as presented at the border" (Canada's second written submission, para. 17).
692 Canada considers that it is unnecessary for the Panel to decide all the precise situations in which the
term "as presented" in the HS may apply to certain shipments of multiple goods (Canada's response to Panel
question No. 210(b)). In Canada's view, that would be a matter for the WCO, not the WTO.
693 Canada's second written submission, para. 59 and its footnotes (including footnote 67, citing the
Appellate Body Report on EC – Chicken Cuts, para. 291).

in that rule; (ii) the practice on which the comment was based related specifically to a handful of
products (principally machinery) imported in separ ate shipments as one product, and did not include
motor vehicles or their parts; (iii) parts used for the manufacturing process and shipped separately
were specifically not intended to be covered by GI R 2(a); and (iv) at the time of China's accession,
there was no established practice among Members to apply this decision to multiple shipments.
7.407 Concerning the circumstances in which a need fo r customs authorities to apply the principle
of GIR 2(a) arises, the WCO Secretariat is of the view that GIR 2(a) should always be applied when
the following three conditions are met:
1. the entry under consideration is presente d incomplete, unfinished, unassembled or
disassembled;
2. as presented, it has the essential character of the complete or finished article; and
3. the heading and Legal Notes of the HS do not otherwise provide for the entry.
694
7.408 The WCO Secretariat explains that the term "as presented" in GIR 2(a) could be understood
to mean the moment at which the goods are presente d to Customs or other officials with a view to
classifying the goods concerned in the customs tariff or in the trade statistics nomenclature. The
WCO Secretariat adds that the HS is silent on "as presented" and the HS Committee has not
considered its meaning except in the context of the issue of split consignments.
695
7.409 The WCO Secretariat replies that during th e HS Committee discussions at issue, the
Committee reaffirmed its earlier decision 696 that the possible treatment of split consignments as a
single entity for purposes of GIR 2(a) was a matter to be handled exclusively at the discretion of each
individual administration, taking into account nationa l laws and regulations. This decision was never
codified in legal or Explanatory Note texts, a lthough it was informally noted by the Committee from
time to time. The WCO Secretariat notes that, based on the Secretariat's experience, national
regulations and laws appear to differ with respect to the applicability of GIR 2(a) to split
consignments. The WCO Secretariat also notes that it would expect that those administrations which
permit such consolidation of entries would consid er requests for that treatment on a case-by-case
basis, applying standards set forth in national laws and regulations.
7.410 Furthermore, decisions of the HS Committee, including the Explanatory Notes and any
amendments thereto, are not binding pursuant to Article 3.1(a) of the HS Convention. 697 Rather, the
Contracting Parties to the HS are requested to info rm the Secretariat in case they are not able to
implement any decision by the HS Committee, and th e Secretariat has not received such a notification
with respect to the decision at hand. Regardl ess, the nature of the commitments posed by the
Explanatory Notes, classification opinions and other advice rendered by the Committee, even when

694 WCO's letter of 30 July 2007, page 2.
695 The WCO Secretariat is of the view that "split consignments", although not formally defined, is
widely used to describe a range of trading practice and would be identified with the situation where parts to be
assembled into a complete article arrive separately in mu ltiple shipments, including those arriving at different
times, in different ports and from different places of origin.
696 Reported in paragraph 81 of Doc. 11.000, NC/11/Oct. 63.
697 The WCO Secretariat explains that Article 3 of the HS Convention obligates Contracting Parties to
use the GIR, Legal Notes and texts of the headings and subheadings in their national nomenclatures, along with
the relevant numerical codes (WCO's letter of 20 June 2007, page 3). The WCO Secretariat points out that
decisions of the HS Commi ttee, including the Explanatory Notes and any amendments thereto, are not binding
under Article 3.1(a) of the Convention (WCO's letter of 20 June 2007, page 4).

specifically approved by the Council pursuant to Article 8 of the HS Convention, is in the nature of
advisory rather than conventional.
698
"As presented" – ordinary meaning
7.411 The Panel notes that China h as focused its arguments concerning the interpretation of the
term "motor vehicles", in particular whether it in cludes in its scope auto parts imported in multiple
shipments, on the meaning of "as presented" 699 in GIR 2(a). In this regard, the parties do not dispute
that GIR 2(a) is applied when customs authorities need to determine whether parts and components of
a complete good, imported and presented in a single shipment, have the essential character of the
complete good. 700 The parties, however, do dispute whethe r GIR 2(a) also applies to parts and
components imported in multiple shipments, presented to customs officials separately and assembled
to a complete good in the importing country. The issue before us is therefore whether the term "as
presented" in GIR 2(a) includes, as argued by Chin a, the situation where parts are imported in
multiple shipments and presented to customs authorities separately.
7.412 The plain meaning of the term "as presented" denotes a temporal meaning, i.e. the moment
when a good is presented to the customs authority: the word "as" can be defined as "B. rel. adverb or
conjunction III Of time or place. ... 8. At or during the time that; when, while; whenever."
701, and the
word "present" as "verb. I Make presen t, bring into the presence of. 6. verb trans. a. Put before the
eyes of someone; offer to sight or view; show, exhibit, display". 702 When these definitions are
combined, we understand the term "as presented" to mean "when something is offered for the eyes of
someone, offered to sight or view". In the absence of any other modifying words, "as presented" in
the context of GIR 2(a) thus appears to point to the moment when goods are offered to customs
authorities for examination, without necessarily encompassing situations where parts and components
of a good are offered at different times for obser vation or examination and later assembled together
into a complete good.

698 WCO Secretariat's letter of 20 June 2007, page 3.
699 The Panel notes that the term "as presented" appe ars in the first sentence of GIR 2(a), whereas the
second sentence has the word "presented". We understand for the purpose of this dispute that the parties' use of
the term "as presented" in their discussion of GIR 2(a) refers to both "as presented" and "presented" in the first
and second sentences of GIR 2(a). The parties agree that "as presented" in the first sentence in GIR 2(a) has the
same meaning as "presented" referred to in the second sentence of GIR 2(a) (Parties' responses to Panel question
No. 218).
700 Canada submits that "[t]he only feature of the Measures that could be accepted customs
classification is the classifi cation of parts as a complete vehicle where those parts, contained in a single
shipment, have the vast majority of necessary parts, and thus have the essential character of a whole vehicle in
accordance with GIR 2(a)" (C anada's second written submi ssion, para. 55). See also the responses of the
European Communities and the United States to Panel question Nos. 113, 129.
Furthermore, the Panel notes the cases in which the complainants' customs authorities have also relied
on the principle of GIR 2(a) in classifying parts and components of a complete good imported in a single
shipment: see China's first written submission, paras. 102-103 and footnote 74, citing Exhibits CHI-19, 20, 21.
701 Shorter Oxford English Dictionary , 2002 (5th edition), Volume 1, page 126. The Panel recognizes
that the word "as" has an extensive list of dictionary meanings. However, none of the definitions other than the
highlighted above seems to make sense when considered in conjunction with "presented" as used in GIR 2(a) for
the phrase "as presented".
702 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 2, page 2332.

7.413 We also note that, as the United States explains
703, the term "as presented" was a replacement
for the term "imported" in GIR 2(a) to the CCCN (i.e. a nomenclature preceding the HS) to align it
with the French word "présenté" and was intended to cover not only "import" but also "export" trade
statistics. Furthermore, in a letter provided by th e Nomenclature Directorate in response to a question
from one of the signatories to the HS concerning the scope of the term "presented" in the text of
GIR 2(a), the Director of the CCC (the immediate precursor to th e WCO) states that the editorial
amendment of replacing the word "imported" with "p resented" was adopted to make it clear that
GIR 2(a) applies to a given article in the state in which it is presented for customs clearance.
704
7.414 We consider that if the term "as presented", in the sense of "as imported", was intended to
broadly cover parts and components imported and presented at different times so long as they would
eventually be assembled together into a comp lete good in the importing Member's territory, the
drafters would not have included the term "as present ed" in the text of GIR 2(a). In other words,
given that the ordinary meaning of the term "as presented" denotes a temporal meaning: the moment
when a good is presented, if the drafters had intende d the scope of the term to be broader than this
ordinary meaning, they would have either excl uded the term connoting such an obvious temporal
meaning from the text of GIR 2(a) or been more specific about the scope of the term.
7.415 Therefore, the ordinary meaning of the term "as presented", considered together with the
context in which the term was introduced into GIR 2(a) by the CCC, supports the view that its scope
is limited to the specific moment when goods are pre sented to the customs authority for classification.
We consider that this interpretation is also in lin e with the basic principle of classification as observed
by the Appellate Body in EC – Chicken Cuts , i.e. goods must be classified based exclusively on their
objective characteristics, which refer to their condition as they are presented to customs authorities at
the time of importation.
705
"As presented" – the HS Committee Decision
7.416 China, however, argues that the interpretation of "as presented" should be read in light of the
HS Committee Decision 1995 concerning the interpretation of GIR 2(a) 706, in particular paragraph 10
of the Decision.
7.417 We will commence our analysis with the parties' contentions on the interpretative weight to
be given to the HS Committee Decision in the interpretation of China's Schedule of Concessions.
Interpretive weight to be given to the HS Committee Decision
7.418 The complainants submit that the HS Committee Decision at issue is not binding on the
contracting parties of the HS and that decisions that do not reflect a consensus of the WCO
membership must be accorded less weight in the interpretative hierarchy of the HS, after the GIR,
Section and Chapter Notes and Explanatory Notes.
707

703 The United States refers to the Decisions of th e Nomenclature Committee in 1979 and a "Letter
from Nomenclature and Classification Directorate" da ted 2 October 1989 (United States' comment on China's
response to Panel question No. 110, citing Exhibit US-1, which is also the same document as that provided in
Exhibit CDA-15).
704 Exhibit US-1 and Exhibit CDA-15, page 2.
705 Appellate Body Report on EC – Chicken Cuts, para. 246.
706 HSC/16/Nov.95, DOC.39.600 (Exhibit CHI-29).
707 Complainants' responses to Panel question Nos. 110, 111; United States' comment on China's
response to Panel question No. 110.

7.419 China is of the view that the Decision is relevant to the Panel's assessment of how the GIR
affects the interpretation of China's tariff provisions for motor vehicles.
708 China bases its argument,
first, on the Appellate Body's finding that interp retations of the GIR adopted by the HS Committee
and the WCO are relevant to a panel's assessment of how the GIR affects the interpretation of a
Member's Schedule of Concessions and, second, on th e fact that the HS Committee Decision at issue
was adopted by the HS Committee and, as such, can be deemed to be approved by the WCO if no
member objects to its adoption under Article 8 of the HS Convention.709

The European Communities submits that the HS Committee decided to include the Nomenclature
Committee's decision relating to "split consignments" into its report, as a completely separate issue from
"assembly". However, GIR 2(a) has not been amended in any way pursuant to the discussion in the Committee.
Thus, the European Communities is of the view that China's submission that the Decision would somehow
affect the "as presented" criterion u nder GIR 2(a) in the context of split co nsignments is entirely without merit.
(European Communities' response to Panel question No. 111). According to the United States, decisions of this
committee are considered advice and guides to the interpre tation of the HS and that the US Customs considers
that these decisions often provide valuable insight into how the HS Committee views certain provisions and that
Decisions of the [HS Committee] that are merely given in the report should be given little weight (United States'
response to Panel question No. 111). Canada is also of the view that decisi ons that do not reflect a consensus
of the WCO membership, including the HS Committee Decisions, must be accorded less weight in the
interpretative hierarchy of the HS, af ter the GIR, Section and Chapter Notes and Explanatory Notes. Canada
notes however that although Explanatory Notes have less probative value than Chapter Notes, the Appellate
Body has not indicated that WTO Members, in applying duties under their Schedules, have the discretion to
ignore the Explanatory Notes (Canada's second written subm ission, para. 42, footnote 36, also referring to its
response to Panel question No. 111). Canada points out that panels or the Appellate Body did not give the same
weight to the HS Committee Decisions as to the Explan atory Notes in their analysis (Canada's second written
submission, footnote 36).
708 China also submits that the nature of the interpretation that the WCO has adopted is not one that
would "bind" members of the WCO, in the sense that it would compel them to reach a specific classification
determination on the facts of particular cases. Rather, the significance of the WCO's interpretation, as pertinent
to this dispute, is that the term "as presented" does not preclude the application of GIR 2(a) to multiple
shipments of parts and components, whether or not a particular WCO member chooses to apply GIR 2(a) in this
manner (China's second written submission, para. 43 and footnote 22).
709 China's second written submission, para. 43. China first submits that 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 sh ipments is a matter to be resolved under national laws
and regulations, the WCO has necessarily interpreted GIR 2(a) as containing no prohibition on this particular
application of the rules, and has found that this applicatio n of the rule is not otherwise consistent with the HS.
The fact that the WCO Secretariat has received no notification from WCO members concerning their inability to
implement the HS Committee decision simply confirms that this decision has not proven to be particularly
controversial or detrimental to the operation of the HS (China's response to Panel question No. 210(c)).
 Article 8 of the HS Convention in relevant parts provides as follows:

"Article 8
Role of the Council

2. The Explanatory Notes, Classification Opinions, other advice on the interpretation of
the Harmonized System and recommendations to secure uniformity in the interpretation and
application of the Harmonized System, prepared during a session of the Harmonized System
Committee under the provisions of paragraph 1 of Article 7, shall be deemed to be approved
by the Council, if not later than the end of the second month following the month during
which that session was closed, no Contracting Party to this Convention has notified the
Secretary General that it requests that such matter be referred to the Council."

7.420 The Panel notes that the parties do not dispute that the concerned HS Committee Decision is
not binding on the HS Contracting Parties within the meaning of Article 3.1 of the HS Convention,
which is an exclusive provision setting out the obliga tions of the Contracting Parties. At the same
time, as pointed out by China and referred to by the WCO Secretariat, materials such as Explanatory
Notes or other advice prepared as guides to the interp retation of the HS are deemed to be approved by
the WCO if no Contracting Party to the HS notifies the Secretary General of its request that such
matter be referred to the Council.
710 Even so, this means, accord ing to the response from the WCO
Secretariat, that the commitments posed by Expl anatory Notes, Classification Opinions and other
advice rendered by the Committee, even when specifically approved by the Council pursuant to
Article 8 of the HS Convention, are advisory rather than conventional in nature.711
7.421 Under Article 3.1 of the HS Convention, classification rules binding on the Contracting
Parties to the HS are the GIR, Section and Chapter Notes, and texts of the headings and subheadings.
Therefore, other materials such as Explanatory No tes and Classification Opinions and other advice
from the HS Committee are not binding on the HS Contracting Parties. In light of this, we agree with
the complainants that the HS Committee Decision, in particular parts of the Decision that have not
been codified into legal texts of the HS or E xplanatory Notes to the HS, do not afford the same
evidentiary weight as the GIR itself or the HS Commit tee Decisions that have been codified into legal
texts or Explanatory Notes.712 The Appellate Body also stated in EC – Chicken Cuts that the Chapter

Article 7, in turn, provides in relevant part:

"Article 7
Functions of the Committee
The Harmonized System Committee, having regard to the provisions of Article 8, shall have
the following functions:

(b) to prepare Explanatory Note s, Classification Opinions or other advice as guides to
the interpretation of the Harmonized System;"

710 The WCO Secretariat advises that it has not recei ved any such notification. The United States
submits that it is not surprising that the WCO Secretar iat has not received notificatio n that a Contracting Party
has not been able to implement the second "decision", since that second decision is not one that could be
implemented by the Contracting Parties as it was not a decision but a statement that these matters were not
within the purview of the HS (United States' response to Panel question No. 210(c)).
711 WCO Secretariat's letter of 20 June 2007, page 3. Based on the text of the provisions of the HS
Convention and the explanation from the WCO Secretariat, the Panel understands that the Contracting Parties to
the HS are obliged to respect only the HS legal texts, which consist of the GIR, Legal Notes (Section, Chapter
and subheading Notes) and texts of the headings and subheadings. The rest of the materials, such as
Explanatory Notes, Classification Opinions and other advice rendered by the Committ ee, even when they are
approved by the Council pursuant to Article 8 of the HS Convention, are advisory rather than conventional.
712 See footnote 707 for the complainants' statements in this regard. For example, the Panel observes
that the part of the HS Committee Decision that GIR 2(a) should imply a certain range of expected assembly
operations was embodied in Explanatory Note (VII) to GIR 2(a). In this connection, the WCO Secretariat
explains that as a result of discussions on GIR 2(a) in the HS Committee, Explanatory Note (VII), first
paragraph, was amended to the current text (WCO letter of 20 June 2007, page 5). On the other hand, paragraph
10 of the HS Committee Decision was never codified in legal or Explanatory Note texts, although according to
the WCO Secretariat, the possible treatment of "split co nsignments" as a single entity (the first question) as
mentioned in paragraph 10 of the HS Committee Decision was informally noted from time to time by the
Committee.

Notes to the HS, which are binding, may have great er probative value than the Explanatory Notes to
the HS, which are not binding.
713
7.422 However, regardless of the exact interpretativ e weight to be given to the HS Committee
Decision at issue, the Contracting Parties can refer to such a decision at the very least as guidance to
the interpretation of the HS. The United States it self has also stated that its national customs
regulations on split consignments is consistent with paragraph 10 of this HS Committee Decision. 714
If one of the issues included in the same provision of the HS Committee Decision can be consulted by
the HS Contracting Parties, in our view, it should also be the case for the other issues contained in that
provision. The European Communities and Canada do not contest either that the Decision can serve
the Contracting Parties at least as guidance on releva nt issues. We find support for our view in the
Appellate Body's statement in EC – Chicken Cuts that the probative value of a Note, either Chapter
Note or Explanatory Note, will also depend on how relevant it is to the interpretative question at
issue.715
7.423 Furthermore, concerning the HS Committee decisions, as China argues, the Appellate Body in
EC – Computer Equipment states: "[i]n interpreting the tariff concessions in [the European
Communities' Schedule in that case], decisions of the WCO may be relevant; and, therefore, they
should have been examined by the Panel". 716 Following the Appellate Body's guidance, the Panel in
EC – Chicken Cuts considered that decisions of the HS Committee of the WCO, even if not binding,
could well be a useful source of information on th e subsequent practice of WTO Members, a large
proportion of whom are signatories to the HS Convention and, thus, are members of the HS
Committee.717 In light of our considerations above, we will now examine whether the HS Committee
Decision concerned could provide guidance on the interpretation of GIR 2(a).
The HS Committee Decision 718 and the interpretation of "as presented" in
GIR 2(a)
7.424 We now turn to the substantive relevance of the HS Committee Decision to the interpretation
of GIR 2(a) as argued by China.
7.425 The HS Committee Decision in relevant part provides as follows:
"9. The Chairman then invited the Co mmittee to rule on whether the present
Report should include the decision 719 previously taken by the Nomenclature

713 Appellate Body Report on EC – Chicken Cuts , para. 224. The Appellate Body further states in a
footnote to the same paragraph:

"The probative value of a Note will, however, also depend on how relevant it is to the
interpretative question at issue; as a result, it cannot be excluded that an Explanatory Note that
directly addresses a given interpretative question will more probative than a Chapter Note that
does not relate specifically to that interpretative question" (footnote 432 to para. 224).

714 United States' response to Panel question No. 224. Also see footnote 707 above.
715 See footnote 713 above.
716 Appellate Body Report on EC – Computer Equipment, para. 90.
717 Panel Report on EC – Chicken Cuts, para. 7.298.
718 See footnote 666.
719 At the request of the Panel, the WCO Secretariat pr ovided a copy of this decision as an attachment
to its letter of 30 July 2007. Paragraph 81 of Doc. 11.000 provides:

Committee as set out in paragraph 81 of Doc. 11.000 (NC/11/Oct. 63 – Report) and
reproduced in paragraph 28 of Doc. 39.235.
10. The Committee decided, by 12 votes to none, to include the Nomenclature
Committee's decision in its Report. Thus, the Committee decided that the questions
of split consignments
720 and the classification of goods assembled from elements
originating in or arriving from different countries are matters to be settled by each
country in accordance with its own national regulations."721 (emphasis added)
7.426 Paragraph 10 of the HS Committee Decision thus refers to two specific questions – "split
consignments" and "the classification of goods assemb led from elements originating in or arriving
from different countries". It states that these two questions are matters to be settled by each country
in accordance with its own national regulations.
7.427 China submits that the second question in paragr aph 10, namely "the classification of goods
assembled from elements originating in or arri ving from different countries," pertains to "as
presented" in GIR 2(a) and multiple shipments. Since paragraph 10 provides that this is a matter to be

"It was further agreed that the questions of split consignments and the classification of goods
assembled from elements originating in or arriving from different countries are matters to be
settled by each country in accordance with its own national regulations."

Doc. 11.000 (NC/11/Oct. 63 – Report) is a Report by the Nomenclature Committee on the issue of
"articles imported unassembled or disassembled" in connection with the Draft Interpretative Rule on the
classification of articles imported unassembled or disassembled.
720 The WCO Secretariat explains that concepts such as "consignments" and "shipments" do not have
conventional status in the HS, and therefore there are no official interpretation for those concepts (WCO letter of
30 July 2007, page 5).
721 The Decision provides in other relevant parts:

"6. Several delegates pointed out that Rule 2(a) was of key importance for the Rules of
Origin, since it determined the classification of articles presented unassembled or
disassembled hence the Explanatory Note to that Rule should be examined in the light of its
impact on the Rules of Origin. However, this view was not shared by several other delegates
who felt that the Rules of Origin had nothing to do with the General Interpretative Rules
which provided solely for the classification of goods in the Harmonized System.
7. The Chairman drew the Committee's attention to the questions of split consignments
and the classification of goods assembled from elements originating in, or arriving from,
different countries.
8. In this Connection, one delegate said that he favoured an international regulation to
deal with split consignments, whereas other delegates felt that the problem had to be resolved
in Members' own national regulations, in accordance with the decision taken by the
Nomenclature Committee when drafting General Interpretative Rule 2(a) and its Explanatory
Rules.

11. Finally, the Committee instructed the Secretariat to undertake an additional study on
the interpretation of General Interpretative Ru le 2(a) and to prepar e a corresponding draft
Explanatory Note, taking account of the comments by delegates in the meeting. Mr. Kusahara
pointed out that the legal text of General Interpretative Rule 2(a) was open to different
interpretations."

settled by each country, China argues that it is allowed to apply GIR 2(a) to parts imported in multiple
shipments.
7.428 The complainants contend that this second phrase in pa ragraph 10 concerns rules of origin
and that China has not proved its claim that it pertains to the issue of "as presented" in GIR 2(a).
7.429 The European Communities submits that the classification of goods assembled from
elements originating in or arriving from different count ries refers to rules of origin as clarified by the
WCO Secretariat.
722
7.430 According to the United States, China's position concerning the phrase "the classification of
goods assembled from elements originating in or arri ving from different countries" is mere conjecture
since paragraph 10 of the Decision does not includ e a definition of this phrase and China has not
identified any other documents that would support its interpretation. The United States considers that
the WCO Secretariat's response to a question from the Panel 723 supports the United States' view that
the second phrase 724 in paragraph 10 of the Decision is referring to origin and not classification and
that the question of multiple origin is not addressed by GIR 2(a).725
7.431 Canada submits that the phrase "the classification of goods assembled from elements
originating in or arriving from different countri es" in paragraph 10 of the HS Committee Decision
refers to the situation where a particular shipme nt may have elements of different origin, in
accordance with particular rules of origin.726
7.432 The WCO Secretariat responded that "elements originati ng in or arriving from different
countries", which is the second question mentioned in paragraph 10, encompasses the possibility of
goods being of (preferential or non- preferential) origin from the country of shipment or from another
country. Further, the WCO Secretariat points out that the HS does not direct its Contracting Parties to
classify entries differently or alike at the HS leve l on the basis of single origin as opposed to multiple
origin. The WCO Secretariat states that it would be inclined to regard the second situation in
paragraph 10 of the HS Committee Decision rather as reflecting the HS Committee's view that the
determination whether multiplicity of origin shall aff ect applicability of GIR 2(a) is a matter left to
each Contracting Party and that the HS does not address the applicability of GIR 2(a) to the
classification of goods of mixed origin.
727
7.433 The question before the Panel is therefore whether the HS Committee Decision, in particular
the phrase "the classification of goods assembled from elements originating in or arriving from
different countries" in paragraph 10, interprets the term "as presented" in GIR 2(a) and if so, whether

722 European Communities' response to Panel question No. 212.
723 Panel question No. 11.
724 Classification of goods assembled from elements originating in or arriving from different countries.
725 United States' comments on China's response to Panel question No. 210(a).
726 Canada's response to Panel question No. 212.
727 WCO's letter of 30 July 2007, pages 3, 4. The WCO Secretariat is also inclined to regard that "the
classification of goods assembled from elements originating in or arriving from different countries" refers to the
classification of a collection of articles based on their susceptibility to further assembly. The WCO Secretariat
responds to a Panel question that paragraph 10 of the HS Committee Decision seems to connote that, in the
Committee's view, whether multiple origin should affect the classification of unassembled or disassembled
articles is a matter to be handled exclusively at the discretion of each individual administration, taking into
account national laws and regulations.

it touches upon the question of "multiple sh ipment" in the manner advocated by China.
728 We will
begin our analysis by considering the two ques tions mentioned in paragraph 10, i.e. "split
consignments" and "the classifications of goods assemb led from elements originating in or arriving
from different countries".
7.434 First, regarding "split consignments ", all parties appear to share the same understanding with
respect to its meaning and the circumstances under which such a question is addressed: generally,
"split consignments" refer to a s ituation where the carrier breaks the consignment of a set of goods
into multiple consignments (multiple deliveries) fo r reasons such as the need to balance loads (in
particular in the case of air transport), cost savi ngs in shipment, or the nature of the goods shipped
(e.g. large or complex machinery that are diffi cult to transport in one single consignment). 729 In such

728 China, the United States and Canada are of the view that "split consignments" and "the
classification of goods assembled from elements originating in or arriving from different countries" referred to
in the second sentence of GIR 2(a) cove r two separate situations, whereas the European Communities
considers that these ar e inter-related issues concerning split consi gnments (parties' responses to Panel question
Nos. 138, 212).
China submits that this second question is, in the cont ext, distinguished from a "split consignment", in
that the imported parts and components were not necessar ily part of a single consignment. China explicitly
states in its response to a Panel question that paragraph 10 of the HS Committee Decision refers to two different
circumstances (China's response to Panel question No. 212 , referring to its response to Panel question No. 138).
According to China, "[t]his is evidence from the sentence itself, which refers to the questions of 'split
consignments' and 'the classification of goods assembled from elements originating in or arriving from different
countries'. ... The plural st ructure of the sentence clearly indicates th at the paragraph refers to two different
circumstances." Decree 125 could apply to either circumstance in paragraph 10, although it will generally apply
to the second circumstance referred to in paragraph 10 of the HS Commi ttee Decision (China's response to
Panel question No. 213).
Despite this apparent gap in the view of the European Communities and the other two complainants
(United States and Canada) on the relationship of the two situations mentioned in paragraph 10, the Panel does
not consider, however, that the European Communitie s understands the second situation in paragraph 10
differently from the other complainants. All the complainants consider that the second situation concerns "rules
of origin" and has nothing to do with the classification of goods imported in multiple shipments. The difference
lies in the European Communities' view that the two ques tions in paragraph 10 are "inter-related" issues that
concern trade facilitation and that the second question provides that the classification of "split consignments" as
the complete product even when some elements arrive from different countries is an option for the importer.
Regardless of whether these two questions are inter-related as suggested by the European Communities, what is
at issue is China's argument that the second situation refers to the multiple shipment situation and the
complainants' contention against that argument.
729 Parties' responses to Panel question Nos. 138, 212. In particular, both China and the United States
provide the same definition of "consignment": a consignment refers to a set of goods handed over to the
custody of a carrier for delivery, whether those goods are packed in one container or in multiple containers. A
consignment is split when the carrier breaks the consignment into multiple deliveries (e.g. it loads the containers
making up the consignment onto different vessels). The European Communities submits that in the context of
some very large or complex machinery that are difficult to transport in one single consignment the importer may
wish to declare the product as a single product irrespective of the fact that the elements of th e product are split
into different consignments and may not be presented to customs precisely at the same time. According to the
European Communities, in some instances an element of the product may need to be transported from two or
more countries or may originate from two countries. Canada also submits that "split consignments" refers to
practices allowing importers, at their discretion, to classify certain separate shipments of a single product as one
item and that this is not an uncommon practice.

a situation, some Members allow, at the importer' s request, goods delivered in multiple consignments
to be declared as one item.
730
7.435 Further, we note that the term "consignment" is defined as "1. The act of consigning goods for
custody or sale. 2. A quantity of goods delivered by this act, esp. in a single shipment" 731; "(shipping)
Shipment of one or more pieces of property, accepted by a carrier for one shipper at one time,
receipted for in one lot, and moving on one bill of lading"
732; and "3. The action of consigning goods
for sale etc. or custody." 733 Therefore, "consignment" refers to goods delivered in a single shipment
by the act of consigning them for custody or sale. In turn, "split" means " adj. 1. That has split or been
split"734 and " verb. 4 ... b verb intrans. & trans. Divide or separate into parts." 735 When these
definitions are considered together, we understand "s plit consignments" to refe r to a situation where
goods were originally consigned for delivery in a si ngle shipment, but have been later split into more
than one shipment.
7.436 In light of the parties' understanding of th e term "split consignmen ts", relevant customs
practices of some Members in this regard 736, and the ordinary meaning of the term "split
consignments", we are of the view that situati ons concerning "split consignments" are distinguished
from the multiple shipment situation encompassed under the measures, in that the classification of
split consignments concerns a unique situation wh ere imported parts and components were intended
to be part of a single consignment, but were then split into multiple consignments for reasons mainly
relating to transportation. In this context, we do not consider that multiple shipments of auto parts
that are considered as complete vehicles under China's measures are comparable to a "split

730 The United States refers to its customs regulations such as 19 C.F.R. § 141.57, which exist for the
benefit of importers who intended their goods to have been accommodated on a single conveyance for arrival in
the United States as a single shipment, but which were split after consignment to the carrier (United States'
response to Panel question No. 224).
We also note China's reference to the US customs regulations in its written submission (China's first
written submission, paras. 156-160; Exhibit CHI-28). The concerne d Judgment of the US Court of
International Trade (Exhibit CHI-28) explains its understa nding of this regulation as well as the notion of "split
consignments": this regulation addresses two scenarios – first, merchandise that importer intended to be shipped
on single conveyance, but which was later split by the carrier and shipped on multiple conveyances on the
initiative of the carrier, and, second, merchandise whose size or nature necessitates that it be shipped in an
unassembled/disassembled condition on more than one conveyance. The Judgment provides in relevant part:

"[t]hese so-called 'split shipments' are a routine occurrence, particularly in the context of air-
shipped cargo, due to practice considerations including limited cargo space, the need for
proper weight distribution, and the offloading of cargo for safety concerns. But, while split
shipments are a straightforward matter of logi stics for carriers, they often created legal
uncertainty and unpredictability for importers. ... The financial repercussions for an importer
could be significant where treatment as separate entries resulted in a different classification
(and a higher rate of duty) than treatment of th e merchandise as a single entry, as the importer
had intended. Sensitive to importers' concer ns, Congress resolved the inconsistency and
clarified the situation by enacting 19 U.S.C. § 1484(j)(2), providing a framework to help
ensure that split consignments are consistently classified as importers intend. ..."

731 Black's Law Dictionary, Seventh edition, 1999, page 303.
732 Handbook of the Global Trade Community, Dictionary of International Trade , E. Hinkelman,
Fourth Edition, 2000, page 49.
733 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 1, page 493.
734 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 2, page 2964.
735 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 2, pages 2967-2968.
736 See footnotes 729-730.

consignment" situation.
737 "Split consignments" also tend to be allowed for the benefit of importers
and considered by customs officials at the specific request of the importer concerned, which is not the
case for the multiple shipment situation covered by the measures.738
7.437 Concerning the second question mentioned in paragraph 10 of the HS Committee Decision,
"the classification of goods assembled from elements originating in or arriving from different
countries", China considers that this question refers to "the classification of goods assembled from
imported parts and components (or 'elements') that arrive in the custom s territory in multiple
shipments".739 The complainants argue that the second qu estion in paragraph 10 refers to rules of
origin, not multiple shipments in the manner the concept is covered under the measures.

737 The United States submits that the treatment of split consignments mentioned in the HS Committee
decision does not provide support for China's over-reaching measures (United States' response to Panel question
No. 210(b)). See China's responses to Panel question Nos. 138 and 212.
738 The Panel notes the European Communities' view that China's position concerning its understanding
of "split consignments" and "multiple shipments" has evolved throughout this proceeding (European
Communities' second written submission, para. 106). Specifically, the European Communities argues that
China initially treated the notions of "split consignments" and "multiple shipments" synonymously (referring to
paragraph 156 of China's first written submission), but, later in the proceeding, it distinguished one notion from
the other (referring to China's response to Panel question No. 138).
Although we recognize the European Communities' point, we do not consider that China necessarily
has changed its position on "split consignments" and "multiple shipments". Rather, while acknowledging the
differences in these two concepts, China made an attempt to analogize the "multiple shipment" situation covered
under the measures to the "split consignment" situation addressed by some other Members.
For example, in the section where the European Communities submits China treats these two notions
synonymously, China submits that th e types of anti-circumvention prac tices, which, according to China,
Members adopt to prevent the circumvention of ordina ry customs duties or anti-dumping/countervailing duties
that apply to complete articles (i.e. in the same sense as China's measures), are not the only circumstances in
which WTO Members examine the commercial intention of the importer when classifying "multiple shipments"
of parts. China argues that this also occurs in the case of so-called "split shipments" (or "split consignments"),
where an importer imports in multiple shipments an item (or group of item) that is the subject of a single
contract, invoice, or transaction. Also, China s ubmits that the HS Committ ee Decision acknowledges the
arbitrary classification results that can occur when a set of related parts and components is broken into multiple
shipments and that this can occur in the context of "split consignments" or in the context of "multiple shipment"
(i.e. when a manufacturer imports parts and components in multiple shipments and assembles them
domestically). These statements, in our view, show th at China itself acknowledges that "split consignments",
although also concerning multiple (split) shipments ( albeit in different sense from that used in the measures),
addresses a situation different from the situations relating to so-called anti-circumvention practices.
This becomes more obvious when China refers to the examples of customs regulations of the United
States and the European Communities concerning "split consignments" (China's first written submission,
paras. 156-160; Exhibit CHI-28). Both regulations of the United States and the European Communities, in these
examples, "allow at the request of the importer", not re quire, multiple entries of unassembled or disassembled
merchandise to be treated as a single entry for customs classification purposes.
In any event, even if China were intending to treat these notions synonymously, this would not affect
our analysis because, as pointed out above, the evidence show s that split consignments are distinguished from
the multiple shipment situation encompassed by the measures at issue. Further, China has also clarified its
position during the proceedings, as pointed out by the European Communities, and acknowledged that "split
consignments" in paragraph 10 of the HS Committee Decisi on is not particularly pertinent to the question of
"multiple shipments" under the measures.
739 China's response to Panel question No. 138. In a footnote, China further submits that 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.
According to China, the number and identity of the exportin g country or countries would only be relevant, if at
all, for the purpose of applying rules of origin – a matt er that is not within the sc ope of GIR 2(a). Moreover,

7.438 China's argument is based on the assumption that the phrase " elements originating in or
arriving from different countries " of the second question in paragraph 10 means " multiple shipments
of parts and components (elements )".
740 As a legal basis for its argument, China submits that
paragraph 10 is the result of the recognition by th e CCC and subsequently the HS Committee that the
arbitrary classification results can occur when a set of related parts and components is broken into
multiple shipments, which encompass both the "split consignments"
741 situation as well as the
situation where a manufacturer imports parts and components in multiple shipments and assembles
them domestically.742 In particular, China argues that the CCC recognized the existence of this issue
when it first drafted GIR 2(a) in the early 1960s an d that it was at that time the CCC agreed that the
application of GIR 2(a) to "split consignments" a nd "multiple shipments" was a matter "to be settled
by each country in accordance with its own nationa l regulations," an interpretation that the HS
Committee reaffirmed in the context of the HS Decision in 1995.
7.439 We do not, however, find any evidence supporting China's claim that when drafting GIR 2(a)
in the 1960s, the CCC recognized that the situat ion where a manufacturer imports parts and
components in multiple shipments to assemble them into a complete product poses the same kind of
classification issue as in the split consignment situat ion. A document relating to the discussions on
GIR 2(a) at the Nomenclature Committee of the CCC shows that the question of whether the draft
Interpretative Rule concerning unassembled and disassembled articles 743 should apply to "articles
imported unassembled or disassembled for industrial assembly " had been discussed at the
Nomenclature Committee. The Secretariat of th e CCC concluded, however, in accordance with the
instructions of the Nomenclature Committee, that the draft Interpretative Rule should not cover such
cases.744 In particular, the following observation by th e Secretariat of the CCC provides some useful
information on historical background with respect to the introduction of GIR 2(a):
"It is quite obvious that the principle of assimilating unassembled or disassembled
articles to assembled articles of the co rresponding kind was laid down in certain
Chapters of the Nomenclature solely in orde r to ensure that if a complete article is
specified or included in one particular heading it should not be classified in several
different headings where, in particular cases, it cannot be imported assembled.
The only purpose of this principle is to preserve the systematic method of
classification on which the Nomenclature rests; it hence reflects technological
considerations only. There is therefore every justification for its application to
articles disassembled or unassembled solely by reason of their bulk or weight, or of
packing and handling difficulties.

China argues, 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.
740 See China's response to Panel question No. 210(A).
741 China explains "split consignments" as a situation when a single import transaction is broken into
"split consignments," usually for reasons of shipping and often without the prior knowledge of the importer
(China's response to Panel question No. 112).
742 China's response to Panel question No. 112.
743 This question appears to correspond to the seco nd sentence of the curren t GIR 2(a) concerning
goods imported unassembled or disassembled.
744 Exhibit CDA-19 (Customs Co-operation Council, Nomenclature Committee, 10 th Session, Brussels,
February 26, 1963, Document No. 10.195E, "Articles (Machinery, Appliances, etc.) Imported Unassembled or
Disassembled", page 3. See Canada's second written submission, para. 59, footnote 70.

However, if the imported goods are parts which are not assembled by the
manufacturer, although he could easily do so before shipment, the aim is mainly to
supply the assembly industry in the importing country; such practices involve
economic considerations, which in the Secretariat's view, cannot be accommodated at
the technological level of the Nomenclature. It is for each importing country to take
such steps as may be felt necessary in the ec onomic field (e.g. in relation to Customs
duties) to assist its assembly industry."
745
7.440 This piece of evidence746 informs us how the classification of "unassembled or disassembled"
goods as the complete good of the corresponding kind b ecame part of GIR 2(a): at least based on the
evidence before us, GIR 2(a) was not intended to ap ply to goods (parts and components) imported for
industrial assembly, which is the multiple shipment situation covered under the measures. Rather, to
the extent the rule concerns goods imported unasse mbled or disassembled, GIR 2(a), second sentence
seems to have been intended to mainly cover the s ituations relating to goods that are difficult to be
imported assembled.
7.441 Such an understanding by the Contracting Parties is now reflected in Explanatory Note (V) to
GIR 2(a), which provides that when the goods are presented unassembled or disassembled, it is
usually for reasons such as "requirements or convenience of packing, handling or transport".747 Given
that this phrase was not included in the main text of GIR 2(a) and the word "usually" is inserted, we
also understand that those mentioned in Explanatory Note (V) to GIR 2(a) are not the only
circumstances under which GIR 2(a), second sentence a pplies. Nevertheless, the evidence as a whole
indicates that the drafters of GIR 2(a) did not intend to have the rule applied to the multiple shipment
situation.748 More importantly, China has not directed us to any evidence showing that the second
question in paragraph 10 of the HS Committee Decisi on refers to the multiple shipment situation of
parts and components imported for the assembly of motor vehicles.
7.442 The WCO Secretariat's opinion also demonstr ates that the second phrase at issue in
paragraph 10 does not concern the multiple shipment situation. The WCO Secretariat states that it is
inclined to regard the reference in paragra ph 10 to "the classification of goods assembled from
elements originating in or arriving from multiple countries" rather as reflecting the HS Committee's

745 Exhibit CDA-19, pages 2-3. Based on the text of this document, the Panel understands that the
situation addressed in that document concerned the situation where tariff rates were lower for complete goods
than for components of the corresponding complete goods.
746 In a background document prepared by the WCO Secretariat in 1996 in relation to the discussions
on the text of the Explanatory Notes to GIR 2(a), in pa rticular the current Explan atory Note (VII), the WCO
Secretariat points to an observation by Sweden during the creation of GIR 2( a): "[I]t transpires that this Rule
was a proposal by Sweden concerning articles which are 'imported unassembled or disassembled for
convenience of transport and can be put together by rather simple operations (e.g. screwed together). If the parts
are intended for industrial production of the articles in question the parts are, as a rule, classified as such in their
appropriate headings'" (Doc. 8.333, Observation by Sweden). Although this was an observation by one Member
of the WCO concerning GIR 2(a), it provides information on how GIR 2(a), in particular the part on the
classification of "unassembled or disassembled" goods, came about. Even when considered against the limited
interpretative weight to be given to this type of document, this still goes against the interpretation advocated by
China.
747 The WCO Secretariat mentions that the text of th e Explanatory Notes is merely an explanation of
historical reasons for articles being shipped unassembled or disassembled (WCO's letter of 30 July 2007).
748 The Panel also notes a comment by the Secretaria t of the Nomenclature Committee that classifying
unassembled or disassembled articles with assembled articles of the corresponding kind obliges importers to
produce all the components of the article in question simultaneously, unless they have the benefit of an
incomplete articles rule or of national provisions on split consignments (emphasis added) (Exhibit CDA-19,
page 3).

view that the determination whether "multiplicity of origin" shall affect the applicability of GIR 2(a)
is a matter left to each Contracting Party and th at the HS does not address the applicability of GIR
2(a) to the classification of goods of mixed origin.
749
7.443 Furthermore, a copy of the document concerning discussions at the CCC in 1962, submitted
by Canada, includes, inter alia , a note by the Austrian administration and observations of the
Nomenclature Directorate on that note. 750 In that document, the Austrian administration raised the
question of whether the unassembled or disassembled articles must be consigned by one exporter or at
least by several exporters in the same country (i.e. whether GIR 2(a) must be confined to goods
imported unassembled or disassembled from one country, as opposed to different countries). In this
regard, the Nomenclature Directorate has noted the following:
"The main classification criteria used in the Nomenclature are: nature, kind, structure
or composition and use of the goods. The origin never affects classification.
It would hence be against the spirit and the letter of the Nomenclature for the
Interpretative Rule on the corresponding Explanatory Note to introduce a
discrimination based on the origin of goods imported unassembled or disassembled.
Moreover, it is common practice for "s ub-assemblies" of large plants to be
despatched directly by their manufacturers to the country of destination.
Although this matter lies outside the field of Nomenclature , the Nomenclature
Directorate considers that such consignmen ts, whether simultaneous or split (insofar
as the latter are provided for by national regulation), should be eligible for the
facilities afforded by the draft Interpre tative Rule, provided that all the other
conditions are met."751
7.444 The language of this document evinces that th e Nomenclature Directorate considered the
question of goods imported unassembled or disassembled from different countries to relate to rules of
origin and thus to be outside the field of nomenclat ure. In our view, this evidence is unsupportive of
China's argument that there is no reason to believe that the HS Committee Decision, which refers to
"goods assembled from elements originating in or arriving from different countries", is not equally
relevant to "goods assembled from elemen ts originating in or arriving from a single country" and that
the number and identity of the countries from which the parts originated would only be relevant, if at

749 The WCO Secretariat further states that in the Secretariat's opinion, "[i]t seems that paragraph 10 of
the HS Committee decision connotes that, in their view, whether multiple origin should affect the classification
of unassembled or disassembled articles is a matter to be handled exclusively at the discretion of each individual
administration, taking into account national laws and re gulations" (WCO Secretariat's letter of 30 July 2007,
page 4).
750 Exhibit CDA-18 (Customs Co-operation Council, Nomenclature Committee, 9 th Session, Brussels,
July 19, 1962, Document No. 9550E, "Articles (Machinery, Apparatus, etc.) Imported Unassembled or
Disassembled"), referred to in footnote 69 of Canada's second written submission. As Canada notes, the
Directorate also provides on page 2 that the second paragraph of General Note I on Section XVI of the Geneva
Nomenclature (machinery – a separate section from motor vehicle in Section XVII) reads that the importation of
machines in an unassembled state, even if forwarded in several consignments, shall not affect their
classification. Further, Canada points to page 3 where it reads that many countries have similar provisions in
their national tariffs, and recommended that there simply be a reference to this practice in the Committee's
Report, Document No. 11.00 NC/11/Oct. 63, which is the report ultimately referred to in paragraph 9 of the HS
Committee Decision (Exhibit CHI-29) relied on by China.
751 Exhibit CDA-18, page 4.

all, for purposes of applying rules of origin.
752 China goes on to claim that as pointed out in
paragraph 6 of the HS Committee decision 753, the GIR pertains solely to classification under the HS,
and has no bearing on rules of origin. We agree with China that the HS pertains only to classification,
not rules of origin. The evidence shows that the Contracting Parties to the CCC were aware of the
fact that rules of origin were outside of the field of the nomenclature, and nonetheless decided to
mention that the question of "the classification of goods assembled from elements originating in or
arriving from different countries" concerning rules of origin was an issue to be dealt with by each
country in accordance with their own national regulations.
7.445 In conclusion, we do not agree with China's argument that the HS Committee Decision proves
that the WCO has interpreted the relevant GIR in a manner that is directly relevant to the
interpretation of the term "motor vehicles" in China's Schedule of Concessions.754 Specifically, China
has not presented sufficient evidence to show that the second situation in paragraph 10 pertains to "as
presented" in GIR 2(a) so as to allow the applica tion of GIR 2(a) to parts and components imported in
multiple shipments for assembly.
7.446 However, even if we were to accept China's argument that the HS Committee Decision should
be read as giving discretion to the Contracting Par ties to apply "as presented" in GIR 2(a) to goods
imported in multiple shipments, this is far from saying that China is required to classify auto parts and
components, imported in multiple shipments and pr esented separately, as a motor vehicle based on
their assembly into a motor vehicl e. Unlike GIR 2(a) itself, wh ich China has submitted that the
Contracting Parties to the HS are required to apply, China does not insist that "as presented" in GIR
2(a) considered in light of the HS Committee Decision requires the application of the principle of
GIR 2(a) to the multiple shipment situation. Ra ther, China considers that a Contracting Party is
afforded discretion to so classify based on the language of paragraph 10 of the HS Committee
Decision. As pointed out by Canada 755, we consider that if discretion were afforded to those HS
Contracting Parties who are also WTO Members, such discretion must be exercised in a manner
compatible with Members' obligations under the WTO.756
7.447 Furthermore, China has submitted that the need for customs authorities to apply GIR 2(a) in
the manner advocated by China arises only in the specific circumstances in which there is a significant
difference in duty rates between the complete article and the parts of that article. 757 When this need
arises, China argues, customs authorities must im plement a process to determine whether specific
importers are importing parts and components in multip le shipments that, in their entirety, have the
essential character of the complete article that is subject to the higher rate of duty.758

752 China's response to Panel question No. 112 (emphasis added).
753 See footnote 721 for the text of paragraph 6 of the HS Committee Decision.
754 See China's response to Panel question No. 112.
755 Canada submits that a WCO decision that is not adopted in the form of a modification or addition to
the GIR or included as an Explanatory Note to the GIR, may provide guidance but cannot be determinative of
how to apply the GIR and that 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 (Canada's response to Panel question
No. 112). As a result, the Decision should have no bearing on the interpretation of GIR 2(a).
756 See, for example, Canada's response to Panel question No. 138.
757 China's responses to Panel question Nos. 38, 238(b). According to China, the same need could arise
in the case of ordinary customs duties or in the case of other types of duties such as anti-dumping or
countervailing duties.
758 At the same time, China also ar gues that "challenged measures fall within the scope of measures
that national customs authorities routinely adopt to ensure the proper interpretation of their tariff schedules and
to ensure the proper classifications of imports" (China's response to Panel question No. 13(b)).

7.448 However, as pointed out by Canada, the HS, in cluding its interpretative rules under the GIR,
is a classification rule and was never designed as a rule to prevent the so-called "circumvention" of
duties that China allegedly tries to prevent through the measures.
759 We note that Article 9 of the HS
Convention states, "the Contracting Parties do not assume by this Convention any obligation in
relation to rates of Customs duty." 760 In this regard, we also recall the statement by the Secretariat of
the CCC, cited above, that practices involving eco nomic considerations cannot be accommodated at
the technological level of the nomenclature and must be addressed by each importing country by
taking steps necessary in the economic field such as in relation to customs duties.
761 In addition, as
the European Communities points out, China's view w ould seem to imply that the rule has a different
meaning in situations where the tariff rate diffe rence is small or where there is no difference. 762 We
do not find support for such a proposition. Further, for the same reason that the HS is about tariff
classification, not about economic considerations, we do not regard the so-called unique classification
challenges under Chapter 87 of the HS – in the sen se Chapter 87 has tariff headings for complete
goods, intermediate goods a nd parts – as presenting a fiscal concern where a Member maintains a
significant difference in duty rates between a complete good and parts of the complete good.763
7.449 This is not to say, however, that classification is irrelevant to tariff duties. As acknowledged
by the parties, classification of a good into the pr oper tariff heading is an essential first step for
assessing the appropriate tariff duty on the product. 764 However, in light of the evidence discussed
above, we are not persuaded that an interpreta tive rule on tariff classification under the HS was
intended to address issues relating to the circumvention of tariff duties.765
7.450 Finally, we also note China's argument that it would be arbitrary to conclude that the same
collection of parts and components, used to ass emble the same finished article, would obtain a
different classification result based solely on whet her the parts and components are contained in one
shipment or in multiple shipments, because such an interpretation would vitiate the rule's resolution of
the relationship between parts and wholes. 766 This argument is, however, once again predicated on
China's own understanding that GIR 2(a) is a rule resolving the relationship between parts and wholes
with significant differences in tariff rates, which we ha ve found not to be the case. To this extent, we
are equally not persuaded by China's argument. Further, China considers that even if GIR 2(a) did not
exist, China (along with other customs authorities) would still need a means of defining and enforcing

759 Canada's responses to Panel question Nos. 186, 225. Canada submits that China attempts to turn a
WTO dispute into a WCO dispute, and also ignores pr oper classification, starti ng with GIR 1, and that
classification is a prerequisite for assessment of duties, but, as the WCO Secretariat points out, "[t]he application
of customs duties is outside the legal purview of the WCO".
The European Communities also submits that China confuses the interpretation of a general rule with
the fiscal consequences of a tariff difference between parts and complete products and that a rule cannot be
applied differently just because the consequence of its application may be more significant (European
Communities' comments on China's response to Panel question No. 238(b)).
760 The WCO Secretariat considers that Article 9 of the HS Convention makes it clear that the
purview of the WCO, its instruments and its Committees does not extend to tariff-based issues (WCO's letter of
30 July 2007, page 2.)
761 See paragraph 7.439 above; Exhibit CDA-19, page 3.
762 European Communities' second written submission, para. 118.
763 China's response to Panel question No. 238(b).
764 Canada's second written submission, para. 44, referring to Exhibit CDA-16 (WCO, HS
Classification Handbook, Part II, Chapter 4, at page II/27) and its response to Panel question No. 113. Also see
paragraph 7.710.
765 Canada's second written submission, para. 59, footnote 69; Canada's response to Panel question No.
224; Exhibit CDA-18. Also see paragraphs 7.443-7.444 above for the relevant text of this evidence.
766 China's response to Panel question No. 110.

the boundary between parts and wholes, and this is what the challenged measures do.
767 Otherwise, in
its view, it would violate the general principle that substance should prevail over form in the
administration of customs laws. China has not prov ided, however, any legal or factual basis, apart
from its arguments relating to GIR 2(a), to suppo rt its position that defining and enforcing the
boundary between parts and wholes necessitates th e assessment of parts imported separately in
multiple shipments for domestic assembly in the im porting country for classification of such parts as
wholes.
Conclusion
7.451 In light of the foregoing, the Panel does not find that the context of the term "motor vehicles"
supports the interpretation that the term "motor vehicles" in China's Schedule includes parts and
components imported in multiple shipments and as sembled into a motor vehicle in the importing
country.
(iii) Object and purpose768
7.452 China submits that Members may interpret thei r Schedules of Concessions in accordance
with the rules of the HS, (and consistent w ith the practice of other WTO Members in like
circumstances) and in a manner that is consistent with the object and purpose of securing the benefit
of reciprocal and mutually advantageous tariff concessions. 769 China considers that the importation
and assembly of auto parts components through multi ple 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.770 Referring to the Appellate Body's statements in previous cases,
China argues that it is consistent with the object and purpose of the GATT 1994 to interpret the term
"motor vehicles" in China's Schedule of Concessions in a manner that preserves the value, from both a
revenue and market access persp ective, of the higher bound duty rates that it negotiated for motor
vehicles.
771 Further, in China's view, the effective re solution of the customs relationship between a
complete article and parts of that article does not pos e a systemic risk either to the security of tariff
concessions under Article II, or to the national treatme nt disciplines of Article III, since the resolution
of this issue does not lead to the result that Me mbers may classify articles on the basis of their end-
use, and it does not lead to the result that Members may impose discriminatory measures on imported
products merely by characterizing the measures as border measures under Article II. China submits
that its position is simply that Members may inte rpret and enforce their Schedules of Concessions in
accordance with the rules of the HS, and in accord ance with the principle that tariff arrangements
should have meaningful effect.
7.453 The European Communities submits that China's arguments do nothing less than undermine
the whole system of tariff classification and the object and purpose of the WTO Agreement and the
GATT 1994, namely "the security and predictability" of the reciprocal and mutually advantageous
arrangements directed to the substantial reduc tion of tariffs and other barriers of trade.
772 This is
because the measures classify parts of products as co mplete products in a context where its tariff
schedules provide for a clear separation between th e products and parts thereof. The European

767 China's second written submission, paras. 167, 168.
768 See 7.699 below.
769 China's response to Panel question No. 38.
770 China's response to Panel question No. 13.
771 China's second written submission, paras. 92-93.
772 European Communities' second written submission, para. 69, also citing the Appellate Body Report

Communities further submits that the measures also provide for considerable unpredictability in terms
of when a part of a product is deemed to be the complete product and subject to a much higher tariff,
which goes to the very heart of the WTO Agreement and the GATT 1994. The European
Communities argues that there seems to be no limit to the flexibility that China needs under the HS
and that China's interpretation of GIR 2(a), namely to include the multiple shipment situation as
envisaged under the measures, is a fundamental and serious attack on the very premise on which
members' tariff commitment s have been negotiated.
773 The European Communities submits that it
cannot emphasize more the seriousness of such a position to the multilateral trading system.
7.454 The United States submits that China ignores the object and purpose of the HS
Convention.774 According to the United States, two key objects and purposes of the Convention are,
first, to establish uniform tariff nomenclature ru les for the purpose of comparing trade statistics
(between exports and imports, and between differe nt parties to the Convention), and, second, to
facilitate international trade. The United States argues that China's interpretation of GIR 2(a) is
totally at odds with these objects and purposes of the Convention: first, it will destroy the
comparability of trade statistics collected by diffe rent members and the comparability between import
and export statistics; and, second, it will destroy the certainty and predictability of tariff classification
as well as serve as a serious impediment to tr ade, because under China's measures, goods are not
classified as imported at the border, but only after goods have been used in manufacturing, and only
after the manufacturer has completed and verified a complex analysis of the local content of the final
product.
7.455 Canada submits that customs duties are applie d 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). To ensure
predictability as to tariff classification and liabili ty, according to Canada, the HS bases the tariff
classification of goods on their physical description at the time of their importation and admits of only
one heading (or sub-heading) for each product.
775 Therefore, according to Canada, to countenance
China's attempt to increase the ta riff on auto parts under the guise of enforcing the customs duty on
automobiles instead of renegotiating their tariff c oncession 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.
7.456 The Panel now examines the interpretation of the tr eaty term concerned – i.e. the tariff term
"motor vehicles" contained in the tariff headings of China's Schedule of Concessions – in light of the
object and purpose of the WTO Agreement and the GATT 1994.776
7.457 One of the objects and purposes of the WTO Agreement, generally, as well as of the GATT
1994, as clarified by the Appellate Body, is the secu rity and predictability of "the reciprocal and

773 European Communities' second written submission, para. 101.
774 United States' second written submission, paras. 33-37.
775 Canada's response to Panel question No. 140. Canada also submits that China agreed to provide
Canada with a lower rate for auto parts than motor vehi cles, and cannot use Article XX(d) to justify unilaterally
altering this commitment and derogating from its Schedu le simply because it is now dissatisfied with this
commitment (Canada's second written submission, para. 77).
776 As found by the Panel in EC – Chicken Cuts , we consider that the WTO Agreement and the
GATT 1994 are also the treaties at issue for the treaty term at issue in this case (i.e. tariff term "motor vehicle"
in the tariff headings of China's Schedule of Concession) given that China's Schedule becomes an integral part
of the GATT 1994 and the WTO Agreemen t in light of Article II:7 of the GATT 1994 and Article II:2 of the
WTO Agreement respectively. See also Panel Report on EC – Chicken Cuts, para. 7.317.

mutually advantageous arrangements directed to th e substantial reduction of tariffs and other barriers
to trade".
777
7.458 The parties in the present case do not dispute that an object and purpose of the WTO
Agreement and the GATT 1994 is the security and pred ictability of tariff concessions. The parties,
however, disagree whether the security and predictab ility of tariff concessions will be undermined if
the tariff term "motor vehicles" contained in China's tariff concessions under China's Schedule of
Concessions is interpreted to include parts and components imported in multiple shipments to be
assembled into a motor vehicle in China.
7.459 China argues that it is consistent with th e objective of maintaining the security and
predictability of tariff concessions to interpret th e term "motor vehicles" in China's Schedule of
Concessions in a manner that preserves the value, from both a revenue and market access perspective,
of the higher bound duty rates that it negotiated for motor vehicles. On the contrary, the European
Communities submits that China's interpretation u ndermines the whole system of tariff classification
and the object and purpose of the treaty, namely "the security and predictability" of the reciprocal and
mutually advantageous arrangements directed to th e substantial reduction of tariffs and other barriers
of trade.
778 Canada is also of the view that the interpretation of the tariff term at issue as advocated by
China would undermine the predictability and value of WTO tariff concessions made by Members on
parts, more broadly.
7.460 First, as noted above, the main purpose and objective of the WTO Agreement and the
GATT 1994 is to maintain the security and predicta bility of reciprocal market access arrangements
manifested in tariff concessions. This, in our view , means that tariff concessions must be interpreted
to benefit both the importing Member, China, and exporting Members. Connecting this purpose and
objective of the treaty at issue to the facts of this case, we consider that Ch ina is entitled to revenues
from the higher tariff rates applicable to motor vehi cles under the relevant tariff headings of China's
Schedule, while the exporting countries should be able to export parts and components of motor
vehicles at the tariff rates applicable to auto parts under the appropriate tariff headings. Considered in
this context, an interpretation of the tariff term "motor vehicles" to include auto parts and components
imported in multiple shipments for assembly into a motor vehicle in the importing country could
indeed undermine the objective and purpose of maintaining security and predictability of the
reciprocal market access arrangements in China's tariff concessions. This is particularly so given that
one of the objects and purposes of the WTO Agre ement in general as well as of the GATT 1994 is
directed to the substantial reduction of tariffs and other barriers to trade , as found by the Appellate
Body.

777 Appellate Body Report on EC – Chicken Cuts , para. 243, quoting Appellate Body Report on EC –
Computer Equipment , para. 82. The Appellate Body also notes that "security and predictability" is also
mentioned in Article 3.2 of the DSU. We also note the reference by the Panel in EC – Chicken Cuts to the
Appellate Body's statement in Argentina – Textiles and Apparel that "a basic object and purpose of the
GATT 1994, as reflected in Article II, is to preserve the value of tariff concessions negotiated by a Member with
its trading partners, and bound in that Member's Schedule" (Panel Report on EC – Chicken Cuts, para. 7.319).
778 European Communities' second written submission, para. 69, also citing the Appellate Body Report

7.461 We also consider that the object of the Members' negotiations on trade facilitation
779 shed
further light on the interpretative issue before us. The object of the negotiations on trade facilitation is
"further expedition of the movement, release and clearance of goods". 780 In our view, this object can
be read in consonance with the overall object a nd purpose of reducing barriers to trade under the
WTO Agreement. Therefore, any discretion a Member may have on trade-related matters must be
exercised in a manner not only consistent with its obligations under the WTO Agreement, but also
supportive of the overall objects and purposes of the WTO Agreement, including the negotiations on
trade facilitation.
7.462 For the reasons above, we find that an interpreta tion of the term "motor vehicles" to include
parts and components imported in multiple shipme nts for assembly into a motor vehicle could
undermine that very object and purpose of the entire WTO Agreement and the GATT 1994.
(iv) Subsequent practice
781
7.463 We now examine, based on China's own practice as well as the practice of other Members
since China's accession to the WTO, whether China h as proved the existence of a subsequent practice
that implies agreement among the WTO Members rega rding the interpretation of the tariff headings
concerned, in particular the application of GIR 2(a) to goods with separate tariff headings for a
complete good and parts of the complete good.
China's own practice
7.464 China submits that prior to the adoption of the measures, China did not have a procedure for
determining whether multiple shipments of parts an d components were related to each other through
their common assembly into a specific vehicle model. 782 China also submits that it does not have a
general law or regulation that deals with each ci rcumstance where there is a significant tariff rate
difference between a complete article and parts of that article. 783 In China's view, the fact that China
has established a customs process to resolve the ta riff classification relationship between parts and
wholes in one context does not mean that it needs to establish a similar customs process in other such
contexts. Rather, China allocates its customs administration resources based on a variety of

779 The Panel notes that in November 2001, WTO Members agreed to launch negotiations on trade
facilitation. The mandate of these negotiations provides that "[n]egotiations shall aim to clarify and improve
relevant aspects of Articles V, VIII and X of the GATT 1994 with a view to further expediting the movement,
release and clearance of goods, including goods in transit ". The Members further agreed, "the negotiations
shall further aim at provisions for effective cooperation between customs or any other appropriate authorities on
trade facilitation and customs compliance issues" (Decision adopted by the General Council on 1 August 2004,
Annex D, para. 1).
780 The WCO Secretariat commented that the preambl e to the original BTN Convention (15 December
1950) notes the desirability of "a common basis for the cl assification of goods in customs tariffs" (WCO's letter
of 30 July 2007, page 2.)
781 Also see paragraphs 7.702-7.705 in the CKD and SKD kits section.
782 China's response to Panel question No. 12(b).
783 China's response to Panel question No. 57, referring to its response to Panel question No. 12(c). As
examples of such circumstances where there is a significant tariff rate difference between a complete article and
parts of that article, China provides fans (8414.5110) with the tariff duty of 21.7 per cent (at the time of
accession) and parts for a complete fan (8414.9020) with the tariff duty of 21.0 per cent and air conditioners
(8415.1000) with the tariff duty of 21.0 per cent (at the time of accession) and parts for a complete air
conditioner (8415.9010) with the tariff rate of 11.7 per cent.

considerations, including the commercial significance of the products at issue, the volume of imports,
and the potential revenue loss from misclassification of the imports.
784
7.465 In this connection, the European Communities submits that the fact that China has adopted
the measures in 2004 and 2005, which is three and four years after China's accession to the WTO,
demonstrates that China has interpreted GIR 2(a) differently prior to the adoption of the measures,
despite its claim that the interpretation it now advances has been the premise under which it
negotiated its accession to the WTO. 785 Therefore, China's anti-circumvention theory is a mere
creation ex post facto for the purposes of defending the measure s before the Panel. The European
Communities submits that there is not a single refere nce, let alone more detailed justification in the
measures, that would even remotely point to GIR 2(a) or its language.786
7.466 Given the absence of any practice relevant to th e interpretation of tariff headings concerned
before the adoption of th e measures in China, the Panel does not find any examples of subsequent
practice, insofar as China's own practice is concerned, that could establish the Members' agreement on
the interpretation of the tariff headings at issue as advocated by China. Since its accession to the
WTO, China has always maintained higher tariff rates for motor vehicl es than those for auto parts in
its Schedule. 787 China informs us, moreover, that no me chanisms or measures comparable to the
measures at issue existed before the introduction of the current measures in 2004 and 2005. Nor has
China provided any proof that it has been interpreting the tariff h eadings concerned in the same
manner under the measures as before the adoption of the measures. Our consideration is further
supported by the fact that no other tariff headings under China's Schedule that have separate lines for
a complete good and parts of the complete good are subj ect to the same kind of tariff interpretation at
issue.
Other Members' practice – In general
7.467 China submits that numerous WTO Members, including all three complainants in this
proceeding, have maintained, both prior and subse quent to China's accession to the WTO, measures
that prohibit the use of domestic assembly opera tions as a means of circumventing duties, whether
they are ordinary customs duties or antidumping/countervailing duties. 788 According to China, these
measures demonstrate a practice among Members of interpreting the term for a complete article to
include the importation and assembly of the compone nt parts of that article, when necessary to
prevent the circumvention of duties. Further, this subsequent practice implies a level of agreement as
to how WTO Members may interpret the term for a complete article to include the parts and
components of that article, and the measures that Members may adopt to discipline the use of
domestic assembly operations as a means of circumventing duties on complete articles. More
specifically, China refers to a classification decisi on by Canada on certain furniture import, which
China considers is directly comparable to China's measures
789, anti-circumvention measures taken by
other Members in relation to anti-dumping and coun tervailing duties, and other Members' measures
concerning split shipments. China further submits that other than these examples, China is not aware

784 China's response to Panel question No. 57.
785 European Communities' second written submission, para. 120, referring to China's responses to
Panel question Nos. 12(b) and 111.
786 European Communities' second written submission, para. 121.
787 See China's response to Panel question No. 2.
788 China's first written submission, paras. 111, 146-148.
789 China's response to Panel question No. 238(b).

of any measures adopted by another party to the HS Convention that are directly comparable to the
measures at issue in this dispute.
790
7.468 The European Communities argues that the fact that China is not able to present any
evidence of comparable measures in other countries necessarily implies that China is not able to
provide any evidence of international customs practice that could sustain its position. 791 T h e
European Communities submits that in the Europ ean Communities, GIR 2(a) applies only to goods
presented at the same time and place. Moreover, th e European Communities is of the view that China
is mixing correct and incorrect information on cust oms classification together with its position on the
relevance of anti-dumping measures to the measure s at issue, while anti-dumping measures have
nothing to do with tariff classification.792
7.469 The United States submits that unlike China, it has not applied the interpretative rules of
GIR 2(a) to classify multiple shipments of parts and components as having the essential character of
the complete article.
793 Instead, the US Customs has found that bulk shipments for inventory
purposes are not covered by GIR 2(a), as bulk shipments for inventory are not for the convenience of
packing, handling or transport. Furthermore, in the United States, it is not considered a circumvention
of duty liability when parts of a machine, subject to a lower rate of duty than the complete machine,
are separately imported in different shipments into the United States and entered at their respective
lower rates of duty for subsequent assembly or manufacture into the final machine.794
7.470 Canada submits that it has shown clear subsequent practice that WTO Members who are also
WCO members interpret "as presented" to mean cla ssification based on the objective characteristics
of a product in a single shipment. 795 Canada argues that a single act of one WTO Member cannot
constitute subsequent practice and that China has not been able to point to "acts or pronouncements"
of WTO Members in relation to the interpre tation of the tariff headings concerned. 796 Canada
considers that anti-circumvention measures in th e context of anti-dumping and countervailing duties
are not legally relevant to measures concerning ordinary customs duties.
7.471 In sum, to prove the existence of subsequent practice corresponding to the measures at issue,
China essentially relies on three types of measures a dopted by other Members: first, a classification
decision by the Canadian Border Services Ag ency ("CBSA") on furniture import; second, anti-
circumvention measures imposed by other Member s in relation to anti-dumping and countervailing
duties; and, third, measures that allow unasse mbled or disassembled entities imported on multiple
conveyances to be treated as a single entry fo r tariff classification purposes (so-called "split
consignments" situation).797 The Panel will examine these measures in turn.

790 China's response to Panel question No. 238(b). At the same time, China submits that given that
there are 124 Contracting Parties to the HS Convention, it is impossible for China to undertake a comprehensive
review of all the national laws and regulations of these co untries that are comparable to the measures at issue.
Although acknowledging difficulties a party may face in searching and producing particular evidence relevant to
its case, the Panel recalls that the party asserting a claim, factual or legal, has the burden to prove its claim.
791 European Communities' comments on China's response to Panel question No. 238(b).
792 European Communities' response to Panel question No. 116.
793 United States' response to Panel question No. 116.
794 United States' response to Panel question No. 116.
795 Canada's response to Panel question No. 210(b), cross-referring to its response to Panel question
No. 186.
796 Canada's response to Panel question No. 116.
797 In response to a Panel question, China submits that other than the CBSA furniture classification
decision and the measures taken in relation to anti-dumping/countervailing duties, China is not aware of any

Other Members' practice – Canada's furniture classification decision

7.472 The CBSA furniture classification decision referre d to by China concerns Canada's policy in
relation to the tariff classification of fu rniture imported in a disassembled condition: 798 w h e n t h e
importer/retailer purchased complete furniture abro ad, and disassembled it into parts for importation
separately into Canada over a period of time, the CBSA concluded as follows:
"[I]n order to determine if articles are to be classified as disassembled furniture
[within the meaning of GIR 2(a)], the co mmercial reality of the transaction between
the importer and exporter must be considered (i.e. what was actually purchased by
the importer - complete furniture or unrelated parts)"799 (emphasis added).
7.473 The CBSA considered that while certain busin ess operations and practices may require that
articles be ordered as complete units, but shipped se parately over a period of time for various reasons,
these shipping practices nonetheless do not change the fact that the goods were ordered as complete
units and not as parts.
7.474 China alleges that the CBSA's furniture tariff classification described above is
indistinguishable from China's interpretation of its own Schedule of Concessions:800 (1) both measures
apply GIR 2(a) to conclude that the impor tation and assembly of parts can, under certain
circumstances, be classified as the importation of the complete article; (2) both measures prevent the
circumvention of the higher duty rate on the comple te article since, in both cases, a tariff schedule
imposed a higher rate of duty on the complete artic le than on parts of that article; (3) the purpose and
effect of both measures is to determine the "comme rcial reality" of the underlying import entries; and
(4) both measures lead to the result that the separat e headings for "parts" of the article encompass the
importation of (i) replacement parts and (ii) parts that are combined with domestic parts to produce an
article that would not be classified as a complete imported article under GIR 2(a).
7.475 Canada submits that the CBSA furniture decision s hould be distinguished from the measures
concerned in this dispute in light of, inter alia , the following considerations:
801 (1) the CBSA
decision covers only complete furniture that is manufactured abroad, but disassembled for importation
and subject to re-assembly in Ca nada (it does not apply to dom estic furniture manufactured in
Canada); and (2) to determine what the importer w as in fact importing, Canadian customs officials
examined the purchase orders and import documentati on in order to ascertain that the imported goods
were covered under the same purchase order, without any assumption of a violation.
7.476 The Panel notes, as argued by China, that the CBSA decision concerns the application of
GIR 2(a) to goods (parts of a complete good) im ported in multiple shipments. Also, in both cases,
tariff rates for complete goods are higher than tho se applicable to parts of the complete goods. We
also notice, however, certain differences between the CBSA decision and the measures at issue in
applying GIR 2(a) to the parts imported in multiple shipments.
7.477 First, we consider that in the CBSA decision, GIR 2(a) is more narrowly applied than under
the measures. As Canada submits, the CBSA decision covers only complete furniture that is

measure adopted by another party to the HS Convention that is directly comparable to the measures at issue in
this dispute (China's response to Panel question No. 238(b)).
798 Canada Border Services Agency, "Tariff Classification of Furniture Imported in Disassembled
Condition," Memorandum D10-14-38, March 23, 2006 (Exhibit CHI-22).
799 Exhibit CDA-22, para. 6.
800 China's first written submission, para. 119.
801 Canada's response to Panel question No. 124(b) and (c).

completely manufactured abroad, disassembled for importation and then subject to re-assembly in
Canada. In the relevant paragraph, the CBSA d ecision indicates that articles imported specifically
either as "replacement parts" or "to be incorpor ated with domestic components in the manufacture of
domestic furniture"
802 will be classified in their own right under the appropriate HS headings. The
decision therefore does not apply GIR 2(a) to dom estic furniture manufactured in Canada. In
comparison, however, the measures at issue do not confine the application of GIR 2(a) to motor
vehicles that were manufactured and disassembled abro ad to be subject to re-assembly in China.
Rather, the measures cover a variety of situations, in cluding auto parts imported to be incorporated in
the manufacture of domestic motor vehicles.
7.478 In this connection, what is described as "the commercial reality" in the CBSA decision, which
Canadian customs officials considered most pertinen t in applying the principles of GIR 2(a), is also
distinguishable from the type of considerations under the measures at issu e. China argues that
although the decision does not elaborate on this co mmercial reality, its purpose appears to be to
discern whether the importer's intention was to import whole furniture in disassembled condition or
whether its intention was to import unrelated furniture parts. Read in this light, China argues that this
is also the case for the measures at issue. U nder the measures, the commercial reality of the
underlying import transaction is determined by th e intention of the importer to assemble a motor
vehicle with imported auto parts above cer tain thresholds set out in the measures.
803 According to
China, the only difference is that, compared to the CBSA determination which does not elaborate on
the standard to determine the commercial reality, the measures at issue define the precise thresholds at
which China will classify multiple import entries as equivalent to the complete article, which makes
the measures more transparent and predictable.804
7.479 We do not, however, agree with China's understanding of the "commercial reality" considered
by the CBSA in the furniture case. The CBSA decision indicates th at the commercial reality means
the actual transaction between the exporter and the buyer (phrased as "what was actually purchased").
There is no reference in the decision to the importer' s intention in the decision. To the extent the
CBSA decision does not determine the commercial rea lity of the underlying import transaction based
on the intention of the importer to assemble complete furniture with imported furniture parts, we do
not consider that the two measures are comparable as China argues.
7.480 Furthermore, the measures at issue in this di spute purport to prevent the use of domestic
assembly operations as a means of circumventing duties on complete articles. 805 We do not find such
a purpose in the CBSA decision. Rather, the decisi on clarifies that it will classify articles that are

802 Regarding "articles imported to be incorporated with domestic components in the manufacture of
domestic furniture" (paragraph 6 of the decision), which th e decision says will be classified as "parts", Canada
submits there is no threshold level of domestic content (Canada's response to Panel question No. 124(c)).
803 However, we also recall China's statement that "Customs authorities interpret and enforce their tariff
schedules in accordance with the rules of the HS, not the intention of the importer to evade applicable duty
rates" (China's response to Panel question No. 13).
The Panel finds it difficult to reconcile this statement with China's analogy above between the
measures at issue and the CBSA decision based on the intention of the importer. The Panel also does not
understand why one type of intention should be taken into account in interpreting a tariff provision, while
another type of intention does not matter.
804 China's response to Panel question No. 124(a).
805 China's first written submission, para. 153.

imported to be incorporated with domestic com ponents in the manufacture of domestic furniture in
their own right under the appropriate HS headings.
806
7.481 Therefore, apart from whether the principle of GIR 2(a) has been correctly applied in the
CBSA decision, which is outside the scope of this dispute, we do not find that the CBSA decision is
precisely comparable to the measures at issue in respect of the application of GIR 2(a). In any event,
even if Canada's measure were directly comparable to the measures at issue, this measure alone would
not amount to "subsequent practice" within the meaning of Article 31(1)(b) of the Vienna Convention,
which can be established only by a pattern of comm on, consistent, and conc ordant actions by WTO
Members.
Other members' practice – Anti-circumvention of anti-dumping and countervailing duties
Anti-dumping duties and ordinary customs duties
7.482 China also argues that practices of Members in preventing the circumvention of anti-
dumping or countervailing duties is applicable to me asures designed to prevent the circumvention of
ordinary customs duties. 807 In China's view, in the anti-dumping and countervailing duty order
context, it is permissible for a Member to apply an anti-dumping or countervailing measure to imports
of the parts and components of a complete product, when necessary to prevent circumvention of the
anti-dumping or countervailing duties that apply to th at complete product. Therefore, as a matter of
treaty interpretation, the resolution of this interpreti ve issue should be the same with respect to both
anti-dumping/countervailing duties and ordinary customs duties.
7.483 More specifically, in China's view, both customs and anti-dumping duties are "duties"
governed by Article II of the GATT 1994 and requi re national authorities to determine whether
imported merchandise is properly classified. China argues that there are no rules on anti-
circumvention in the context of anti-dumping duties e ither and that "whatever the legal basis for the
imposition of duties, duties are duties once they are validly in place" and they can all be
circumvented.
808 China submits that the existence of separate tariff headings for parts and
components of an article does not dictate the manne r in which a Member may interpret and enforce a
tariff heading for the complete article. Accordingl y, China considers that national authorities should
be able to draw a dividing line between the importati on of the complete article and the importation of
the parts of that article based on a "reasonable a nd practical approach" as adopted by other Members
in the context of anti-dumping duties. 809 China does not consider that the purpose of anti-dumping
duties is more relevant than the acknow ledged purpose of ordinary customs duties 810, when both can
be undermined as effectively. If anything, the extraordinary nature of anti-dumping duties should
make it more difficult for Members to extend the scope of these measures to include parts and
components of a product.
811

806 Exhibit CHI-22, paragraph 7. Canada's response to Panel question No. 210(b), cross-referring to its
response to Panel question No. 186.
807 China's first written submission, paras. 120, 138-145.
808 China's second writen submission, para. 70.
809 China is referring to the LNPPs from Germany and Japan case of the US Commerce Department
(See paragraphs 7.501-7.507 below). China also refers to an argument by the United States in EEC – Parts and
Components, which in China's view, analogizes the circumve ntion of AD/CV duties to the circumvention of
ordinary customs duties (China's first written submission, para. 143, citing para. 4.37 of the panel report).
810 According to China, the purpose of ordinary cust oms duties is to regulate market access for imports
and generate customs revenues.
811 China's second written submission, paras. 72-78.

7.484 The European Communities submits that the antidumping circumvention rules cannot be
relied upon to establish a subsequent practice releva nt to the interpretation of China's obligations
under Article II of the GATT 1994 and its Schedule of Concessions, as this would totally ignore that
anti-dumping duties and customs duties follow a completely different logic and are rooted in two
different sets of WTO obligations.
812
7.485 The European Communities argues that anti- dumping duties are not customs duties under
Article II of the GATT 1994, but rather as an excep tion to Article II of the GATT 1994 and to the
MFN principle. Also, anti-dumping duties may be imposed only after an investigation establishing
that dumped imports are causi ng injury to domestic industry. 813 The European Communities argues
that anti-dumping duties are subject to detailed obl igations under Article VI of the GATT and the
Anti-Dumping Agreement and aim at re-establis hing fair trade conditions between the dumped
imports and the domestic like products and protecting the domestic industry from the injury caused by
the dumping.814
7.486 The United States submits that China's analogy to Members' anti-dumping practices is
irrelevant in the absence of any proceeding initiate d by China under the rules of Article VI of the
GATT 1994 and the Anti-Dumping Agreement, since the rules governing anti-dumping are different
from Article II of the GATT 1994 rules and thus have no relevance to China's measures.815
7.487 The United States argues that in respect of anti-dumping duties, the investigating Member is
not required to impose them on the basis of tariff lin es, and thus, in the anti-dumping context, unlike
customs duties governed by Article II, tariff lin es and how tariff concessions are set forth in a
Member's Schedule are not relevant. 816 The United States submits that anti-dumping measures are
authorized only in certain circumstances, i.e. wh ere the investigating Member makes findings of
dumping, injury and causal link. 817 Furthermore, the United States argues that when anti-dumping
duties are imposed in the circumvention context, th ey are not applied in the way that China seeks to
apply the charges under the measures at issue: th e investigating Member does not impose the same
anti-dumping duties on the products governed by a circumvention ruling as that imposed on the
products that were clearly within the scope of the anti-dumping order from the outset.
818 There is no
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 on the basis of the
amount of dumping found for particular transactions involving particular products.
7.488 Canada is also of the view that there is a sep arate regime that govern s application of anti-
dumping duties under the Anti-Dumping Agreement, and anti-dumping duties are measures that do
not qualify as either "ordinary customs duties" or "other duties or charges" under Article II of the
GATT 1994.
819 Canada submits that anti-dumping duties are fundamentally different from ordinary

812 European Communities' response to Panel question No. 132.
813 European Communities' response to Panel question No. 132.
814 European Communities' response to Panel question No. 132.
815 United States' response to Panel question No. 140.
816 China agrees that anti-dumping duties are defined by reference to the scope of the investigation, not
by reference to its tariff, but this is a distinction without a difference. Anti-dumping measures and tariff
provisions both refer to specific products. The United Stat es offers no explanation as to why the resolution of
the issue, whether a reference to a pr oduct includes a reference to the parts and components if assembled into
the complete product, should differ si mply because the product to which th e duty applies is described in the
scope of an anti-dumping measure, instead of in a tariff line (China, second written submission, para. 79).
817 United States' responses to Panel question Nos. 67, 140.
818 United States' response to Panel question No. 140.
819 Canada's response to Panel question No. 140.

customs duties in that anti-dumping duties are tem porarily 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.
820 In contrast, ordinary customs duties do not correct a
situation of wrongdoing ("injury"), nor does it relate to activity within the internal marketplace. The
lack of "wrongdoing" and the need to correct such actions is the reason that the concept 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 already found to
be illegal under a Member's domestic law.
7.489 To support its argument that the rationale behi nd anti-circumvention measures in relation to
anti-dumping or countervailing duties also extends to China's interpretation of the tariff headings
concerned, China starts from the proposition that there is no difference between anti-dumping duties
and ordinary customs duties, as both are "duties" regardless of the legal basis for anti-dumping duties
and ordinary customs duties and as both can be circumvented. First, the Panel notes that ordinary
customs duties and anti-dumping are governed by two different sets of rules under the WTO
Agreement, namely Article II and Article VI of the GATT 1994 and the Anti-Dumping Agreement.
The Anti-Dumping Agreement, in particular, pr ovides detailed rules on the application of anti-
dumping duties, including specific preconditions such as the finding of dumping, injurious effects to
the relevant domestic industry and causation between these two factors. These rules are not in any
manner related to the interpretation of a Member's Schedule of Concessions.
7.490 Moreover, the reference to anti-dumping duti es in Article II:2 of the GATT 1994 does not
mean that anti-dumping duties are also ordinary customs duties within the meaning of Article II of the
GATT 1994. As pointed out by the complainants, th e types of charges list ed in Article II:2 are
exceptions to the disciplines under Article II that nothing other than ordinary customs duties as
indicated in a Member's Schedule can be im posed on the importation of goods from other
Members.
821
7.491 Further, the purpose of ordinary customs duties, as opposed to that of anti-dumping duties is,
in our view, also a factor distinguishing customs du ties from the other: ordinary customs duties are to
regulate market access for imports and to genera te revenues, as submitted by China, whereas anti-
dumping duties are allowed, as necessary and u pon showing the preconditions set out in the
Anti-Dumping Agreement, to address the injurious effects caused by illegally dumped imports on the
importing country's domestic market. Moreover, ordinary customs duties are imposed on imported
goods under appropriate tariff headings in a tari ff schedule without any notion of illegal activity
associated with imports.

820 Canada's response to Panel question No. 140.
821 The Appellate Body in Chile – Price Band System stated:

"[w]e observe that Article II:2 of the GATT 199 4 sets out examples of measures that do not
qualify as either 'ordinary customs duties' or 'other duties or charges'. These measures include
charges equivalent to internal taxes, anti-dumping and countervailing duties, and fees or other
charges commensurate with the cost of services rendered. They too may be based on the value
and/or volume of imports, and yet Article II:2 distinguishes them from 'ordinary customs
duties' by providing that '[n]othing in [Artic le II] shall prevent any Member from imposing'
them 'at any time on the importation of any product'" (Appellate Body Report on Chile – Price
Band System, para. 276).

Furthermore, this understanding of Article II:2 of the GATT 1994 is also confirmed in reference
materials, such as Jackson, John, World Trade and the Law of GATT (1969) , page 210 and Bhala, Raj,
International Trade Law: Theory and Practice (2001, Second Edition), page 299.

7.492 In light of the above, we do not find that Chin a has proved that there is no difference between
ordinary customs duties and anti-dumping duties.
Anti-circumvention measures in respect of anti-dumping duties
7.493 Furthermore, the complainants submit that the anti-circumvention concept in the context of
anti-dumping and countervailing duties should not be c onsidered as part of the "subsequent practice"
for the measure at issue because unlike ordina ry customs duties, Members have recognized
circumvention in the context of AD duties such as the Ministerial Decision on Anti-Circumvention
822;
and Article VI GATT and Anti-Dumping Agreement 823, and because anti-circumvention measures in
connection with anti-dumping duties do not change the customs classification.
7.494 More specifically, the European Communities submits that anti-circumvention rules on anti-
dumping measures find their legitimacy in Article VI of the GATT, the Anti-Dumping Agreement and
the Ministerial Declaration on this issue, and thus enforce and relate to a different set of rights and
obligations, which are not relevant to the inte rpretation of the rights and obligations of WTO
Members under Article II of the GATT 1994.
824 The European Communities further argues that the
anti-circumvention duty is never applied on products leaving the assembly factory in the European
Communities.825 Rather, an investigation is carried out and if it is found that the imports of parts
constitute circumvention, the anti-dumping duty is extended to the parts. Also, the European
Communities' anti-circumvention measures change ne ither the customs classification nor the customs
duty applicable to the product concerned.826
7.495 The United States argues that while the WTO Agreement does not define circumvention,
Members have traditionally recognized two patterns of trade which they have considered to be
circumvention, both of which arise in the cont ext of anti-dumping duty measures and countervailing
duty measures – trade patterns involving (i) marginal alterations to the product itself and (ii) marginal
alterations in the patterns of shipment and assembly respectively. 827 The United States submits that
most Members recognize that circumvention takes place when such marginal modifications as regards
merchandise otherwise subject to an anti-dumpi ng or countervailing duty measure are done in a
manner which undermines the purpose and effectiven ess of trade remedies provided for under the
WTO Agreement. Also, according to the United St ates, the concept of circumvention in the anti-
dumping context has also been recognized in a Ministerial D ecision, 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 countervailing measures through circumvention. 828 The United States argues that in

822 In addition, Canada also refers to the GATT Panel Report on EEC – Parts and Components . See
Canada's response to Panel question No. 13(a).
823 The European Communities is the only complainant who makes this argument.
824 European Communities' response to Panel question No. 132.
825 European Communities' response to Panel question No. 132.
826 The European Communities explains that applied to the example of anti-dumping measures against
bicycles from China and the anti-circ umvention measures against imports of major bicycle parts, this would
mean that the imports of parts would be subject to an anti-dumping duty for bicycles, but the customs duty will
remain the one applicable for bicycle parts, as explicitly stated in Article 13(5) of Regulation 384/96 (European
Communities' response to Panel question No. 132).
827 United States' response to Panel question No. 140.
828 The United States submits that "the Decision confirms that the topic of circumvention formed part
of the negotiations which preceded the Anti-Dumping Agreement and referred this matter to the Committee on

contrast, it is not aware of any generally held concept of circumvention under Article II of the
GATT 1994.
7.496 Canada argues that unlike anti-circumvention of anti-dumping duties, which is a notion
recognized by Canada and many other WTO Members, no parallel concept applies in respect of tariff
concessions and there exists no generally recognized WTO basis for the application of internal "anti-
circumvention" measures related to tariffs.
829
7.497 China considers that the Ministerial Decision on Anti-Circumvention does not, on its face,
apply to countervailing duties, but Members ha ve, nonetheless, adopted measures to prevent the
circumvention of countervailing duties. In additi on, the Decision does not establish rules but simply
notes the existence of this issue in the anti-dum ping context and refers to the Committee on Anti-
Dumping. Nothing in the decision implies that th e same problem does not exist in the context of
countervailing duties or ordinary customs duties . The evasion of duties is the same for all different
types of duties.830 Further, there are in fact, no "rules" in either Article VI of the GATT or the Anti-
Dumping Agreement that legitimize this practice.831
7.498 The Panel notes that as submitted by the complainants, the notion of anti-circumvention
measures applied in connection w ith anti-dumping duties is recognized in the Ministerial Decision on
Anti-Circumvention. The Decision provides:
"Decision on Anti-Circumvention
Ministers,
 Noting that while the problem of circumvention of anti-dumping duty
measures formed part of the negotiations which preceded the Agreement on
Implementation of Article VI of GATT 1994, negotiators were unable to agree on
specific text,
 Mindful of the desirability of the applicability of uniform rules in this area as
soon as possible,
 Decide to refer this matter to the Committee on Anti-Dumping Practices
established under that Agreement for resolution."
7.499 As shown in the text of the Decision, WTO Members referred issues relating to
circumvention of anti-dumping duties to the Committee on Anti-Dumping Practices at the time of the
Uruguay Round negotiations. Since then, WTO Memb ers have continued to discuss the relevant
issues in accordance with the mandate under the Deci sion and as part of the Doha negotiations. In
contrast, we have no evidence or document show ing that comparable recognition or discussion has
ever taken place in the context of ordinary customs duties or interpretation of Members' Schedules of

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" (United States' response to Panel question No. 140).
829 Canada's response to Panel question No. 140.
830 China's second written submission, paras. 80-85. China also refers to the "unresponsive answer" of
the United States to Panel question No. 94. China also not ices differences in view among the complainants. In
particular, China cites the statement of the European Communities that the Decision "recognizes that uniform
rules on anti-circumvention of anti-dumping measures have not been defined".
831 China's second written submission, para. 71.

Concessions within the scope of Article II of the GATT 1994. In the absence of any specific
indication or legal basis that the Members' discuss ions on the notion of circumvention in relation to
anti-dumping duties can be also related to ordinary customs duties, we do not find that the
circumstances surrounding the notion of anti-ci rcumvention of anti-dumping measures can be
extended to the interpretation of Members' Schedules of Concessions.
7.500 In this regard, China argues that since "not hing" in the Decision implies that the same
problem does not exist in the ordinary customs duty context, it should be presumed that it also exists
in the ordinary customs duty context. We are not persuaded by China's argument. The Decision
explicitly notes that WTO Members could not agr ee on specific text relating to the problem of
circumvention of anti-dumping duty measures, which formed part of the negotiations which preceded
the Agreement on Implementation of Article VI of GATT 1994, which is an agreement on anti-
dumping duties. It also expresses the negotiators' "desirability of the applicability of the uniform rules
in this area " (in the area of anti-dumping measures) (emphasis added). We do not find any basis in
the language of the Decision, which is specifical ly aimed at the negotiators' recognition of the
circumvention problem with respect to anti- dumping duty measures, for extending the same
consideration to ordinary customs duties.
Anti-circumvention measures: EC bicycle case and US printing press case
7.501 China refers to the measures taken by the European Communities and the United States to
prevent the circumvention of anti-dumping duties through the importation and domestic assembly of
parts to support its argument that anti-circumve ntion measures in respect of anti-dumping measures
constitute the subsequent practice for China's measures in the present case.
832 More specifically,
China takes two specific examples of anti-circum vention measures the European Communities and
the United States have taken in respect of anti- dumping duties imposed originally on bicycles and
printing press imports. 833 Essentially, China submits that th e European Communities and the United
States have imposed the same anti-circumvention measu res as the measures at issue, in the sense that
both types of measure employ the same standards such as a value test (consideration of the value of
imported parts used in the assembly of a complete good); distinguish the importation of individual
parts per se (i.e. replacement parts) from the importation of parts for the purpose of assembling what
is, in the essential character, a complete good; and adopt customs procedures to facilitate the tracking
of imported parts and components - conditions imposed at the time of importation. China submits that
the purpose, structure, and operation of th e anti-circumvention measures in both cases are
indistinguishable from China's measures.
7.502 The European Communities submits that the purpose of the rules set out in Article 13(2) of
that regulation is to act against shipments of parts which are either assembled in the Community or a
third country if these shipments of parts replace the shipment of pr oducts which had previously been
found dumped and shipped in an assembled form.
834 According to the European Communities, all
these actions are linked and must take place in the context of an anti-dumping measure on the
assembled product with a view to undermining the remedi al effect of these duties. In comparison, the
European Communities submits that China's measures are not an action against imports of parts which

832 China's first written submission, paras. 120-136. Specifically, China refers to the EC Council
Regulation (EC) No. 384/96 (as amended by regulation 461/2004) and 19 U.S.C. 1677j(a)(1) (Exhibit CHI-26).
833 Anti-circumvention measure imposed on Bicycle Imports from China under Council Regulation
(EC) 71/97 (10 January 1997) (Exhibit CHI-24) and anti-circumvention measure imposed on Large Newspaper
Printing Presses and Components Thereof, Whether Assembled or Unassembled from Germany and Japan by
the US Commerce Department (Exhibit CHI-25).
834 European Communities' response to Panel question No. 132.

have previously been imported in the form of a ssembled cars, but rather an action against parts as
such with a view to increasing local content and developing a domestic industry for auto parts and
complete vehicles. The European Communities poi nts out that its regulation is applied against
importers which intentionally circumvented the anti-dumping duty, and this was found out by an
investigation.
835 Second, the anti-circumvention duty is never applied on products leaving the
assembly factory in the European Communities.836
7.503 With respect to the US Final Determination on "Large Newspaper Printing Presses and
Components (LNPPs)" 837, the United States argues that unlike automobiles, which are routinely
imported fully assembled, it is not feasible to im port fully assembled LNPPs. Further, the United
States submits that "the value test" was part of a process of the Department of Commerce so that
importers could demonstrate that their merchandise was not subject to the anti-dumping order.
7.504 In the Panel's understanding, China's argument above is that since the mechanisms 838 of the
measures at issue and the anti-circumvention m easures imposed by the European Communities and
the United States are similar, these anti-circumv ention measures are indistinguishable from China's
measures and therefore establish subsequent practice in respect of China's measures. In assessing
China's argument, we first recall our finding above that the recognition of the problem relating to
circumvention of anti-dumping duty measures
839 and the rationale underlying anti-dumping duties 840
cannot be in principle extended to the ordinary customs duty context: unlike anti-dumping duty
measures, the notion of, or any problems relating to, circumvention in the context of ordinary customs
duties does not exist; ordinary customs duties are gove rned by an entirely separate set of disciplines
under the WTO Agreement from anti-dumping duties; and ordinary customs duties are imposed on
goods in accordance with appropriate tariff headings in a tariff schedule without any notion of illegal
activity associated with imports. Considered agains t this background, we are not of the view that a
mere similarity in the operative mechanisms between the anti-circumvention measures taken in
respect of anti-dumping duties as cited by China and China's measures taken in the context of
ordinary customs duties would make the measures co mparable to the two examples of circumvention
measures taken by the European Communities and the Untied States in the context of anti-dumping
measures.
7.505 Further, we note the European Communities' poi nt that unlike the measures at issue, its anti-
circumvention measure in respect of bicycle part imports from China purports to act against imports
of parts which had previously been imported and du mped to the EC market in the form of assembled
bicycles so as to cause an injury to the EC domestic bicycle market.
841 In this light, the purpose of the
anti-circumvention measures associated with anti-du mping measures cannot be related to the charge
imposed under China's measures. Under the measures at issue, the condition triggering the imposition
of the charge is the importers' intention to asse mble motor vehicles using imported parts above the
thresholds set out in the measures 842, without the need to show the preconditions of the kind attached

835 European Communities' response to Panel question No. 132.
836 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. See European Communities' response to Panel
question No. 132.
837 United States' response to Panel question No. 126.
838 See paragraph 7.501 for the operative factors under these two anti-circumvention measures that
China argues are comparable to those relating to China's measures.
839 See paragraphs 7.497-7.499.
840 See paragraphs 7.489-7.492.
841 See paragraph 7.502. European Communities' response to Panel question No. 132.
842 See China's response to Panel question No. 108(d). China states, inter alia, that the charge imposed
under the measures relates back to the condition attached at the time of importation; when the auto manufacturer

to the imposition of anti-circumvention measures in respect of original anti-dumping duties, for
example, a proof that the subject parts had previ ously been imported in the form of assembled goods
and found dumped. If anything, China's tariff schedule itself provides the two different tariff rates for
motor vehicles and parts thereof, which is a dir ect result of the negotiations between China and WTO
Members.
7.506 Finally, to the extent China has maintained a position that the notion of "circumvention" for
the purpose of this case is a matter of correct tariff classification, China has not explained how anti-
circumvention measures in respect of anti-dumping measures, which have no relation with tariff
classification, are indistinguishable from the measures taken in the context of ordinary customs duties
allegedly for correct classification.
843
7.507 Overall, given the noticeable legal and factual differences between anti-dumping duties and
ordinary customs duties, the Panel finds that anti-circumvention measures imposed in relation to anti-
dumping or countervailing duties cannot be consider ed as constituting subsequent practice for the
interpretation of tariff headings as suggested by China.
Other Members' practice – "split shipments"
7.508 Finally, China also refers to certain regulati ons of other Members that allow multiple entries
of unassembled or disassembled merchandise to be treated as a single entry for tariff classification
purposes (so-called "split shipments" situation).
844 We recall our finding in paragraphs 7.434-7.436
above that regulations addressing split shipment s are distinguished from the multiple shipment
situation covered under the measures. Therefore, we do not consider that the regulations dealing with
split shipments establish subsequent practice for the measures at issue.
Conclusion
7.509 For the reasons above, the Panel does not find based on the available evidence before it that
there exists a "concordant, comm on and consistent" sequence of acts or pronouncements by WTO
Members that would amount to the subsequent prac tice for the interpretation of the tariff headings
concerned as advocated by China.

fulfils its stated intention to import and assemble parts and components that have the essential character of a
motor vehicle, it will be obliged to pay the applicable duty rate for motor vehicles.
843 We also note China's argument that the complainants have failed to establish why the practices of
WTO Members in respect of anti-dumping duties are not relevant to the interpretation of China's Schedule of
Concessions, and to a consideration of the types of measures that China may adopt to prevent the evasion of the
higher duty rate for motor vehicles that it negotiated (China's second written submission, para. 85). As set out in
Section VII.A.3, however, the burden of proof rests with the party, be it the complainant or the respondent, who
makes an affirmative claim. As regards the issue of WTO Members' practices in respect of anti-dumping
measures, it is China who has put forward an argument th at such practices constitute the subsequent practice for
the measures at issue. Therefore, it is China that bears the burden of proof concerning this particular issue.
844 China's first written submission, paras. 156-160.
Also, in response to a Panel question whether national customs authorities, as a common practice,
make classification determinations after the parts are assembled, the WCO Secretariat indicates that it is aware
of at "least one Contracting Party who has introduced legal provisions in Section XVI (i.e. Chapters 84 and 85)
and for headings 86.08, 88.05, 89.05 and 89.07, stipulating that '[t]he provisions of GIR 2(a) are also applicable,
at the request of the declarant and subject to conditions stipulated by the competent authorities, to [machines]
[goods of headings 86.08, 88.05, 89.05 and 89.07] im ported in split consignments'." (WCO's letter of 20 June
2007, page 5).

(v) Supplementary means of interpretation
845
7.510 We will now examine evidence submitted in rela tion to the circumstances of conclusion of
China's accession to the WTO, including China' s classification practice prior to its WTO accession,
that could potentially discern what was, or was not, the common intention of the Members with
respect to the tariff term "motor vehicles" in Chin a's concessions contained in the tariff headings of
China's Schedule.
7.511 China argues that the interpretation of the term "motor vehicles" that China has implemented
through the measures is confirmed by recourse to the circumstances surrounding the conclusion of
China's accession to the WTO, such as the historical background against which the accession was
negotiated.846 According to China, at the time Chin a negotiated its Schedule of Concessions, many
WTO Members, including the United States and th e European Communities, had long maintained
measures to prevent the circumvention of duties. China submits that these circumstances help discern
the common understanding of the parties as to the di stinction between complete articles and parts of
those articles, and the types of measures that Members are allowed to adopt to delineate the boundary
between these two categories.847
7.512 The European Communities submits that the fact that China has adopted the measures only
in 2004 and 2005 demonstrates that China has interpreted GIR 2(a) differently prior to the adoption of
the measures despite its claim that the interp retation it now advances has been the premise under
which it negotiated its accession to the WTO. 848 The European Communities argues that if China
already applied such an interpretation at the time of its accession to the WTO, the measures would be
redundant.849
7.513 Canada submits that at the time of China's accession, there was no established practice
among Members to apply the concerned HS Committee Decision 1995 to multiple shipments.
7.514 The Panel will first consider China's own practice at the time of, or prior to, its accession to
the WTO in 2001. China submits that, prior to th e adoption of the measures, China did not have a
procedure for determining whether multiple shipment s of parts and components were related to each
other through their common assembly into a specific vehicle model, which is the situation that has
triggered, according to China, the need for the measures at issue in 2004.850 This seems to be the case
although China has been maintaining, including pr ior to China's accession to the WTO, higher tariff
rates for motor vehicles than those for parts and components of a motor vehicle. 851 Specifically,
China submits that in 2001, immedi ately prior to China's accession to the WTO, the average applied

845 See paragraphs 7.722-7.725 below.
846 China's first written submission, paras. 149-150. China refers to the Appellate Body's statement in
EC – Computer Equipment that the "circumstances of the conclusion" of a treaty includes, "in appropriate cases,
the examination of the historical b ackground against which the treaty was negotiated" (Appellate Body Report
847 China's first written submission, para. 151.
848 European Communities' second written submission, para. 120, referring to China's response to Panel
question No. 111.
849 The European Communities also points out that China must be applying GIR 2(a) differently in
different contexts given that China does not have sim ilar measures in place in the context of other products
where applicable tariff rates are different between the complete articles and their parts (European Communities'
second written submission, para. 120, referring to China's response to Panel question No. 57).
850 China's response to Panel question No. 12(b).
851 All the parties to the dispute do not dispute that China has always applied lower tariff rates to auto
parts than to motor vehicles. Also See China's response to Panel question No. 2.

tariff rate for "motor vehicles" was 63.6 per cent, a nd the average applied tariff rate for "auto parts"
was 24.7 per cent.
852
7.515 In any event, China has not been able to provi de the Panel with evidence showing that China
had ever classified, prior to its accession to the WTO, multiple imports of auto parts and components
as a motor vehicle, based on their assembly into a motor vehicle in China. Nor has China been able to
point to classification practices of other WTO Member s that could support China's interpretation of
the tariff term "motor vehicles". We note that Ch ina has referred to the so -called anti-circumvention
measures imposed by other Members such as the Unit ed States and the European Communities in the
context of anti-dumping duties. However, for the reasons we explained above, we do not consider
that the measures imposed in connection with an ti-dumping or countervailing duties are comparable
to the interpretation of a tariff term in the concessions contained in China's Schedule.
7.516 China also argues that the importance of the inte rpretation of GIR 2(a) adopted by the WCO
(referring to the HS Committee Decision) is that WTO Members have been aware, since at least 1995,
that the HS allows Members to classify multiple imports of parts and components in accordance with
the principle of GIR 2(a). According to China, ther efore, this is part of the context in which WTO
Members have negotiated and entered into tariff concessions and in turn also part of the context in
which China negotiated its Schedule of Concessions with other WTO Members in connection with its
accession to the WTO.853
7.517 In addressing China's assertion that WTO Members have been aware, since at least 1995, that
the HS allows Members to classify multiple imports of parts and components in accordance with the
principle of GIR 2(a), the Panel first recalls the Appellate Body's observation regarding the HS in EC
– Computer Equipment:
"We are puzzled by the fact that the Panel, in its effort to interpret the terms of [the
EC Schedule], did not consider the Harmonized System and its Explanatory Notes .
We note that during the Uruguay Round negotiations, both the European
Communities and the United States were parties to the Harmonized System .
Furthermore, it appears to be undisputed 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."854
7.518 We further note that referring to its observation cited above in EC – Computer Equipment, the
Appellate Body in EC – Chicken Cuts made reference to an observation by the Panel:
"[T]he Panel also pointed out , and no participant in this proceeding contested, that
'the [Harmonized System] was used as a basis for the preparation of the Uruguay
Round GATT schedules.

The above circumstances confirm that, prio r to, during, as well as after the Uruguay
Round negotiations, there was broad consen sus among the GATT Contracting Parties

852 China's response to Panel question No. 2.
853 China's response to Panel question No. 111. China adds that under Article 31 of the Vienna
Convention, the decision of the WCO concerning the interpretation of GIR 2(a) is therefore relevant context for
the interpretation of China's tariff provisions for motor vehicles.
854 Appellate Body Report on EC – Computer Equipment, para. 89.

to use the Harmonized System as the basi s for their WTO Schedules, notably with
respect to agricultural products. ..."
855
7.519 As the Appellate Body observed above, give n that the Uruguay Round tariff negotiations
were held on the basis of the nomenclature of the HS and that requests for, and offers of, concessions
were normally made in terms of this nomenclature , the WTO Members were aware of the content of,
and their obligations under, the HS at the time of the Uruguay Round negotiations. Furthermore, the
Panel in EC – Chicken Cuts noted that the membership of the HS was "extremely broad" and included
the "vast majority of WTO Members". 856 In light of this, we consider it reasonable to presume that at
the time of the Uruguay Round negotiations, the Me mbers recognized the obligations under the HS.
As regards the obligations under the HS, Article 3(a)(ii) of the HS Convention provides:
"[I]t shall apply the General Rules for the interpretation of the Harmonized System
and all the Section, Chapter and Subheading Notes, and shall not modify the scope of
the Sections, Chapters, headings or subheadings of the Harmonized System."
7.520 The Members' obligation under the HS thus incl uded the application of GIR 2(a), which is a
provision under the GIR. Then, to prove that the Members understood at the time of the Uruguay
Round negotiations that they were allowed to classi fy "multiple imports of parts and components" in
accordance with GIR 2(a), China must show that GIR 2(a) is interpreted to include "multiple imports
of parts and components".
7.521 In this relation, China exclusively relies on pa ragraph 10 of the HS Committee Decision: that
the statement in paragraph 10 of the Decision – "the questions of ... the classification of goods
assembled from elements originating in or arriving from different countries are matters to be settled
by each country in accordance with its own nationa l regulations" – supports its proposition that the
Contracting Parties to the HS were allowed to classify parts and components of a complete good
imported in multiple shipments under the correspondi ng tariff heading for the complete good. As
examined above in Section VII.D.2(a)(ii), however, China has not demonstrated that paragraph 10 of
the HS Committee Decision addresses the multiple shipment situation as advocated by China. Rather,
we found that the evidence before us showed that paragraph 10 of the Decision addressed the question
of rules of origin.
857 Therefore, we do not consider that the HS Committee Decision should be
understood as indicating the WTO Members' awareness of the interpretation of GIR 2(a) as advanced
by China at the time of, or prior to, China's accession to the WTO.
7.522 The considerations above in relation to the supplementary means of interpretation confirm our
preliminary finding that the tariff term "motor ve hicles" in the concessions contained in the tariff
headings of China's Schedule does not require that multiple imports of parts and components of a
motor vehicle be included in its scope, based on th e assembly of those parts and components into a
motor vehicle in China.
(b) Conclusion
7.523 For the reasons above, the Panel concludes that the tariff provisions for motor vehicles
(87.02-87.05) of China's Schedule of Concessions do not include in their scope auto parts imported in
multiple shipments based on their assembly into a moto r vehicle. Accordingly, to the extent the
measures could be considered as falling within th e scope of Article II of the GATT 1994, China's

855 Appellate Body Report on EC – Chicken Cuts, paras. 196, 199.
856 Appellate Body Report on EC – Chicken Cuts, paras. 196, 199.
857 See paragraphs 7.444 above.

measures have the effect of imposing ordinary cust oms duties on imported auto parts in excess of the
concessions contained in the tariff headings for auto parts under its Schedule, inconsistently with its
obligations under Article II:1(a) and (b) of the GATT 1994.
3. Treatment of auto parts imports under China's measures - essential character test under
Articles 21 and 22 of Decree 125
7.524 We recall our consideration above that the thres holds to determine the essential character of a
motor vehicle, set out in Articles 21 and 22 of De cree 125, could be considered as an element that
would characterize the charge as ordinary customs duties, provided the thresholds are by themselves
applied to the classification of auto parts and components imported in a single shipment. The
complainants argue that the criteria for the determ ination of the essential character of a motor vehicle
set out in Articles 21 and 22 of Decree 125, even if they are applied to auto parts imported in a single
shipment, are still in violation of Article II of the GATT 1994. We will thus examine this claim by
the complainants in this section on the assumption that these criteria are applied to auto parts imported
in a single shipment.
858
(a) "Essential character" test under GIR 2(a)
(i) Circumstances under which the essential character test under GIR 2(a) is applicable
7.525 As examined above, those WTO Members who are also contracting parties to the HS are
obliged under the HS Convention to apply the interp retive rules of the HS, namely the GIR, to the
classification of goods. In this connection, we found that in certain classification situations, GIR 2(a)
needs to be consulted, in conjunction with GIR 1.859
7.526 Specifically, the HS Contracting Parties are requi red to classify an incomplete or unfinished
good, imported either unassembled or disassembled, as the corresponding complete good provided the
incomplete or unfinished good, as presented, has the essential character of the complete or finished
good. The parties to the dispute do not dispute that the principle of GIR 2(a) applies when customs
authorities need to determine whether parts a nd components of a complete good, imported and
presented in a single shipment, have the essential character of the complete good.
7.527 Therefore, in this section, we will examine wh ether the criteria provided in Article 21(2) and
(3) and Article 22 of Decree 125 for the essential charact er of a motor vehicle, if their application is
limited to a single shipment situation, are comp atible with the principle of GIR 2(a), China's
concessions in the tariff headings for motor vehicl es of China's Schedule, and consequently with
Article II:1(a) and (b) of the GATT 1994.
(ii) Panel's task in respect of the complainants' claim on the essential character test under the
measures
7.528 We observe that no definite guidance exists for the assessment of whether the criteria under
Articles 21 and 22 of Decree 125 provide a valid sta ndard for determining the essential character of a
motor vehicle under GIR 2(a) and consequently are c onsistent with China's concessions in the tariff
headings for auto parts.

858 The complainants' claim relating to China's treatment of CKD and SKD kits under Article 21(1) of
Decree 125 is addressed in Section VII.E of these reports.
859 See paragraphs 7.389-7.391 above.

7.529 In response to questions from the Panel in th is regard, the WCO Secretariat has commented
that except for several examples cited in the E xplanatory Notes to certain areas of the HS, the
Nomenclature and Explanatory Notes are largely silent regarding the meaning of the "essential
character" of the complete or finished article as it appears in GIR 2(a).
860 Referring to the General
Explanatory Note to Chapter 87 as a notable example, the WCO Secretariat states that the question at
what point a collection of parts can be considered to substantially compose a complete motor vehicle
is one that must be considered on a case-by-case ba sis. In this connection, the Committee has not
formally developed principles, nor has the Co mmittee ruled formally on the classification of
unassembled sets of parts for motor vehicles of Chapter 87.
7.530 At the same time, the WCO Secretariat notes that Chapter 87 presents unique classification
challenges because in addition to headings describing complete motor vehicles (headings 87.01-
87.05) and a heading for parts and accessories (hea ding 87.08), the Chapter also provides a separate
heading for motor vehicle chassis fitted with engine s (heading 87.06) and a heading for motor vehicle
bodies (including cabs) (heading 87.07). In the view of the WCO Secretariat, some sets of auto parts
may be classifiable by application of GIR 2(a) in either heading for complete motor vehicles or
headings for intermediate goods (i.e. motor vehi cle chassis fitted with engines under heading 87.06
and motor vehicle bodies under heading 87.07).
861 Accordingly, the WCO Secretariat considers that
the treatment of collections of parts of motor vehicles could range from individual classification of
each part in heading 87.08 or other eo nomine provisions in the Nomenclature (see Note 2 to Section
XVII)862, through headings 87.06 and 87.07, to headings 87.01-87.05, although the borderlines among
these headings have not been tested in the Committee with respect to unassembled sets of parts.
7.531 Regarding the principles that would affect a deci sion on the application of GIR 2(a) to the
standards set out in Article 21 of Decree 125, the WCO Secretariat comments that the HS criterion is
whether the specific collection of parts presented has the essential character of the complete or
finished article, bearing in mind the existence of headings for intermediate goods (tariff headings
87.06 and 87.07) in the case of Chapter 87. 863 At the same time, the WCO Secretariat points out that
absent specific guidance from the nomenclature (i .e. legal provisions) or the Committee (i.e.
interpretation of the nomenclature), it is within th e purview of national customs administrations to
interpret provisions such as GIR 2(a).864

860 WCO Secretariat's letter of 20 June 2007, page 2. We also note a reference by the Panel in EC –
Chicken Cuts to the WCO Secretariat's comments regarding a question on what factors and material are
considered when deciding the heading under which a product should be classified to which the WCO
[Secretariat] responded: "When goods are classified under the HS, this is always done on the basis of the
objective characteristics of the product at the time of im portation. ... the factor which determines the essential
character of a product will vary from one product to anothe r. ... the determination of the essential character of a
product may be done through a visual inspection of the product including indications on the packing. Reference
may also be made to accompanying documents" (Panel Report on EC – Chicken Cuts (Brazil), para. 7.314).
861 The WCO Secretariat further adds that heading 87.07 would cover only those sets in which the
engine is already fitted into the chassis, and such assemb lies that include cabs are classified in the headings for
complete motor vehicles (WCO's letter of 20 June 2007, page 3, referring to Note 3 to Chapter 87).
862 Note 2 to Section XVII provides a list of articles ((a ) – (l)) that would not fall within the scope of
the expressions "parts" and "parts and accessories".
863 WCO Secretariat's letter of 20 June 2007, page 4.
864 In this regard, the WCO Secretariat further emphasizes that under the provisions of the HS
Convention (i.e. Article 10), any dispute between Co ntracting Parties concerning the interpretation or
application of the HS Convention shall, so far as possible, be settled by negotiation between them. If it is not
possible to settle the dispute, it shall be referred to the HS Committee to consider the dispute and to make
recommendations for its settlement.

7.532 As noted by the WCO Secretariat, the Genera l Explanatory Notes to Chapter 87 provide two
examples of incomplete or unfinished vehicles that are classified as the corresponding complete or
finished vehicles for having the essential character of the complete or finished vehicles:
(A) A motor vehicle, not yet fitted with the wheels or tyres and battery; and
(B) A motor vehicle, not equipped with its engine or with its interior fitting.
7.533 The European Communities points out that the General Explanatory Notes to Chapter 87,
which are a particular application of GIR 2(a) in the context of Chapter 87, provide for a tool in
exceptional borderline situations to be applied on a case-by-case basis.
7.534 China considers that the two examples provided in the General Explanatory Notes to Chapter
87 are just examples which do not define the boundar ies of the application of the essential character
test to motor vehicles.
865
7.535 In our view, although they may not provide an absolute or exhaustive standard for
determining the essential character of a motor vehi cle given the non-binding nature of the General
Explanatory Notes under the HS, these two exam ples could be considered as guidance for the
question before us.866
7.536 We also recall the unique structure of Chapter 87, which consists of the tariff headings for not
only complete motor vehicles and parts and compone nts thereof, but also intermediate goods (87.06-
87.07). The tariff headings 87.06 and 87.07 provide:
"87.06 – Chassis fitted with engines, for the motor vehicles of headings 87.01 to
87.05
87.07 – Bodies (including cabs), for the motor vehicles of headings 87.01 to 87.05"
7.537 This means that goods satisfying the descriptions in tariff headings 87.06 and 87.07 must be
classified under these specific headings pursuan t to the principle of GIR 1 and GIR 2(a)
(determination whether incomplete or unfinished vehicles should be classified as complete or finished
vehicles) will not be applicable.867

865 China considers the first example ("a motor vehicle, not yet fitted with the wheels or tyres and
battery") to constitute at least an "SKD kit", which could be also be classified simply as a motor vehicle, since
"wheels, tyres and batteries are all consumable items which are commonly added to the vehicle in the domestic
market". According to China, the second example ("a motor vehicle not equipped with its engine or with its
interior fittings") would likely correspon d to Article 21(2)(b) of Decree 125, as it constitutes a "body ... plus at
least three other assemblies" (China's response to Panel question No. 117).
866 See paragraph 7.586 below and footnote 923 for the Appellate Body's reference to Explanatory
Notes of the HS in examining the meaning of a tariff term.
867 The WCO Secretariat comments that these tariff headings would be examples of the situation
where the conditional clause under GIR 1 – "provided the headings and legal notes do not otherwise require" –
would apply. The WCO Secretariat explains that this conditional clau se means that a heading providing
specifically for a collection of unassembled parts or an incomplete article would prevail by application of GIR 1
because GIR 2 would not apply. The European Communities submits that the classification of a brake
cylinder or of a product fulfilling the conditions of heading 87.06 "chassis fitted with engines" would not
necessitate recourse to GIR 2(a) and the General Explanatory Notes to Chap ter 87 because the classification of
the product would be clear on the ba sis of the heading (European Commun ities' response to Panel question No.
211).

7.538 Furthermore, we note the WCO Secretariat's comment that the legal text of GIR 2(a) is open
to different interpretations and that it is the general concept that interpretation of the HS is the right of
every Contracting Party.
868 The WCO Secretariat further explains that, based on the general concept
concerning the Contracting Parties' right to interpretation of the HS, there could be interpretations that
differ among different Parties. Thus, when the HS Committee makes a determination and issues a
Classification Opinion, upon request from a Contrac ting Party, for the classification of a specific
article (or a group of articles presented together), it is not uncommon for the resulting Classification
Opinion to be at variance with one or more national classification rulings, BTIs, or other
administrative or statutory rules. In such a case, the HS Contracting Parties are expected to seek a
way to modify their internal instruments so as to permit application of the Classification Opinion, and
they are obligated to inform the Committee when they are unable to do so.
7.539 We will bear in mind the above considerations as guidance in examining the criteria set out in
the measures.
7.540 Overall, in light of the fact that there are no cl ear criteria that the Contracting Parties to the
HS are obliged to apply for the essen tial character determination, our task in this connection is not to
decide what should be the correct criteria for th e essential character of a motor vehicle under Chapter
87 of China's Schedule. We consider that the scope of our review in respect of the complainants'
claim against China's measures, in particular the essential character determination, under
Article II:1(a) and (b) of the GATT 1994 is limited to a very narrow question whether any aspect of
the criteria set out in the measures will necessarily lead to a violation of China's obligations under its
Schedule and consequently Article II:1(a) and (b) of the GATT 1994.
869
(iii) Preliminary issue: pre-determined criteria for the essential character test
7.541 Before commencing our analysis, we will addr ess the European Communities' argument that
the principle of GIR 2(a) is not applicable at the le vel of the tariff headings and without considering a
very specific shipment as presented to customs at the border, and should be considered only on a case-
by-case basis.870
7.542 The European Communities submits that the other rules and in particular GIR 2(a) on which
China bases its entire defence strategy are not releva nt in interpreting a Member's schedule generally
unless one assumes a very specific product or a combin ation of products that are presented to customs
at the same time. Recourse to GIR 2(a), which is one of the "following provisions" within the
meaning of GIR 1, can only be relevant in very specific individual cases "as presented" to customs,
and not at the level of China's tariff schedules ge nerally as China insists. The European Communities
argues that China's systematic treatment under th e measures of imported goods contrary to their

868 WCO Secretariat's letter of 30 July 2007, page 4.
869 In response to a question from the Panel, China states that although it is not clear whether a
measure must be shown to always viol ate the WTO Agreement to prove an "a s such" claim, a party bringing an
"as such" claim against the measures must identify and prove the specific circumstances in which the measure
"will necessarily be inconsistent" with the responding Members' WTO obligations (China's response to Panel
question No. 228). The European Communities responds that the criteria under Articles 21 and 22 of
Decree 125 would necessarily lead to incorrect classification . Canada submits that the measures "as such"
violate Article II by always subjecting auto parts to the motor vehicle rate if the thresholds are exceeded and that
it is irrelevant to the analysis of Article II that, in rare instances, a collection of assembled parts large enough to
constitute an assembled vehicle under Article 21 of Decree 125 may properly be classified as whole vehicles
under the HS.
870 European Communities' second written submission, para. 90; European Communities' responses to
Panel question Nos. 208, 209, 211.

objective characteristics and contrary to the explicit wording of the headings of schedules has nothing
to do with discretion.
7.543 China considers that, notwithstanding their repeated insistence that GIR 2(a) can only be
applied "in casu" or "on a case-by-case basis", the complainants have not ch allenged the application
of Decree 125 as it pertains to any specific combinations of auto parts and components.
871 In fact, the
complainants, along with Australia, contradict them selves on basic issues of where and how to draw
the line between motor vehicles and pa rts of motor vehicles under GIR 2(a). 872 In this light, China
considers that the complainants have failed to ma ke a prima facie case that China has misinterpreted
the term "motor vehicles" in respect of where China has drawn the line between motor vehicles and
parts of motor vehicles. Consistent with their own understanding of GIR 2(a), such a claim would
have to be brought on the facts of a specific ca se or cases, with evidence and arguments concerning
the proper application of the essential character test in each instance. The complainants have chosen
not to do this.873
7.544 China argues that the fundamental problem with the complainants' case is that they have
failed to present evidence and legal arguments sufficient to identify the specific instances in which the
challenged measures will necessarily result in a mi sapplication of the essential character test. The
complainants have failed to define the boundaries of the essential character test as it relates to parts
and components of motor vehicles under Chapter 87 of the HS, and to substa ntiate those boundaries
by reference to evidence and legal arguments. Nor ha ve the complainants demonstrated a consistent
application of the challenged measures that has resu lted in a misapplication of the essential character
test to parts and components of motor vehicles. Having failed to meet their burden of proof, the
complainants have provided the Panel with no basis to distinguish between those instances, if any, in
which the measures will necessarily result in a misapplication of the essential character test, and those
instances in which it will not. Therefore, China subm its that the Panel cannot find that the challenged
measures, as such are inconsistent with the essential character test under GIR 2(a).874
7.545 The WCO Secretariat has responded to a question from the Panel in this regard that there is
nothing in the HS Convention or policy decisi ons of the HS Committee that would preclude an
administration from establishing formal criteria for de termining when GIR 2(a) is to be applied.
Further, it adds that interpretation of the HS is the right of every Contracting Party, and such
interpretations could conceivably take the form of advance classification rulings (binding tariff
information or BTI), individual classification dete rminations upon liquidation of a specific formal
entry, national court rulings, regulations or statutes.875

871 China's second written submission, para. 26.
872 China submits that Australia considers that the engine must be present for an incomplete or
unfinished vehicle to have the essential character of a motor vehicle (Australia's response to Panel question to
third parties No. 12); the United States and Canada take the position that the engine is not required to establish
essential character (United States' response to Panel qu estion No. 117(b); Canada's response to Panel question
No. 117(b)); the European Communities suggests that an unfinished or incomplete vehicle cannot be missing
anything "essential for the functioning of the vehicle," which would clearly include the engine and transmission
(CHI-43). China considers the European Communities' "essential for the functioning" standard inconsistent with
the United States' position that what matters is whether th e articles are "recognizable" as the machine that they
will become (CHI-42).
873 China's second written submission, para. 30; Ch ina's comments on the complainants' responses to
Panel question No. 233. See also China's response to Panel question No. 133.
874 China's response to Panel question No. 206.
875 WCO Secretariat's letter of 30 July 2007, page 1 (response to question No. 5). The WCO
Secretariat further elaborates, "such actions [individual interpretation of the HS by the Contracting Parties]

7.546 The Panel considers that the essence of the European Communities' argument in this respect
is that determining, based on the principle of GIR 2(a), whether a certain set of incomplete or
unfinished goods has the essential character of the corresponding complete or finished good can only
be made by examining a specific shipment as pres ented to customs authorities, and not based on a
pre-determined set of criteria at the level of ta riff headings. The Europ ean Communities argues that
the material conditions set out in Articles 21 and 22 of Decree 125 amount to tariff classification at
will.
7.547 However, in response to a question from the Panel whether a Member has the discretion to set
forth criteria that it will apply to all shipments of parts of a given product to determine whether they
have the essential character of the whole, th e European Communities acknowledged that Members
may adopt instruments and use documents that guid e customs authorities and importers in the context
of particular kinds of shipments, as long as such guidance is in accordance with the HS and the
Members' WTO obligations.
876 The United States has also submitted that a Member may set forth
criteria that it will apply to all shipments of parts of a given product so long as the criteria set forth are
consistent with the Member's obligations under the GATT 1994 and other WTO Agreements and – if
the Member is also a party to the HS Convention – its obligations under the HS Convention. 877
Canada does not take issue either with Members set ting forth guiding criteria to apply to particular
shipments of goods to determine their classification 878, insofar as such criteria are in accordance with
the rules of the HS and consistent with a Member's WTO obligations.
7.548 Further, the WCO Secretariat advises that such interpretations could conceivably take the
form of BTIs (advanced classification determinati ons), individual classification determinations upon
liquidation of a specific formal entry, national cour t rulings, regulations or statutes. In our view,
having a pre-determined set of criteria for the essenti al character test based on a particular Member's
interpretation of the HS is not different from providi ng interpretations in the form of BTIs, individual
classification determinations, nationa l court rulings or regulations or statutes, insofar as all these
forms of interpretations have a binding effect on their domestic customs authorities and provide a
standard to be applied to future cases.
7.549 In light of the responses from the complainants, we understand that they are not in principle
objecting to a pre-determined set of criteria for the essential character determination that a Member
may have in its domestic legal system, as long as su ch criteria are consistent with the obligations
under the WTO Agreement and the HS Convention, if the Member is also a Contracting Party to the
HS. The WCO Secretariat's comment is also in line with this view.
879 Therefore, we consider that the
core of the complainants' contention is the consis tency of the substantive criteria for the essential

could result in interpretations that differ among countrie s. When a CP requests that the Committee consider the
classification of a specific article (or group of ar ticles presented together), and the Committee makes a
determination and issues a Classification Opinion (CO), it is not uncommon for the resulting CO to be at
variance with one or more national classification rulings, BTIs, or other administrative or statutory rules. CPs
are expected to seek a way to modify their internal instruments so as to permit application of the CO, and they
are obligated to inform the Committee when they are unable to do so."
876 European Communities' response to Panel question No. 209.
877 United States' response to Panel question No. 209.
878 Canada's response to Panel question No. 209. Canada submits that this approach is illustrated with
respect to kit cars in Canada (see Exhibit CHI-17) and other shipments elsewhere (e.g. EC Regulation
2127/2005, Exhibit CHI-14). Canada refers to paragraphs 41-51 of its second written submission for its
argument why the measures, ev en if applied to a single shipment of all parts at the border, do not classify
imported goods in accordance with the requirements of the HS.
879 See paragraph 7.545 above.

character of a motor vehicle set out in China' s measures with the obligations under the WTO
Agreement. We address this question in this section, immediately following the current discussion.
7.550 In this connection, we note China's argument th at the complainants have not established their
prima facie case that China has misinterpreted the term "motor vehicles" in respect of where China
has drawn the line between motor vehicles and parts of motor vehicles. China considers that such a
claim would have to be brought on the facts of a sp ecific case or cases, with evidence and arguments
concerning the proper application of the essential character test in each instance.
7.551 To support its position, China argues that the complainants have failed to define the
boundaries of the essential character test as it rela tes to parts and components of motor vehicles under
Chapter 87, and to substantiate those boundaries by reference to evidence and legal arguments.
7.552 As set out above, a party advancing an affirmativ e claim, legal or factual, bears the burden to
prove its case.
880 To establish a prima facie case for their claim, the complainants therefore have to
demonstrate, based on factual and legal arguments, how the criteria for the essential character
determination set out in the measures are inconsiste nt with China's concessions contained in the tariff
headings for auto parts. However, in our view, this does not necessarily require the complainants to
define themselves the boundaries of the essential character test for the products concerned in this case.
We recall that establishing a prima facie case means that if a party asserting a claim adduces evidence
sufficient to raise a presumption that what is claimed is true, the burd en then shifts to the other party,
who will fail unless it adduces sufficient evidence to rebut the presumption. 881 In this connection, the
Appellate Body clarified that precisely how mu ch and precisely what kind of evidence will be
required to establish such a presumption will necessarily vary from measure to measure, provision to
provision, and case to case.882
7.553 For the complainants in the present dispute, one way of proving their claim could be by
putting forward the "correct" boundaries as China claims. This might indeed be the best way, if
possible, to prove their claim, but is not a prerequisite for or the only way of establishing the
complainants' prima facie claim concerning the essential character test contained in the measures. As
noted by the WCO Secretariat, the Nomenclature a nd Explanatory Notes of the HS are largely silent
regarding the meaning of the essential character of th e complete or finished article as indicated in
GIR 2(a) and the legal text of GIR 2(a) is open to different interpretations. Further, we are informed
that the HS Committee has not formally developed principles in this rega rd, nor has the Committee
ruled formally on the classification of unassembled sets of parts for motor vehicles of Chapter 87. 883
Under these circumstances, therefore, it would not be the appropriate application of the burden of
proof if the complainants were required to prove their prima facie case by putting forward what are
the correct boundaries for the essential character of a motor vehicle.
7.554 China also argues that the complainants have not demonstrated a consistent application of the
challenged measures that has resulted in a misapplic ation of the essential character test to parts and
components of motor vehicles. As China itself has noticed, however, the complainants have brought
a claim on the measures as such, not as applied to specific facts. 884 In proving their as such claim, the

880 See Section VII.A.3 above.
881 See Section VII.A.3 above.
882 Appellate Body Report on US – Wool Shirts and Blouses, page 14.
883 See paragraph 7.529 above.
884 China submits that it considers that the complainants have brought an as such claim against the
challenged measures and that the European Communities ha s no basis to assert that Decree 125 is inconsistent
with the essential character test in all circumstances to which it might be applied. China points out that even the
United States concedes that "there might be a few comb inations" of auto parts under Decree 125 "that could

complainants may resort to evidence of the cons istent application of the concerned measures.
885
However, we do not consider that this is ne cessarily required to establish a prima facie case for the as
such claim brought by the complain ants because what the complainants are required to show in order
to prove their claim is the incons istency of "norms or rules" underlying China's legislation at issue
with the WTO Agreement.886
(b) Essential character test under the measures at issue
7.555 Articles 21 and 22 of Decree 125 provide:
"Article 21 Imported automobile parts shall be characterized as complete
vehicles if one of the following applies:
(1) imports of CKD or SKD kits for the purpose of assembling vehicles;
(2) within the scope identified in Article 4 of these Rules:
(a) imports of a body (including cabin) assembly
887 and an
engine assembly for the purpose of assembling vehicles;
(b) imports of a body (including cabin) assembly or an engine
assembly, plus at least three other assemblies (systems), for
the purpose of assembling vehicles;
(c) imports of at least five assemblies (systems) other than the
body (including cabin) and engine assemblies for the purpose
of assembling vehicles; or
(3) the total price of imported parts account s for at least 60% of the total price of
a complete vehicle of that vehicle model. This criterion shall enter into force
on July 1, 2006.

conceivably properly be classified under the HS as whole vehicles" (China's comments on complainants'
responses to Panel question No. 233).
885 As China has provided, the Appellate Body stated:

"[t]he party asserting that another party's municipal law, as such, is inconsistent with relevant
treaty obligations bears the burden of introducing evidence as to the scope and meaning of
such law to substantiate that assertion. Such evidence will typically be produced in the form
of the text of the relevant legislation or legal instruments, which may be supported, as
appropriate, by evidence of the consistent application of such laws ..." (Appellate Body
Report on US – Carbon Steel, para. 157) (emphasis added).

886 The Appellate Body in Dominican Republic – Import and Sale of Cigarettes stated: "[w]e observe
that the Appellate Body has consistently affirmed the right of WTO Members to challenge legislation laying
down norms or rules 'as such', as well as their right to bring claims against the appli cation of such measures in
specific instances" (Appellate Body Report on Dominican Republic – Import and Sale of Cigarettes, para. 302).
In US – 1916 Act, the Appellate Body also states, "Prior to the entry into force of the WTO Agreement,
it was firmly established that Article XXIII:1(a) of the GATT 1947 allowed a Contracting Party to challenge
legislation as such, independently from the application of that legislation in specific instances. ..." (Appellate
Body Report on US – 1916 Act, para. 60).
887 For the term "assembly", see paragraphs 7.88-7.89.

Article 22 Imported automobile parts sh all be characterized as an assembly
(system) if one of the following applies:
(1) imports of a complete set of parts for the purpose of assembling assemblies
(systems);
(2) imports of key parts or sub-assemblies for the purpose of assembling
assemblies (systems), if the quantity of the imported key parts or sub-
assemblies reaches or exceeds the specifie d level as set forth in Annexes 1
and 2
888; or
(3) the total price of imported parts account s for at least 60% of the total price of
that assembly (system)."
7.556 We will examine each criterion in turn.
(i) Overview of the arguments of the parties
7.557 The European Communities considers that the ordinary meaning, context and purpose of
headings 87.01 to 87.05 of China's tariff schedule cl early point to complete motor vehicles, and that
only in some exceptional situations the General E xplanatory Notes to Chapter 87 of the HS foresee
that an incomplete or unfinished vehicle may be classified as the corresponding complete or finished
vehicle (where it has the essential character of the latte r). For a collection of parts to be classifiable as
a complete vehicle, "the overwhelming majority of the parts must be present and fitted together". 889
Such a determination has to be made case-by-case based on the objective characteristics of that
article, in the state it is presented to customs officials at the border (i.e. the "snapshot"). 890 The mere
fact that there may be exceptional individual in stances where a large combination of parts as
presented to Customs at the border in a single co nsignment would qualify as a complete vehicle
pursuant to GIR 2(a) of the HS and in the light of the General Explanatory Note to Chapter 87 cannot

888 As of 1 July 2008, lower quantity thresholds will apply to those key parts identified as class A in
Annex 1 to Decree 125. If those thresholds are met, the assembly will be characterized as an "imported
assembly" (Note 5 of Annex I to Decree 125 and Article 19 of Announcement 4). The entry into force of this
class A/B distinction was initially foreseen on 1 July 2006, but was postponed until 1 July 2008 (CGA Joint
Bulletin No. 38 of 5 July 2005) (Exhibit JE-29).
Further, Article 20 of Announcement 4 provides:

"If the imported parts accounts for more than 60% of the price of the key parts or sub-
assemblies, such key parts or sub-assemblies sh all be deemed as imported key parts or sub-
assemblies. Manufacturers shall provide a list of price ratios of parts needed.

Key parts or sub-assemblies, in principle, shall only be traced back to the secondary suppliers
of the manufacturers of complete vehicles.

Imported parts purchased by domestic suppliers or trading companies shall be counted as
imported parts."

889 European Communities' response to Panel question No. 205. See also the European Communities'
responses to Panel question Nos. 211, 231 and 250.
890 European Communities' second written submission, para. 94.

exempt the Chinese measures from being, as such, in compatible with Article II, when it has been
established that their application will necessarily result in WTO violations.
891
7.558 The United States acknowledges that under GIR 2(a) incomplete products may be classified
as complete ones, if they have their essential character. However, the United States is of the view that
China ignores GIR 1 (which provides that "classifi cation should be determined according to the terms
of the headings and any relative section or chapter no tes"), the HS chapter h eadings specific to auto
parts, and its own schedule of tariff commitments containing detailed descriptions of various parts and
auto assemblies and sub-assemblies. The auto parts and auto assemblies imported into China must be
classified in accordance with the specific tariff headings listed in China's schedule.892
7.559 The United States is of the view that the criteria set out in Articles 21 and 22 of Decree 125
are not the types of criteria commonly used as standa rds by customs officials in determining whether
parts and components of a product should be considered as a complete product. 893 The measures lay
down thresholds that arbitrarily define some collec tion of imported parts as having the character of a
whole product, and result in the application of duties for whole products to parts.894
7.560 Canada recognizes that there may be instances when an article is an incomplete or unfinished
product on importation, but has all of the essential char acteristics of a complete or finished product.
WTO Members can make 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.
 895 The "essential characteristics" must
be assessed based on the objective characteristics of th e product as presented at the border in a single
shipment. This involves elements such as visual in spection, reference to documents, and if necessary
further testing or analysis (based upon the state of the good as it passed the border). 896 Canada argues
that 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 pr esented to customs officials at the border. 897 No consideration is

891 European Communities' second written submission, para. 134.
892 United States' first oral statement, paras. 36-40; United States' second oral statement, para. 24. The
United States submits that under the HS, the GIR and the Section notes, goods are required to be classified in
their condition as imported under the heading that most accurately describes the good. Following GIR 2(a),
customs officials must make a determination as to whether components presented together impart the essential
character of a complete or finished article. If not, then the components are to be individually classified. If
Decree 125 were considered a valid interpretation of the HS, it would void several headings and subheadings
that specifically describe automobile assemblies, subass emblies, and parts (United States' responses to Panel
question Nos. 209, 223, 231).
893 United States' response to Panel question No. 1.
894 United States' response to Panel question No. 68.
895 Canada explains in response to Panel question No. 39: "the Explanatory Note VII to GIR 2(a) is
meant to cover 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 presented. Any excess parts not require d to form that article contained in that shipment can
be classified as parts." In response to Panel question No. 113, Canada adds that "the Explanatory 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".
896 Canada's responses to Panel question Nos. 68, 12 5 and 224. Canada's written version of its oral
statement at the first meeting with the Panel, paras. 17-20. Canada, in response to Panel question No. 110, also
refers to EC – Chicken Cuts , in which "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'."
897 Canada's response to Panel question No. 110.

to be given to separate consignments arriving at di fferent times, end-use or value of the article, but
simply to objective characteristics of the product as presented at the border.
7.561 Canada submits that Canadian customs officials perform assessments on a case-by-case basis
of those parts presented together at the border, and that they do not base their classification of those
parts on a formula that is linked to the number of imported assemblies. Canada points out that this is
particularly the case with vehicles since they consist of a great number of individual parts, including
assemblies and sub-assemblies.
898
7.562 China considers it important to stress that GIR 2(a) does not provide a licence 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". With respect to the second sentence of GIR 2(a), the
unassembled or disassembled parts must be capable of assembly into the complete article within a
carefully circumscribed range of assembly opera tions. Thus, customs authorities could not invoke
GIR 2(a) to classify any collection of parts or ma terials as a complete article that those parts or
material could conceivably form. 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 na rrow range of products under the HS to which this
circumstance applies.899
(ii) Criteria under Article 21(2) of Decree 125
7.563 Article 21(2) provides the following three categor ies of criteria for the essential character of a
motor vehicles:
"(a) imports of a body (including cabin) assembly and an engine assembly for the
purpose of assembling vehicles;
(b) imports of a body (including cabin) assembly or an engine assembly, plus at
least three other assemblies (systems), for the purpose of assembling
vehicles;
(c) imports of at least five assemblies (systems) other than the body (including
cabin) and engine assemblies for the purpose of assembling vehicles;"
(emphasis added)
7.564 The European Communities submits that even assuming that the parts would arrive in a
single shipment, the measures would still fail to meet the "essential character" condition.
900 Under
Article 21(2) of Decree 125, imported parts will be classified as complete vehicles even though parts
or assemblies essential for the functioning and character of a vehicle will be missing in the
combination of imported parts. Further, this is all the more so because an assembly need not be
imported in its entirety or even manufactured in Ch ina from exclusively imported parts to be Deemed
Imported under Article 22 of Decree 125. As a r esult, the import of a relatively limited quantity or
value of parts is sufficient to meet the thresholds of Article 21(2) of Decree 125 and leads to the
classification of the imported parts as a complete vehicle.

898 Canada's response to Panel question No. 1.
899 China's response to Panel question No. 68.
900 European Communities' second written submission, para. 113.

7.565 The European Communities points out that although the average number of parts in a
complete vehicle is in the thousands, under the meas ures, the import of five key parts of the vehicle
body and six key parts of the engine will be suffi cient to make both assemblies Deemed Imported and
all imported parts characterized as complete ve hicles for a certain type of vehicle under the
measures.
901
7.566 The European Communities further argues th at once the class A/B distinction under
Article 22 of Decree 125, the entry into force of which is postponed until 1 Ju ly 2008, takes effect,
imported auto parts will be classified as complete vehicles under much lower thresholds. For
example, the imports of one door, one engine hood, one engine block and one cylinder head will be
sufficient to make the vehicle body and the engine Deemed Imported Assemblies, and the imported
parts characterized as complete vehicles.902
7.567 Regarding Article 21(2)(a) of Decree 125, the European Communities considers that it covers
the situation whereby the two main assemblies (the vehicle body and engine ), without being fitted
together, are imported for the purposes of manufactu ring a complete vehicle. Such a situation is
"manifestly far away from the categories foreseen by China's Schedule examined in the light of the
General Explanatory Notes to Chapter 87 whereby an incomplete or unfinished vehicle may be
classified as the corresponding complete or finished vehicle provided it has the essential character of
the latter". There is no basis in China's Schedules or in the Notes to the HS that would allow imposing
a different tariff than specifically indicated under th e relevant China's tariff headings just because the
engine and the body are imported in order to be manufactured and fitted together. Instead, these
products are subject to their own very specific head ings, which provide genera lly for a bound rate of
duty of less than 10 per cent for bodies and relevant engines. The fact that under the measures the
imported vehicle body and the engine would be charact erized as a complete motor vehicle and subject
to the 25 per cent duty for complete vehicles under tari ff headings 87.02 to 87.04 is a manifest breach
of the bound rates of duty of China under its tariff sc hedule and consequently a breach of Article II of
the GATT 1994.
903
7.568 With regard to Article 21(2)(b) and (c) of Decree 125, the European Communities points out
that Chapter 87 of China's Schedule includes headi ngs for intermediate categories between complete
vehicles and parts thereof, such as 87.06 (Chassis fitted with engines) and 87.07 (Bodies (including
cabs)). These two headings deal with situations where some automotive parts and accessories are
already fitted together with other such parts creat ing a combination that is destined to be fitted
together with other parts in order to build a complete or whole vehicle. 904 Partly based on the
Explanatory Notes to tariff heading 87.06 905, the European Communities submits that the product

901 European Communities' second written submission, para. 115, referring to first written submission,
paras. 40-41; response to Panel question No. 117; Exhibit EC-1.
902 European Communities' second written submission, para. 115, referring to first written submission,
paras. 40-41; response to Panel question No. 117, Exhibit EC-2.
903 European Communities' first written submission, para. 261-266.
904 European Communities' first written submission, para. 255.
905 The Explanatory Notes to tariff heading 87.06 provide:

"This heading covers the chassis-frames or the combined chassis-body framework (unibody or
monocoque construction), for the motor vehicles of headings 87.01 to 87 .05, fitted with their
engines and with their transmission and steering gear and axles (with or without wheels). That
is to say, goods of this heading are motor vehicles without bodies.

The chassis classified in this heading may, however, be fitted with bonnets (hoods),
windscreens (windshields), mudguards, running-boards and dashboards (whether or not

foreseen under heading 87.06 is clearly in a ve ry advanced stage of manufacture, yet still not
classifiable as a complete or finished vehicle. The European Communities considers that "a chassis
fitted with engines" falls within the scope of Ar ticle 21(2)(b) and (c) of Decree 125, and would be
considered as a "whole vehicle" and subject to the general 25 per cent duty, instead of a bound duty
rate between 8 to 20 per cent under tariff heading 87. 06. This is a manifest breach of the bound rates
of China under its tariff schedule and consequently a breach of Article II of the GATT 1994.
906
7.569 The United States submits that China's interpretation of GIR 2(a) exceeds the discretion a
Contracting Party has to interpret GIRs as it eliminates from consideration several headings within the
HS such as headings 87.06 and 87.07, which deal with sub-assemblies as well as specific headings
that name particular goods such as headings 84.04 and 84.08.907
7.570 The United States argues that the criteria set out in Article 21 of Decree 125 in most cases go
far beyond what can appropriately be considered to be parts with the "essential character" of a motor
vehicle under the HS, including application of the General Explanatory Note to Chapter 87. There
might be a few combinations of parts under Article 21 that could conceivably properly be classified
under the HS as complete 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) might appropriately under
the HS be classified as a whol e vehicle, based upon the General Explanatory Note example ("a motor
vehicle not equipped with its engine"). However, that would require an individual assessment that the
additional assemblies and other parts were enough to constitute the "essential character" of a motor
vehicle. In the vast majority of cases, howev er, parts characterized as complete vehicles under
Article 21, even if they were presented together at the border, could only be classified as intermediate
products or parts.
908
7.571 With regard to Article 21(2)(a) of Decr ee 125, the United States submits that, under
longstanding classifications by Customs authorities around the world as well as the tariff classification
experts at the WCO Secretariat, a vehicle body and an engine for a motor vehicle, even if shipped
together, would have to be separately classified (u nder headings 87.07 and 84.07/84.08). 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 vehicle body and an engine.909
7.572 The United States considers that Article 21(2)(b) of Decree 125 presents the same situation as
Article 21(2)(a): it defies the longstanding conventio ns and principles of classifying imported articles
in their condition at the time of importation, as set forth in the GIR and their Explanatory Notes. A

equipped with instruments). Chassis also remain classified here whether fitted with tyres,
carburettors or batteries or other electrical equipment. However, if the article is a complete or
substantially complete tractor or other vehicle it is not covered by this heading.

The heading also excludes:

 (a) Chassis fitted with engines and cabs , whether or not the cab is complete
 (e.g., without seat) (headings 87.02 to 87.04) (see Note 3 to this Chapter).
 (b) Chassis not fitted with engines, whether or not equipped with various mechanical
parts (heading 87.08)"

906 European Communities' first written submission, paras. 255-260.
907 United States' comments on China's response to Panel question No. 238(a).
908 United States' response to Panel question No. 117.
909 United States' response to Panel question No. 128.

vehicle body or an engine combined with any 3 of the other specified assemblies could never be
properly classified as an article with the essential character of a complete motor vehicle. For
example, a vehicle body with brakes, a steering syst em 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
combinations 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.
910
7.573 Concerning Article 21(2)(c) of Decree 125, th e United States submits that classifying the
specified assemblies without a body or an engine as a complete motor vehicle or more specifically as
having the "essential character" of a complete motor vehicle takes the well-established principles and
conventions of tariff classification even further afie ld. None of these assemb lies, 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.
911
7.574 Canada notes that Article 21(2) of Decree 125 considers that parts in a vehicle are
characterized as a complete vehicle if a certain number of assemblies are Deemed Imported (an
assessment made separately under Article 22), b ased on three separate thresholds: (a) body and
engine; (b) body or engine plus three other assemblies (chassis-frame, steering system, transmission,
brake system, drive axle, and non-driving axle); and (c ) five or more other assemblies. With regard to
the first threshold, Canada submits that these should be classified separately (i.e ., the body under
heading 87.07 and the engine under heading 84.07). Concerning threshold (b), Canada considers that
if the Main Assembly is the engine, these combina tions could at best constitute a chassis with engine
of heading 87.06, and then only if the chassis was one of the other assemblies; however, in all other
combinations, each article 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). With respect to the third
threshold (c), Canada is of the view that rega rdless of the combinations each article should be
classified separately under the appropriate subheading of heading 87.08.
912
7.575 Canada is of the view that China has not shown subsequent practice of other Members
supporting its method of classifying parts and motor ve hicles that could be relevant in interpreting
Article II:1(b) of the GATT 1994. Canada acknow ledges that China has provided some practice
related to the propositions that (1) when parts are presented together in one shipment at the border that
constitute all, or virtually all, the parts necessar y to assemble a whole product, those parts may be
classified as that whole product; and that (2) where a shipment includes most of the parts necessary to
assemble a complete product, on an individual b asis those parts may be classified as that whole
vehicle product if the parts presented are determined to constitute the "essential character" of the

910 United States' response to Panel question No. 128.
911 United States' response to Panel question No. 128.
912 Canada's responses to Panel question Nos. 117 and 12 8. Canada refers to a chart that it argues sets
out the proper application of GIR 1 and the relevant headings to the various combinations of Deemed Imported
Assemblies that, under the measures, are sufficient to find parts characteri zed as a complete vehicle (See the
chart in Canada's second written submission, page 20). The chart shows that only in a few situations (the
bottom three lines), even assuming that all the part s in a Deemed Imported Assembly are imported and
contained in a single shipment, parts characterized as complete vehicles under Article 21(2) could properly be
classified as whole vehicl es under the HS. In all other cases, the measures do not follow the HS for
classification, and as a result the ch arge imposed under the measures, even if properly characterized as an
ordinary customs duty, violates Article II of the GATT 1994 (Canada's second written submission, paras. 48-
51).

finished product.
913 However, China has not shown that a WTO Member may deem that parts have
the essential character of the complete vehicle based on the volume thresholds contained in the
measures. Therefore, Canada considers that the only feature of the measures that could be accepted
customs classification is the classification of parts as a complete vehicle where those parts, contained
in a single shipment, have the vast majority of necessary parts, and thus have the essential character of
a whole vehicle in accordance with GIR 2(a).
914 The measures classify parts contrary to
Article II:1(b) of the GATT 1994.915
7.576 China argues that the different combinations of auto parts and components set forth in
Article 21 of Decree 125 all result in an incomplete article that is plainly recognizable as a motor
vehicle and that these combinations therefore ha ve the essential character of a motor vehicle under
GIR 2(a). 916
7.577 China submits that there are a variety of f actors that customs authorities consider in
evaluating whether an incomplete or unfinished artic le has the essential character 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.917 The essential character test does not require the presence of every component that is
"essential" to the use or operation of the machine in its finished form.918
7.578 Moreover, China is of the view that the fact that certain assemblies only constitute a certain
portion of the value of the assembled motor vehicl e does not necessarily mean that those assemblies
do not, in their entirety, have the essential characte r of a motor vehicle. The ratio of a particular
assembly to the value of the assembled vehicle will change from one vehicle 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 under the essential character test.
7.579 The Panel begins its analysis by considering th e view of the European Communities and
Canada that an auto part combination "a chassis f itted with engines", which is classified under tariff
heading 87.06 of China's Schedule, would fall within the scope of Article 21(2)(b) of Decree 125 and
be subject to the tariff rates applicable to moto r vehicles in violation of Article II of the GATT
1994.919
7.580 Article 21(2)(b) of Decree 125 stipulates that the following category of combinations of auto
parts has the essential character of a motor vehicle:
"imports of a body (including cabin) assembly or an engine assembly, plus at least
three other assemblies (systems), for the purpose of assembling vehicles" (emphasis
added)

913 Canada refers to GIR 2(a); China's first written submission, paras. 81-103; Exhibits CHI-14, CHI-16
to CHI-20 and CHI-43.
914 Canada points out that such shipments of parts are often labelled CKD or SKD kits.
915 Canada's second written submission, paras. 52-55.
916 China's response to Panel question No. 117.
917 China submits three exhibits drawn from US cu stoms practice where the "recognizable" test was
used: CHI-42, CHI-43 and CHI-44.
918 China's response to Panel question No. 117. Chin a refers to Exhibit CHI-14 concerning the EC
classification determination of incomplete pick-up trucks.
919 The United States considers that it would fall under Article 21(2)(a) of Decree 125.

7.581 Accordingly, one type of the auto parts combinations under this provision could be " engine
plus at least three other ass emblies (systems)" among the chassis assembly, the transmission
assembly, the drive-axle assembly, the non-drive ax le assembly, the steering system and the brake
system. Thus, if "a chassis fitted with engines" was imported with at least two other assemblies, fitted
or not, it would indeed fall within the scope of Article 21(2)(b) of Decree 125 and accordingly be
classified as a "motor vehicle". China does not dispute this.
920
7.582 We recall an observation above by the WCO Se cretariat that Chapter 87 provides a unique
challenge in that it has tariff headings 87.06 and 87.07 for intermediate goods which fall in between
complete motor vehicles and parts and components thereo f. We are also mindful of the principle that
GIR 2(a) must be applied in conjunction with GIR 1, which would imply in the case of tariff headings
87.06 and 87.07 that if auto parts imported in a si ngle shipment "as presented" fit the description of
one of these two headings, they would have to be classified under either heading in accordance with
GIR 1.
7.583 Tariff heading 87.06 and the Explanatory Note to the heading provide:
"87.06 Chassis fitted with engines, for th e motor vehicles of headings 87.01 to
87.05.
This heading covers the chassis-frames or the combined chassis-body framework
(unibody or monocoque construction), for the motor vehicles of headings 87.01 to
87.05, fitted with their engines and with their transmission and steering gear and axles
(with or without wheels). That is to say, goods of this heading are motor vehicles
without bodies. ..."
7.584 Therefore, the text of tariff heading 87.06, read in the context of the Explanatory Note to the
heading, illustrates that a "chassis fitted with e ngines" fitted with the transmission assembly, the
steering system and the axle assemblies falls within the scope of tariff heading 87.06. Under
Article 21(2)(b) of Decree 125, however, the same "c hassis fitted with engines" with the transmission
assembly, the steering system and the axle assemb lies would be considered as having the essential
character of a motor vehicle and thus classified under tariff headings for motor vehicles (87.02-87.05)
instead of tariff heading 87.06 as required under GIR 1. This implies that Article 21(2)(b) requires a
"chassis fitted with engines" with the transmissi on assembly, the steering system and the axle
assemblies to be always classified as a motor vehicle inconsistently with the terms of tariff heading
87.06.
7.585 In this regard, China argues that the Eur opean Communities' position presumes that the
Explanatory Note to tariff head ing 87.06 is bindi ng on what constitutes the essential character of a
motor vehicle. In China's opinion the Explanator y Notes do not form part of the HS and are not
binding at all.
921
7.586 The Panel does not consider that the European Communities' arguments necessarily presume
that the Explanatory Note to tariff heading 87.06 is binding on what constitutes the essential character

920 See China's response to Panel question No. 131. China does not specifically respond to a question
from the Panel to comment on the European Communities' statement in its first written submission that "a
chassis fitted with engines", which is classified under ta riff heading 87.06, falls within the scope of Article
21(2)(b) and (c) of Decree 125. Ch ina submits that the European Communities' argument 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. This issue is addressed in paragraphs 7.585-7.586 below.
921 China refers to the Appellate Body Report on EC – Chicken Cuts, para. 214, n. 416.

of a motor vehicle. The European Communities has referred to the text of the Explanatory Note to
87.06 to further support its position that "a chassis fitted with engines" under tariff heading 87.06 falls
within the scope of Article 21(2)(b) and (c) of Decree 125.
922 Moreover, we recall that in interpreting
a tariff term at issue, the Appellate Body in EC – Chicken Cuts also considered, inter alia, whether a
proposed meaning of the term could be derived from the relevant Explanatory Notes to a HS chapter
as well as a tariff heading.923 Therefore, based on the terms of tariff heading 87.06 considered in their
context and the types of auto pa rts combinations falling within th e scope of Article 21(2)(b), we
conclude that the application of Article 21(2)(b ) would necessarily lead to a result that "a chassis
fitted with engines" within the scope of tariff heading 87.06 is classified as a complete motor vehicle.
7.587 China also points out that the European Comm unities itself has classified as a complete
vehicle an incomplete and unassembled vehicle that was missing substantially more than the "tyres
and battery" referred to in the example pr ovided in the Chapter Notes to Chapter 87. 924 However, a
classification decision of another Member, whether correct or not under the relevant classification
rules, would not render justifiable an element of th e measures at issue that is inconsistent with the
terms of tariff headings 87.06 and consequently China's concessions contained in that heading.
7.588 In sum, we find that Article 21(2) of Decree 125 has an element that would necessarily lead to
a result that "a chassis fitted with engines" within the scope of tariff heading 87.06 is classified as a
complete motor vehicle and consequently assessing th em at the tariff rate applicable to a motor
vehicle inconsistently with China's concessions contained in the tariff headings of China's Schedule.
(iii) Criterion for essential character under Article 21(3) of Decree 125
7.589 Article 21(3) of Decree 125 provides:
"(3) the total price of imported parts account s for at least 60% of the total price of
a complete vehicle of that vehicle model. This criterion shall enter into force on July
1, 2006."
925
7.590 The European Communities considers that Article 21(3) of Decree 125 provides for a
criterion, which cannot even remotely be associat ed with the basic categorisation of products under
Chapter 87 of China's Schedule and the HS. This cr iterion does not even attempt to use any technical
language to disguise the incons istency between the measures a nd China's Schedule and hence
Article II of the GATT 1994. A criterion of 60 per cent of the aggregate price of the parts not only

922 European Communities' first written submission, para . 255. The European Communities states that
the Explanatory Note to tariff heading 87.06 is particularly interesting, before quoting the actual text of the
Explanatory Note (emphasis added).
923 Appellate Body Report on EC – Chicken Cuts , paras. 196, 214, also citing the Panel's reference to
the relevant finding in this regard in the Appellate Body Report on EC – Computer Equipment, para. 89.
924 China's response to Panel question No. 131, referring to Exhibit CHI-14.
925 The entry into force of this third criterion is postponed until 1 July 2008 (CGA Joint Bulletin No. 38
of 5 July 2005) (Exhibit JE-28). In response to the Panel's question concerning the postponing of this criterion,
China has explained that it is primarily because of the administrative complexity of implementing this particular
criterion and that once auto manufacturers and customs officials have gained more experience with the
implementation of Decree 125, and have laid a solid foundation of record-keeping 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 (C hina's response to Panel question No. 59). Further,
concerning the specific nature of the complexity relating to the implementation of Article 21(3) of Decree 125,
China submits that the specific difficulty encountered by the customs is how to identify the fair value of the
parts (China's response to Panel question No. 170).

means that the parts are not necessarily fitted a nd/or equipped together but also means that
fundamentally important parts may be missing. The Eu ropean Communities is of the view that this is
a manifest breach of Article II of the GATT 1994 as the full vehicle duty is imposed on auto parts that
under China's Schedule are subject to a tariff of 10 per cent or less.
926
7.591 According to the European Communities, it is clear that the examples of incomplete or
unfinished vehicles in the General Explanatory Notes to Chapter 87 do not operate on the basis of the
aggregate price of the parts, which is an entirely alien concept to customs classification. As China
itself admits, the combinations of imported parts th at will make up the 60 per cent threshold will vary
from one model to another and will also vary depend ing on the respective evolution of the prices of
auto parts in China and abroad.
927 The European Communities theref ore considers it impossible even
to begin any reasonable comparison between the exam ples of Chapter 87 of the HS and Article 21(3)
of Decree 125 because they are based on completely different criteria the latter having nothing to do
with customs rules. 928 The parts should instead be classified under the applicable headings for the
specific parts.929
7.592 The United States submits that no imported articles are ever properly classified according to
their value, and that the GIR does not provide for this way of classification. Classification addresses
the physical qualities and sometimes the function of th e article without any regard to its value or its
relative value with respect to the nature or purpose of the finished good.930
7.593 Canada submits that there is nothing in any of the HS that suggests that value may be used to
classify products.931 As a result, the application of Article 21(3) inevitably leads to duties imposed
based on an incorrect classification, and consequently violates Article II of the GATT 1994.932
7.594 Canada considers that China has not shown a common and consistent practice that value
thresholds can be used as a classification tool. 933 In Canada's view, the value of imported content is
properly used only for determining origin of im ported products; not for determining their tariff
classification. Canada therefore submits that the 60 per cent threshold category is erroneously applied
to classification of parts, which in most cases should be classified under heading 87.08.934
7.595 China submits that 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). 935 The 60 per cent threshold criterion under Article 21(3) of Decree 125 reflects this aspect
of the essential character 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.936

926 European Communities' first written submission, paras. 276-277; second written submission,
para. 116.
927 European Communities' second written submission, para. 116, referring to China's response to Panel
question No. 64. The European Communities also refers to Exhibits EC-5 to EC-11.
928 European Communities' response to Panel question No. 117.
929 European Communities' response to Panel question No. 218.
930 United States' response to Panel question No. 128.
931 Canada's second written submission, para. 48.
932 Canada's second written submission, para. 48.
933 Canada's second written submission, para. 54, footnote 60.
934 Canada's response to Panel question No. 128.
935 China's response to Panel question No. 64.
936 China's response to Panel question No. 102.

7.596 China points out that, although Canada and the Eu ropean Communities insist that the value of
imported parts and components is never a relevant consideration in applying the essential character
test, US Customs determinations explicitly refer to value as a factor.
937 China refers to a United
States tariff classification of incomplete, unasse mbled pistol kits from Austria and a tariff
classification of an incomplete railway car, in wh ich, according to China, US Customs considered
value as a relevant fact in determining essential character.938
"Value" as a criterion for the essential character determination
7.597 The Panel first turns to the complainants' argument that "value" is not a valid criterion for
tariff classification. 939 The complainants argue that nothing in the HS, including the GIR, and
Chapter 87 of China's Schedule suggests that value ma y be used to classify products. We agree that
no reference to "value" can be found in China's Sc hedule, the HS, the GIR or relevant Explanatory
Notes. Although we do not consider that the abse nce of reference to "v alue" as a classification
criterion in the relevant classification rules proves in and of itself that value as such cannot constitute
a criterion for determining the essential character of a complete good, it does cast doubt on the
reasonableness of "value" as a criterion for the essential character test.940
7.598 China argues that the value of th e incomplete article in relation to the value of the complete
article is one of the factors that customs author ities apply in evaluating the essential character of an
incomplete or unfinished article. To support its proposition, China points to two US Customs
classification decisions in which the term "value" is mentioned.
7.599 First, China addresses a US Customs classificati on decision where "value" was referenced in
applying the principle of GIR 2(a) to determine the essential character of a pistol. 941 We note that the
US Customs indeed noted that "[t]he nature of the item, its bulk, quantity, or value may be looked to
in a determination of essential character." It is not clear, however, whether the US Customs meant to
imply that all these criteria were relevant altogether or individually, and how value, if at all, would be
considered in determining the essential character of a complete pistol in that case. The text of the
decision does not indicate that the US Customs base d its classification determination on the value of
the unassembled pistol kits missing one part proposed to be imported, despite its reference, among
others, to value in the decision. Rather, it show s that the decision was based on the fact that the
unassembled pistol kits, even absent the receiver co mponent, constituted the aggregate of distinctive
component parts that established its identity as to what it was, a complete or finished pistol.

937 China refers to exhibits CHI-16 and CHI-45 ; the European Communities' responses to Panel
questions, para. 91; Canada's responses to Panel questions, p. 34.
938 China's response to Panel question No. 117.
939 See paragraphs 7.590-7.593 above.
940 In this context, the Panel takes note of the stat ement made by Australia, a third party participant in
this dispute, that the value of goo ds has no place in an objective intern ational trading classification system
(Australia's response to Panel question No. 19). According to Australia, because "values are subjective and can
change according to factors such as seasons, fashion, ex change rates and fuel prices", this could lead to
inconsistent classification of essentially the same goods from different sources.
Furthermore, we note that Annex 2 to Decree 125 ("Scope of Automobile Parts in Assemblies
(systems))" provides: "This Scope of Automobile Parts in Assemblies (systems) is mainly intended to clarify the
scope of assemblies and systems for the purpose of veri fying the complete vehicles character. The scope is
delimited according to the following principles: (1) functional independence, and (2) distinctive and separate
assembly phase. ..." (emphasis added).
941 US Customs and Border Protection, Tariff Classification of Incomplete, Unassembled Pistols from
Austria, NY M83114, 10 May 2006 (Exhibit CHI-16).

7.600 We also note China's reference to another US Customs classification concerning a series of
component welded together to form the front runner car body (consisting of the central box section, to
which other components are fabricated), i.e. whet her it should be classified as an unfinished railway
or tramway freight car having the essential character of the finished railway or tramway freight car.
942
From the language of the decision, however, it is not clear whether, and if so, how value was taken
into account in deciding that the imported produc t constituted an unfinished railway or tramway
freight classifiable under the corresponding finished pr oduct. The value of the imported parts at issue
(57 per cent) was mentioned as part of the description of the fact of the case: " It is indicated that the
imported car body represents 57 per cent of the to tal value of the complete front runner car"
(emphasis added). The decision, issued as a form of advanced classification decision upon the request
of an importer, does not elaborate on the basis for its conclusion. Under these circumstances, we do
not have sufficient information to conclude whether value as such was relied on by the US Customs as
an independent criterion for the essential char acter determination as under Article 21(3) of
Decree 125.943
7.601 Given our considerations above of the US Cu stoms classification decisions cited by China
and in light of the fact that no reference to "value " as a classification criterion can be found in the text
of China's Schedule, the HS or its interpretative tools 944, it is questionable whether "value" as adopted
by China for the essential character test under the measu res can be considered consistent with China's
obligations under its Schedule.
7.602 In this connection, determining the essential ch aracter based on "the value of the incomplete
good in relation to the value of the complete good" as embodied in Article 21(3) of Decree 125 would
necessitate specific information on "the value of a co mplete good", that of a complete vehicle in this
dispute. This means that an importer should know at the time of importation the exact value of the
complete good into which the subject incomplete arti cle presented for classification will eventually be
incorporated, with domestic and/or other imported goods, in the importing Member's territory. This
would seem to be a difficult, if not impossible, task for importers. In particular, as examined in
paragraph 7.362 above, the evidence before us indicates that auto parts are more standardized and thus
can interchangeably be used among different vehi cle models, which makes identifying a specific
vehicle model into which certain auto parts will be incorporated unnecessarily trade restrictive. In
fact, China itself acknowledges the difficulties assoc iated with the implementation of the value
criterion under Article 21(3) of Decree 125. In expl aining the postponement of the entry into force of
Article 21(3) until 2008, China submits that the reaso n for this delay is the difficulty encountered by
Customs on how to identify the fair value of the parts. 945 Therefore, we conclude that the value
criterion does not necessarily confine the essential char acter determination to the assessment of auto
parts imported in a single shipment. 946 To that extent, the value criterion under Article 21(3) is
inconsistent with the principle of GIR 2(a).

942 US Customs, Tariff Classification of Railway Freight Car Body , HQ 081691, 18 January 1989
(Exhibit CHI-45).
943 Further, we take note of Canada's view that "value" is a notion usually associated with the rules of
origin, not tariff classification.
944 The Panel also observes that the statement by Au stralia, who participated in this proceeding as a
third party, that Australian customs practice in relation to the essential character rule underscores that the value
of the parts in relation to the value of the completed good is irrelevant (Australia's oral statement, para. 24).
945 See footnote 925 above and China's response to Panel question No. 170.
946 See paragraph 7.524 where the Panel stated that it would examine the complainants' claim in this
section on the assumption that these criteria are applied to auto parts imported in a single shipment.
Accordingly, to the extent that a certain criterion for th e essential character determination, by its nature, cannot

Criteria for the essential character determination under Article 21(2) and 21(3) of Decree 125

7.603 Next, we turn to the European Communities' argument that because the combinations of
imported parts that will make up the 60 per cent th reshold will vary from one model to another and
will also vary depending on the respective evolution of the prices of auto parts in China and abroad947,
it is impossible even to begin any reasonable comparison between the examples of Chapter 87 of the
HS and Article 21(3) of Decree 125 because they ar e based on completely different criteria the latter
having nothing to do with customs rules. We agr ee that depending on the vehicle model, 60 per cent
of a motor vehicle in value could mean different comb inations of parts of that motor vehicle. China
does not deny this.
7.604 China however argues that a ratio of imported parts beyond a certain value level may indicate
that those parts have the essential character of the complete article.
948 According to China, a
collection of imported parts and components that meets the 60 per cent threshold will necessarily be
recognizable as a motor vehicle, and therefore have the essential character of a motor vehicle. 949 The
basis for China's position is not clear to us. This is particularly so in light of China's argument on the
rationale behind the criterion provided in Article 21( 2) of Decree 125. China has submitted in respect
of the criteria under Article 21(2) of Decree 125 that as regards machines, su ch as motor vehicles, a
principal consideration for the essential character determination is whether the incomplete or
unfinished article is recognizable as that type of machine in its assembled condition .950 C h i n a ' s
argument in this context implies that whether parts of a motor vehicle are "recognizable" as a
complete motor vehicle is determined based on the physical appearance of the parts presented for
classification. This implication drawn from China's argument finds further support from China's own
statement: "China considers that the different comb inations of auto parts and components set forth in
Article 21 of Decree 125 all result in an incomplete article that is plainly recognizable as a motor
vehicle".
951 We understand that for parts, in particular machines as emphasized by China itself, to be
"plainly recognizable" as the corresponding complete good of parts, they must have the physical
appearance of the complete good.
7.605 Furthermore, in an effort to explain the con cept "recognizable", China refers to certain US
Customs classification decisions concerning the essential character of incomplete goods presented. 952
These decisions also illustrate that "recognizable", relied on as a criterion for the essential character
determination, refers to the physical appearan ce of a good when presented to customs authorities.
Based on the consideration of the specific elemen ts or parts of a good (i.e. incomplete backhoe
excavators, a four-wheel drive motor vehicle missing its engine and transmission, and a centrifuge
imported without the motor, valves, and the various electronic elements and controls) presented for

be applied to auto parts imported in a single shipment, which is the assumption for the Panel's analysis in this
section, such a criterion is inconsistent with the principle of GIR 2(a).
947 European Communities' second written submission, para. 116, referring to China's response to Panel
question No. 64. The European Communities also refers to Exhibits EC-5-11.
948 China's response to Panel question No. 64.
949 China's response to Panel question No. 102 (emphasis added). Also see paragraph 7.595 above.
950 China's response to Panel question No. 102. Also, in response to Panel question No. 117(b), China
refers to certain US Customs classi fication decisions where the 'recognizable' test was used (Exhibits CHI-42,
CHI-43 and CHI-44). See paragraph 7.605 for the Panel's discussion on China's argument relating to these
decisions.
951 China's response to Panel question No. 117(b).
952 China's response to Panel question No. 117(b), referring to Exhibits CHI-42, 43 and 44.

classification, the US Customs have decided whethe r such parts were recognizable as the complete
good of parts and thus had the essential character of the complete good of the parts presented.
953
7.606 Considered against this background, we are not convinced by China's argument that a
collection of imported parts and components that meets "the 60 per cent threshold" will necessarily be
recognizable as a motor vehicle.954 As noted earlier, various combinations of auto parts characterized
as a complete vehicle in accordance with this 60 pe r cent value threshold as set out in Article 21(3)
would not be necessarily the same types of auto parts combinations falling within the scope of
Article 21(2) of Decree 125, which China has argued constitute the types of auto parts combinations
that are recognizable as a complete motor vehicle. Therefore, given that China has defined the scope
of auto parts that are "recognizable" as a complete vehicle by setting out the specific physical
combinations of auto parts, it logically follows that any other combination of auto parts that does not
reach the level of auto parts combination as set out in Article 21(2) are not recognizable as a complete
vehicle under the measures. To the extent certain sets of auto parts satisfying the 60 per cent value
test under Article 21(3) of Decree 125 will not fall w ithin the scope of the auto parts combinations
specified in Article 21(2) of Decree 125, we do not consider that the 60 per cent value test under
China's measures provides a valid criterion for the essen tial character determination in respect of auto
parts.
7.607 Therefore, we find that the value test contained in Article 21(3) of Decree 125, when
considered, inter alia , in relation to the criterion employed under the measures based on specific
combinations of auto parts (i.e. Article 21(2) of Decree 125), illustrates the lack of coherency and
objectivity between different criteria contained in the same measures. In reaching this conclusion, we
are not suggesting that a Member cannot have more than one criterion for the essential character test.
Our view is that if a Member provides for more th an one criterion for the purpose of determining the
essential character of a complete good, it must ensu re that such criteria are logical, coherent and
objective.
955

953 For example, in a classification decision concer ning knocked-down backhoe excavators, the US
Customs reasoned: "In this instance, an incomplete or unfinished backhoe excavator would be classified as an
excavator, if it has the essential charact er of an excavator. The incomplete or unfinished excavator must be
easily recognizable as an excavator. ..." (emphasis added) (US Customs, Tariff Classification of Knocked-Down
Backhoe Excavators, HQ086555, 16 April 1990) (Exhibit CHI-42). Also, in another classification decision, the
US Customs found by referring to its previous classification ruling, "'For machinery, the nature of the item is
generally determinative. For an item to have th e essential character of a machine, it must be recognizable as
such a machine .' ... Even without the equipment added in the U.S., it [a centrifuge assembly from Italy] is
recognizable as a centrifuge hence GIR 2(a) is applicable" (emphasis added) (US Customs, Tariff Classification
of Centrifuge Assembly from Italy, NY H80093, 4 May 2001) (Exhibit CHI-44).
954 The Panel also observes that the notion "recognizable" as such is not mentioned in the HS, nor in its
interpretive notes. Although we are not ruling on whether "recognizable" as such is a valid criterion for the
essential character determination, we note Members could define the scope of the notion "recognizable" in the
manner that does not correspond to the essential character of a complete good. In such a case, the application of
the notion "recognizable" as a criterion could result in an arbitrary and artif icial determination on the essential
character of a complete good.
955 The Panel considers that by ensuring that such criteria are logical, coherent and objective, Members
would contribute to promoting the main objective and purpose of the WTO Agreement, namely "security and
predictability of the reciprocal and mutually advantageous arrangements directed to the substantially reduction
of tariffs and other barriers of trade".

(iv) Criteria for Deemed Imported Assemblies under Article 22 of Decree 125
7.608 Article 22 of Decree 125 provides:
"Article 22 Imported automobile parts shall be characterized as an assembly
(system) if one of the following applies:
(1) imports of a complete set of parts for the purpose of assembling assemblies
(systems);
(2) imports of key parts or sub-assemblies for the purpose of assembling
assemblies (systems), if the quantity of the imported key parts or sub-assemblies
reaches or exceeds the specified level as set forth in Annexes 1 and 2
956; or
(3) the total price of imported parts account s for at least 60% of the total price of
that assembly (system)."
7.609 The Panel understands that the criteria set out in Article 22 of Decree 125 are applied to
determine whether the eight assemblies as defined under the measures should be considered as
"Deemed Imported Assemblies", which in turn w ill be counted toward the thresholds for the
determination on the essential character of "mot or vehicles" under Article 21(2) and (3) of
Decree 125. To that extent, the application of Article 21 of Decree 125 is dependent on the
application of Article 22 of Decree 125, in that the criteria under Article 22, which are applied to
assemblies to determine whether they are "Deemed Imported Assemblies", will eventually affect the
final determination under Article 21 of Decree 125 of whether imported auto parts in a given vehicle
model are "characterized as motor vehicles".

956 As of 1 July 2008, lower quantity thresholds will apply to those key parts identified as class A in
Annex 1 to Decree 125. If those thresholds are met, the assembly will be characterized as an "imported
assembly" (Note 5 of Annex I to Decree 125 and Article 19 of Announcement 4). The entry into force of this
class A/B distinction was initially foreseen on 1 July 2006, but was postponed until 1 July 2008 (CGA Joint
Bulletin No. 38 of 5 July 2005) (Exhibit JE-29).
Further, Article 20 of Announcement 4 provides:

"If the imported parts accounts for more than 60% of the price of the key
parts or sub-assemblies, such key parts or sub-assemblies shall be deemed as
imported key parts or sub-assemblies. Manufacturers shall provide a list of
price ratios of parts needed.

Key parts or sub-assemblies, in princi ple, shall only be traced back to the
secondary suppliers of the manufacturers of complete vehicles.

Imported parts purchased by domestic suppliers or trading companies shall
be counted as imported parts."

With respect to the class A/B distinction, which has not yet entered into force, China submits that 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 e ssential character of the part icular assembly at issue.
The parts designated under Class B reflect China's consideration of the other parts of that assembly which, in the
aggregate, also impart the essential character of the as sembly at issue. Until the 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 the class A/B distinction, China considers th at the designated parts at the designated thresholds
impart the essential character of that assembly (China's response to Panel question No. 26).

7.610 Therefore, under the measures, the characteriza tion of auto parts as motor vehicles can be
attributed to the application of two consecutive essential character determinations: first,
characterization as an imported "assembly" pursuant to the criteria under Article 22 of Decree 125,
which is based on the quantity of imported key parts or sub-assemb lies (Article 22(2)) or on the value
of imported auto parts in relation to the valu e of an assembly (Article 22(3)); and second,
subsequently, characterization as an imported "motor vehicle" pursuant to the criteria under 21 of
Decree 125, which is based on the quantity of imported "assemblies" (Article 21(2)) or on the value of
auto parts in relation to the value of a motor vehicl e (Article 21(3)). In our view, the criteria for the
determination of the essential character of "assemblies" under Article 22, which must be applied
under the measures to reach a final conclusion on whether imported auto parts have the essential
character of "motor vehicles", hampers the appropria te determination of whether certain auto parts
have the essential character of a "motor vehicle" in accordance with the principle of GIR 2(a). This is
because the application of Article 22 of Decree 125 ma kes it more likely for imported auto parts to be
characterized as motor vehicles under Article 21 of Decree 125.
7.611 Furthermore, as we have already found above, th e application of certain aspects of Article 21
of Decree 125 will necessarily lead to the result that China violates its concessions contained in the
tariff headings for auto parts. Consequently, if Article 21 of Decree 125 is proven inconsistent with
the principle of GIR 2(a), this would also a fortiori be the case for Article 22 because it applies the
criteria with the same flaw s that were found in respect of Article 21. Thus, to the extent the criteria
under Article 22 of Decree 125 are necessarily connect ed to the same aspects of the criteria under
Article 21 of Decree 125, we also find that Article 22, in combination with Article 21, is inconsistent
with China's obligations under its Schedule.
(c) Conclusion
7.612 The Panel finds that the criteria for the essential ch aracter determination under Article 21(2)
and (3) and Article 22 of Decree 125, to the extent cer tain aspects of the criteria necessarily lead to a
violation of relevant rules, are in consistent with China's concessions contained in the tariff headings
for auto parts of China's Schedule and consequently with China's obligations under Article II:1(a) and
(b) of the GATT 1994.
4. China's justification of the measures under Article XX(d)
7.613 As noted in paragraphs 7.283-7.287 above, Chin a initially did not distinguish its justification
of the measures under Article XX(d) in respect of the Panel's possible finding against the measures
under Article III of the GATT 1994 from that under Article II.
7.614 In response to a question from the Panel, Ch ina explained how its justification of the
measures under Article XX(d) would be different de pending on the specific provision under which a
violation was found. In relevant part, China has responded as follows:
"In respect of Article II, the Panel could fi nd, for example, that there is uncertainty
within the Harmonized System concerni ng the circumstances under which customs
authorities are allowed to cl assify multiple shipments of parts and components as
having the essential character of the complete article. Based on such a finding, the
Panel might conclude that the challenged measures are not in accord with China's
rights and obligations under Article II, as they do not have a clear affirmative
basis
within the rules of the Harmonized System.

However, another way of viewing the presence of a known and identifiable ambiguity
within the rules of the Harmonized System, and within international customs practice
generally, is that China is entitled to rely upon the general exception in Article XX(d)
to adopt measures that are necessary to secure compliance with its tariff provisions
for motor vehicle, and to ensure that those provisions have meaningful effect. China's
tariff provisions for motor vehicles reflect th e tariff bindings set forth in its Schedule
of Concessions, and they are therefore not inconsistent with the GATT 1994. To the
extent that the rules of the Harmonized System do not provide an unambiguous legal
basis for China to give effect to those provisions, this authority could be found in
Article XX(d). The rules of the Harmonized System may not clearly provide for
every circumstance in which customs author ities need to interpret and enforce their
tariff schedules to ensure that they ar e undermined through the manner in which
importers structure and document their imports. In these circumstances, it is
consistent with the purpose of Article XX(d ) to ensure that Members are nonetheless
able to adopt measures that are necessary to secure compliance with their tariff
provisions. ...
957"
7.615 China's response above does not provide any explanation how the measures are justified
under Article XX(d) if the measures were found to be inconsistent with Artic le II:1(b) of the GATT
1994. China makes an assertion without any supporti ng arguments or evidence that it is consistent
with the purpose of Article XX(d) to ensure that Members are able to adopt measures that are
necessary to secure compliance with their tariff provisions.
7.616 Therefore, the Panel finds that China has faile d to prove that the measures are justified under
Article XX(d). Even if China's justification of th e measures under Article XX(d) in respect of their
Article III violation was given consideration in respect of the measures' violation of Article II, China
still has not proved that the measures are justified under Article XX(d) for the same reasons identified
above under Section VII.B.5.
E. SUBSIDIES AGREEMENT
1. Arguments of the parties
7.617 The United States argues that China's measures exempt manufacturers from additional duties
imposed on imported auto parts if they use domestic au to parts rather than imported auto parts. The
United States argues that the measures therefore c onstitute an import substitution subsidy in breach of
Articles 3.1(b) and 3.2 of the SCM Agreement.958
7.618 The United States argues that the reduction available for using domestic auto parts is a
subsidy pursuant to Article 1.1 of the SCM Agreem ent. Specifically, according to the United States,
China provides a financial contribution within th e meaning of Article 1.1(a)(1)(ii) of the SCM
Agreement by foregoing revenue otherwise due. The United States asserts that under China's
measures, on domestic parts the government forego es the difference between the across-the-board
25 per cent charge on auto parts and the customs duty (10 per cent or less) applied to imported parts.
Likewise, on certain imported parts, the government foregoes the difference between the across-the-

957 China's response to Panel question No. 282 (emphasis original).
958 United States' first written submission, para. 123.

board 25 per cent charge and the customs duty (10 per cent or less) when the thresholds for using
domestic parts in a finished vehicle are satisfied.
959
7.619 The United States maintains that the "normative benchmark" that should be compared to the
Chinese measure to determine whether revenue othe rwise due has been foregone is the "revenue
collected when the 25 per cent charge is applied, and it is the differential between the revenue
collected when the 25 per cent charge is applied and the revenue collected when the 10 per cent
charge is applied that, as a legal matter, re presents the revenue foregone by the Chinese
government."960 Specifically, the United States argues th at automobile manufacturers that use
imported parts in quantities that exceed certain thre sholds when assembling complete vehicles pay 25
per cent on all imported auto parts used in the asse mbly of a complete vehicle, while the Chinese
government foregoes revenue by only requiring paymen t of 10 per cent on all imported parts used in
the assembly of a complete vehicle in the case of automobile manufacturers that use sufficient
quantities of domestic parts when assembling complete vehicles. 961 The United States contends that
the appropriate normative benchmark is 25 per cent regardless of whether the application of the
measure is found to be a violation of Article II a nd/or Article III of the GATT 1994 because "it is the
rate that applies in China, i.e., under Chinese law (a s determined by the Panel as a factual matter), and
it is Chinese law that determines the benchmark."962
7.620 The United States also contends that this "financial contribution" confers a benefit pursuant to
Article 1.1(b) of the SCM Agreement, because the au to manufacturer is able to retain the amount of
money equivalent to the amount of revenue foregone by the government.963
7.621 The United States further argues that the Chin ese measures are "prohibited" within the
meaning of Article 3.1(b) of the SCM Agreement b ecause they are contingent, whether solely or as
one of several other conditions, upon the use of domestic over imported goods. As such, the measures
are deemed to be "specific" within the meaning of Article 2.3 of the SCM Agreement. The United
States argues that because China's measures constitute a subsidy within the meaning of Article 1.1,
are specific within the meaning of Article 2.3, an d are "prohibited" within the meaning of Article
3.1(b) they violate Articles 3.1(b) and 3.2 of the SCM Agreement.964
7.622 The European Communities asserts its claim under Article 3 of the SCM Agreement as a
claim in the alternative, only in the event that the Panel finds that the measures are border charges
and, secondly, that China is entitled to accord to the imports of auto parts the treatment it provides for
vehicles in its schedule, quod non. In the case that these two conditions were satisfied, the European
Communities argues that the Measures would, in any case, be a prohibited subsidy pursuant to
Articles 3.1(b) and 3.2 of the SCM Agreement.965
7.623 The European Communities argues that the me asures constitute a financial contribution
within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement. Under the measures, imported
auto parts that satisfy the local content requirement s of Article 21 of Decree 125 are charged at a rate
of generally 10 per cent if they "have been verified as not being Deemed Whole Vehicles" (see Article
28 of Decree 125). The revenue "otherwise due" follows from the normative benchmark provided by

959 United States' first written submission, para. 124.
960 United States' response to Panel question No. 268.
961 United States' response to Panel question No. 157(a).
962 United States' response to Panel question No. 267(a).
963 United States' first written submission, para. 124.
964 United States' first written submission, paras. 125-126.

the Chinese treatment of imported auto parts that do not satisfy the local content requirements of
Article 21 of Decree 125. These parts "verified by the Center as Deemed Whole Vehicles" are
charged "according to the duty rate for whole vehi cles" (see Article 28 of Decree) which is typically
25 per cent. As this 25 per cent rate is explicitl y foreseen for certain imported auto parts in the
Chinese Measures, it is, in the words of the Appellate Body in 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 per cent rate, China has, in the words of United States –
FSC, "given up an entitlement to raise revenue that it could 'otherwise' have raised".
966.
7.624 The European Communities disagre es with China that the 25 per cent rate for parts Deemed
Whole Vehicles is not an appropriate "normative be nchmark" and that this rate should rather be
considered as the "revenues due under the cont ested measure". According to the European
Communities, China does not provide any reasons for this position and simply maintains that the 25
per cent and the 10 per cent duty treatment "are not th e same 'fiscal situations' for purposes of making
a proper comparison". 967 As indicated above, the European Communities considers that the 10 per
cent duty treatment for parts not Deemed Whole Vehicles and the 25 per cent duty treatment for parts
Deemed Whole Vehicles are in fact comparable fo r the purposes of Article 1.1(a)(1)(ii) of the SCM
Agreement.
968
7.625 The European Communities further argues that the measures confer a benefit within the
meaning of Article 1.1(b) of the SCM Agreement. Vehicle manufacturers using imported parts that
are not Deemed Whole Vehicles are financially "bette r off" than those using imported parts that are
Deemed Whole Vehicles.969
7.626 Finally, the European Communities argues that the subsidies which the measures provide are
contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the
SCM Agreement. In particular, the benefit of th e lower 10 per cent duty rate is only conferred if
vehicle manufacturers satisfy the local content requ irements of Article 21 of Decree 125 by using
sufficient domestic parts instead of imported parts in order to stay below the relevant local content
thresholds.970
7.627 China argues that the basic flaw in the reasoni ng of the United States and the European
Communities is that it does not acknowledge the inde pendent scope and effect of China's separate
tariff provisions for auto parts and components. China has adopted measures to prevent the
importation and assembly of multiple shipments of auto parts as a means of circumventing its tariff
provisions for motor vehicles. The fact that China has adopted these measures, however, does not
mean that it must impose the tariff rates for motor vehicles on all imported auto parts. On the
contrary, China must continue to give effect to its separate tariff provisions for auto parts, and assess
imported auto parts at those rates when they are not used to circumvent the duties that apply to
complete vehicles.
971 For this reason, China does not forego revenue when it applies its tariff rates for
auto parts to non-circumventing imports. China ar gues that it is not entitled under its Schedule of

966 Appellate Body Report on United States – FSC , para. 90. European Communities' second written
submission, para. 150; European Communities' first written submission, paras. 285 to 288. See also European
Communities' response to Panel question No. 157(a).
967 China's response to Panel question No. 159.
968 European Communities' second written submission, para. 151.
969 European Communities' second written submission, para. 152; first written submission, paras. 289-
292.
970 European Communities' second written submission, para. 153; first written submission, paras. 293-
298.
971 China's first written submission, para. 177.

Concessions to collect the 25 per cent tariff rates on non-circumventing imports, and it does not do
so.
972
7.628 China recalls the Appellate Body's statement that "the term 'otherwise due' implies some kind
of comparison between the revenues due under the c ontested measure and revenues that would be due
in some other situation."973 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."
974 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 other rules of taxation of the Member in
question."975 In making these comparisons, "panels must obviously ensure that they identify and
examine fiscal situations which it is legitimate to compare."976 According to China, the basic problem
with the arguments of the United States and the Eu ropean Communities is that they have failed to
"identify and examine fiscal situations which it is legitimate to compare."977
7.629 China argues that Decree 125 concerns the obligation of auto manufacturers to pay the
applicable duty rates for motor ve hicles when they import parts and components of motor vehicles
that, in their entirety, have the essential character of a motor vehi cle under GIR 2(a). These are the
"revenues due under the contested measure." Wh en 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 Harmonized 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 shipments of
parts) leads to a different classification depending on whether the parts have the essential character of
the complete article.978
7.630 China asserts that it is therefore not the case, as the United States and European Communities'
arguments necessarily presume, that the benchmark rate of taxation is the duty rate that applies to
complete 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 "f orego 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."
979
7.631 China argues that the proper classification of imports, and the collection of the ordinary
customs duties that arise under a Member's Schedule of Concessions, cannot result in revenue
foregone within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.
980
7.632 China concludes that the complainants have failed to demonstrate a violation of the SCM
Agreement and that the Panel should reject the United States and European Communities' claims
under Article 3 of the SCM Agreement.981

972 China's first written submission, para. 178.
973 Appellate Body Report on US – FSC, para. 90.
974 Appellate Body Report on US – FSC, para. 90.
975 Appellate Body Report on US – FSC (Article 21.5 – EC), para. 89.
976 Appellate Body Report on US – FSC (Article 21.5 – EC), para. 90.
977 China's response to Panel question No. 159.
978 China's response to Panel question No. 159.
979 China's response to Panel question No. 159 citing China's first written submission, para. 177.
980 China's second written submission, paras. 156-160; response to Panel question No. 234(b).

2. Consideration by the Panel
7.633 The United States and the European Communitie s each presented claims that China has
violated Articles 3.1(b) and 3.2 of the SCM Agreem ent by providing prohibited subsidies. However,
the European Communities specified that it was only claiming violations of Articles 3.1(b) and 3.2 of
the SCM Agreement in the event the Panel found both that the measures impose border charges and
that China is entitled to accord to the imports of auto parts the treatment it provides for vehicles in its
schedule, quod non.
982 As noted above, the Panel has not made those two findings. Therefore, we
find that the European Communities claim with resp ect to a violation of the SCM Agreement is not
before us.
7.634 Concerning the status of the claims of the United States under the same provisions of the
SCM Agreement, in an answer to a question fro m the Panel the United States indicated that its
"claims under the SCM Agreement are not stated in the alternative – that is, they do not depend on
whether or not China's charges are intern al taxes or 'ordin ary customs duties.'" 983 The United States
also indicated in the same response, however, that insofar as the findings of the Panel are sufficient to
resolve the dispute, it viewed the exercise of judi cial economy in respect of its SCM claims as a
matter to be left to the discretion of the Panel. 984 The United States made a similar statement in
response to another question from the Panel, stating that it considers:
"the most essential claims in this disput e as the breach of Article III:4 and/or the
TRIMs Agreement, because 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 Article 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 [sic] findings are made that are necessary for
the resolution of the dispute."
985
7.635 In view of these statements by the complaining party, and in vi ew of our findings above that
China has acted inconsistently with Articles III:2 an d III:4 of GATT 1994, we consider that we have
made the findings that are necessary for the resoluti on of the dispute raised by the United States. In
particular, bringing the measures into conformity with China's obligations pursuant to our findings
under Articles III:2 and III:4 of GATT 1994 also would remove any inconsistency of those measures
with Articles 3.1(b) and 3.2 of the SCM Agreemen t. We therefore exercise judicial economy in
respect of the United States' claims under the SCM Agreement.
F. CKD AND SKD KITS
1. Complaining parties' claims
7.636 All the complainants agree that to the extent the importation of CKD and SKD kits is
exempted by Article 2(2) of Decree 125 from th e administrative procedures under the measures and
subject to China's regular customs procedures, incl uding automatic issuance of an import licence, the

983 United States' response to Panel question No. 156.
984 United States' response to Panel question No. 156.
985 United States' response to Panel question No. 151.

imposition of the charge on CKD and SKD kits can be considered as an ordinary "customs duty" and
thus should be addressed under Article II:1(b), first sentence of the GATT 1994.
986 The complainants
claim that China's tariff treatment of CKD and S KD kits under the measures is inconsistent with
China's obligation under Article II:1(a) and (b) of the GATT 1994.
7.637 In addition to their claim under Article II of the GATT 1994, the United States and Canada
submit that China's imposition of the charge on CKD and SKD kits is also inconsistent with China's
commitment under paragraph 93 of its Working Party Report.
7.638 The Panel will thus examine first the compla inants' claim under Article II of the GATT 1994
and then the claim of the United States and Ca nada concerning China's commitment under
paragraph 93 of the Working Party Report.987
2. Scope of CKD and SKD kits
7.639 The Panel recalls its observation above that there exists no standard definition of what
constitutes a CKD and an SKD kit.988 The measures at issue in this case, in particular Article 21(1) of
Decree 125989, do not define these product terms either. 990 The parties, however, generally agree on
what should constitute a CKD or SKD kit based on the way these terms are understood in the
automobile industry.
7.640 The complainants submit that at the time of China's accession to the WTO, China did not
have a separate tariff line for auto parts that were either fully or partly unassembled and that were
shipped together for assembly and further pr ocessed into a whole ve hicle within China. 991 M o r e
specifically, according to the complainants, CKD kits ("completely knocked-down kits") are auto
parts imported together in unassembled condition that provide the necessary parts in order to
manufacture a whole vehicle. 992 CKD kits may include not only parts, but also sub-assemblies and
assemblies such as engine, transmission, axle assemb lies, chassis and body assemblies. China in turn
submits that a CKD kit consists of all, or n early all, of the parts and components necessary to
assemble a complete vehicle.993

986 Complainants' responses to Panel question Nos. 80, 105, 192; United States' responses to Panel
question Nos. 184, 192; China's response to Panel question No. 88; China's first written submission, paras. 7 and
44; China's second written submission, para. 107. Also see footnote 1102.
987 The European Communities mentions paragraph 93 of China's Working Party Report in para. 274 of
its first submission. However, the European Commun ities has neither included a specific claim relating to
paragraph 93 of China's Working Party Report in its re quest for the establishment of a panel nor developed any
legal and factual arguments in this relation.
988 See paragraph 7.91.
989 See paragraphs 7.32 for the description of Article 21 of Decree 125. Under Article 21(1) of
Decree 125, auto parts or a set of auto parts that are considered as constituting a CKD or SKD kit will be
characterized as complete motor vehicles. Also see paragraph 7.78 above.
990 Noting that the HS does not use the terms CKD or SKD kits, nor are the terms in common use in
customs practice, Canada submits that the terms CKD or SKD kits become relevant in this dispute only because
they are used both in the Working Party Report and in the measures (Canada's response to Panel question
No. 33).
991 See Part C of the factual background section submitted jointly by the complainants.
992 See Part C of the factual background section submitted jointly by the complainants; the
complainants' responses to Panel question No. 69; Canada's response to Panel question No. 33.
993 China's first written submission, paras. 35-36; China's response to Panel question No. 69.

7.641 The complainants consider that S KD kits ("semi knocked-down kits")
 refer to partially
assembled combinations of parts that can be used to manufacture a whole vehicle. 994 China also
considers that an SKD kit differs from a CKD kit in the extent of its prior assembly, in that unlike a
CKD kit, an SKD kit includes significant part s and components that have already been assembled.995
In other words, the difference between CKD and SKD kits lies in the degree of assembly as CKD kits
are parts imported together in unassembled condition, whereas SKD kits contain partially assembled
combinations of parts.
7.642 In respect of a kit , China submits that it refers to "a set of parts or constituents from which a
thing may be assembled or made," which is a dictionary definition of the term "kit". 996 The European
Communities considers that "[CKD and SKD] kits consist of all the necessary parts of a whole
product packaged and imported together." 997 The United States also poi nts out that in commercial
realities, a kit is totally different from the streams of parts used in manufacturing operations.998
7.643 Based on the parties' understanding of the terms – CKDs, SKDs and kits – as noted above, the
scope of "CKD and SKD kits" can be defined in terms of the following three elements:
(1) extent of auto parts included in a kit;
(2) package and shipment as a kit; and
(3) assembly operations in the importing country.
7.644 First, with respect to the extent of auto parts and components that need to be contained in a kit
so as to constitute a CKD or SKD k it, the parties generally agree that in the automobile industry, the
term is understood as referring to "all, or nearly a ll, of the auto parts and components necessary to
assemble a complete vehicle". While sharing a similar view with the other parties that in the language
of the industry, CKD or SKD kits may denote, inter alia , a combination of parts that make up a
complete vehicle and the concepts are used in a variety of ways, the European Communities submits
that in its understanding, CKD and SKD kits under the measures comprise all the parts necessary to
make a complete vehicle. 999 However, the European Communities does not elaborate on why CKD
and SKD kits under the measures consist of "all" the parts, rather than "all or nearly all the parts",
necessary to assemble a complete vehicle. In the absence of an explanation from the European
Communities in this relation and in light of the understanding of the term generally shared by the
automobile industry as submitted by the parties, we consider that a CKD or SKD kit under the
measures may be understood as consisti ng of "all or nearly all" the au to parts necessary to assemble a
complete vehicle.1000

994 Part C of the factual background section submitted jointly by the complainants.
995 China's first written submission, paras. 35-36; Shorter Oxford English Dictionary, 2002 (5th edition),
Volume 1, page 1502.
996 China's first written submission, para. 192.
997 European Communities' first written submission, para. 267.
998 United States' second written submission, para. 9.
999 European Communities' first written submission, para. 267; response to Panel question No. 69. The
European Communities states that "[a]lthough the measures do not provide for an exhaustive definition of what
a CKD or an SKD kits consists of, it is assumed that such kits consist of all the parts necessary to manufacture a
vehicle or an 'assembly'. In other words, such kits consist of all the necessary parts of a whole product packaged
and imported together" (European Communities' first written submission, para. 267).
1000 China, in particular, in arguing that it does not consider that a CKD or SKD kit must include "all"
of the parts necessary to assemble a motor vehicle and that there is some ambiguity in how the automobile

7.645 Second, all, or nearly all, of the auto parts necessary to assemble a complete vehicle must be
packaged and shipped altogether in a single shipment to constitute a CKD or SKD kit. Given that a
"kit" is by definition "a set of parts or constituen ts from which a thing may be assembled or made", it
is reasonable to understand that a CKD or SKD kit is a set of auto parts and components, either
entirely unassembled or partially assembled, from which a motor vehicle may be assembled or
made.
1001
7.646 Finally, CKD and SKD kits must go through th e assembly process to become a complete
vehicle since auto parts constituting a CKD or SKD kit are "entirely unassemble d" or "only partially
assembled". As the parties submit, the nature a nd degree of the assembly process required for CKD
and SKD kits to become a complete vehicle will vary depending on the extent to which the parts and
components in a CKD or SKD kit would have been already assembled prior to their shipment to the
importing country.1002 Regardless, the parties agree that the assembly operations for CKD and SKD
kits may be less complicated than the full manufacturing of vehicles from individual auto parts.1003 At
the same time, we consider that CKD or SKD kits, in particular SKD kits, are distinguished from
complete motor vehicles because of the degree of assembly operations required once they are
imported into the importing country. For example, if a certain SKD kit containing all or nearly all the
parts necessary to assemble a motor vehicle is impor ted in a substantially assembled state so as not to
require any further assembly operations in the importing country (for examples, motor vehicles
missing only the tyres or the wiper blades) 1004, that kit might not fall within the scope of "CKD or
SKD kits" as such.1005
7.647 In conclusion, although there is no fixed defi nition for CKD and SKD kits, we will consider
for the purpose of this dispute that CKD and SKD kits under the measures refer to those that fall
within the descriptions above.

industry uses these terms (China's response to Panel question No. 70), refers to the following statements in
Indonesia – Autos: the European Communities stated that CKD kits for export to Indonesia included "almost all
the parts and components necessary for assembling the cars"; and the United States stated that the CKD kits for
the Ford Escort would have contained all of the individual parts necessary to build a complete Escort, except for
locally procured parts and components, such as oil a nd gasoline (China's response to Panel question No. 69,
referring to the Panel Report on Indonesia – Autos, paras. 8.239 and 8.242 respectively). China also points to a
BMW website where it states 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 respec tive countries. These kits are then
supplemented with locally manufactured parts in the partner countries" (China's response to Panel question
No. 69).
1001 As described in Section VII.A.1(b), the measures at issue also cover auto parts imported in multiple
shipments for the domestic assembly of motor vehicles. This aspect of the measures is addressed in Section
VII.D of these reports.
1002 Parties' responses to Panel question No. 71.
1003 Parties' responses to Panel question No. 71; European Communities' second written submission,
paras. 130-132; United States' second wr itten submission, paras. 9-10. For example, the United States submits
that "[a]n operation that assembles kits is different than a full-fledged, automobile manufacturing plant with full
logistical capabilities to handle bulk shipments of parts (footnote original omitted). And most auto
manufacturing plants are not in the business of assembli ng discrete kits" and that "[a]s a practical commercial
matter, CKD and SKD kits are an inefficient production method that is limited in use by manufacturers to
circumstances (1) when they are starting up a new assembly operation in a distant location with no developed
supplier base; or (2) when the number of vehicles produced in a distant location is limited to only several
thousand vehicles annually."
1004 China refers to these examples in paragraph 23 of its second written submission.
1005 They may still be classified as complete moto r vehicles in accordance with general classification
rules relied upon by customs authorities, such as GIR 2(a).

3. Is China's treatment of CKD and SKD kit imports under the measures consistent with
Article II:1(b) of the GATT 1994?
(a) Treatment of CKD and SKD kits under China's measures
7.648 There is no separate tariff line for CKD and SKD kits in China's Schedule of Concessions.
1006
Under Articles 2 and 21(1) of Decree 125 and Ar ticle 13 of Announcement 4, China imposes an
ordinary customs duty at the tariff rate applicable to complete vehicles (i.e. 25 per cent on average) on
imports of CKD and SKD kits.1007
7.649 The complainants submit that China's treatment of CKD and SKD kits under the measures is
inconsistent with China's tariff commitment under its Schedule and consequently with Article II:1(b)
of the GATT 1994.1008
7.650 China argues that it is consistent with China's obligation under its Schedule and
Article II:1(b) of the GATT 1994 to treat CKD and S KD kit imports as complete vehicles in light of
the principle of GIR 2(a), which provides that a complete set of parts "presented unassembled or
disassembled" (e.g., in a kit) is classified as the complete article, not as parts of that article.1009
7.651 The issue before the Panel is therefore whether imposing the tariff rates applicable to
complete vehicles on CKD and SKD kits imports is consistent with China's commitment under its
Schedule.
(b) Interpretation of China's Schedule of Concessions
7.652 Article II:7 of the GATT 1994 provides that the schedules annexed to the GATT 1994 are
made an integral part of the GATT 1994. As observed by the Panel in EC – Chicken Cuts , the
Appellate Body in EC – Computer Equipment clarified that Article II:7 means that the concessions
provided in such schedules are part of the terms of the treaty, namely the GATT 1994. 1010 Paragraph
1 of Part II of China's Accession Protocol stat es that China's Schedule CLII annexed to China's
Accession Protocol shall become the Schedule of Concessions and Commitments annexed to the
GATT 1994. Thus, the content of a Member's Schedule of Concessions (i.e. China's Schedule of the
Concessions in this case) is considered treaty language , which must be interpreted in accordance with
customary rules of interpretation of public inte rnational law, namely the provisions of the Vienna
Convention1011 in accordance with Article 3.2 of the DSU.

1006 "China's Schedule of Concessions" means Chin a's Schedule CLII to China's Accession Protocol
(Exhibit JE-2).
1007 See paragraphs 7.71-7.77, 7.78.
1008 European Communities' second written submission, para. 132; the United States' first written
submission, paras. 118-119; Canada's first written subm ission, paras. 141 and 149-150. The United States and
Canada refer to the arguments provided by the European Communities in Section III.D of the European
Communities' first submission (United States' first written submission, footnote 145 to para. 118).
1009 China's first written submission, para. 90.
1010 Appellate Body Report on EC – Computer Equipment, para. 84; Panel Report on EC – Chicken
Cuts, para. 7.6.
1011 Article 31 of the Vienna Convention provides:

"General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to
be given to the terms of the treaty in their context and in the light of its object and purpose.

(i) Tariff term to be interpreted
7.653 The European Communities starts its analysis of the interpretation of the Chinese tariff
schedule with a reference to the term "whole vehicles" in Article 2 of Decree 125.
1012 Article 2 states
that the measures apply to the supervision and admi nistration of imported automotive "parts" that are
deemed "whole vehicles" falling within the sc ope of tariff headings 87.02, 87.03 and 87.04. 1013
According to the European Communities, "motor vehi cles" referred to in these tariff headings can be
defined as "a road vehicle powered by an intern al-combustion engine" and denotes complete or whole
vehicles. Thus, the terms to be interpreted pursuant to the Vienna Convention are " whole (motor)
vehicle" and "parts of a whole vehicle (as defined in Article 21 of Decree 125)" and a proper analysis
of China's tariff Schedule requires an examination of the relevant words in all relevant tariff headings
starting with "parts and accessories" of motor vehicles, "chassis fitted with engines", and so forth.1014
7.654 The United States and Canada have not provided any specific view on the tariff term to be
interpreted in the context of CKD and SKD kits.
7.655 China submits that the measures concerned impl ement China's Schedule of Concessions by
interpreting and giving effect to its tariff provi sions for "motor cars and other motor vehicles
principally designed for the transport of persons" (i.e. tariff headings 87.02 & 87.03) and "motor
vehicles principally designed for the transport of goods" (i.e. tariff heading 87.04). 1015 The measures
give effect to these tariff provisions by defining the circumstances under which China will classify the
importation and assembly of auto parts as equivalent to the importation of a complete motor vehicle.
Thus, China considers that the interpretative is sue before the Panel is whether the challenged
measures are based on a valid interpretation of the term "motor vehicles".
7.656 The Panel observes that the position of the European Communities is slightly different from
that of China to the extent that the European Communities submits that the terms to be interpreted are
respectively "whole (motor) vehicles" and "auto parts", whereas China submits that the term at issue is
"motor vehicles". We consider that the term to be interpreted is what is contained in the concerned
tariff heading of China's Schedule of Concessions, not the term in China's measures. In our view, the
question of whether the term "motor vehicles" is in terpreted to include in its scope something other

2. The context for the purpose of the interpretation of a treaty shall comprise, in
addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all
the parties in connection with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in
connection with the conclusion of th e treaty and accepted by the other
parties as an instrument related to the treaty.
3. There shall be taken into acco unt, together with the context:
(a) any subsequent agreement be tween the parties regarding the
interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which
establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations
between the parties."

1012 European Communities' first written submission, paras. 240-248.
1013 The European Communities also submits that it is not disputed that the "vehicles" subject to the
measure at issue are those falling under tariff headings 87.02, 87.03 and 87.04 (Article 3 of Decree 125), under
all of which "motor vehicles" is the common denominator.
1014 European Communities' second written submission, footnote 83.
1015 China's first written submission, paras. 77-78.

than whole (or complete) vehicles (i.e. CKD and SKD k its) is the very issue before us. Therefore, we
consider that the tariff term to be interpreted in relation to China's measures concerning CKD and
SKD kits is "motor vehicles"
1016 as indicated in tariff headings 87.02, 87.03 and 87.04.
7.657 Other relevant terms such as "auto parts", however, will also be examined as part of the
context of the term "motor vehicles".
(ii) Ordinary meaning of the term "motor vehicles"
7.658 Based on the dictionary definitions 1017 of the terms "whole" ("complete, total" or "something
not divided into parts; not broken up or cut into pi eces; entire") and "part" ("portion or division of a
whole", which is the opposite of "whole" or "complete", and "any of the manufactured objects that are
assembled together to make a machine or in strument, especially a motor vehicle"), the European
Communities argues that there is no logical or sema ntic basis for considering or deeming an
automotive part as a complete or whole vehicle since a part of a vehicle by definition is a part or a
portion or division of a whole or complete vehicle. Therefore, the classification (or "deeming") of
auto parts as complete vehicles, when there are separate tariff lines for parts and whole vehicles, is not
only a manifest error but a contradiction in terms of the basis of the ordinary meaning of these terms.
7.659 China disagrees with the European Communities on whether "a 'motor vehicle' denotes
complete or whole vehicles". 1018 China does not consider that there is a clear separation between
complete vehicles and the parts and components th ereof. According to China, the European
Communities reaches its "clear separation" principle in this case because it ignores the critical context
provided by GIR 2(a), which establishes that there is never a clear separation between a complete
article and the parts and components of that article. China argues that the ordinary meaning analysis
is limited in this case and dictionary definitions of the term "motor vehicle" do not inform an
understanding of where to draw the line between motor vehicles and parts of motor vehicles.1019
7.660 The tariff headings for motor vehicles under China's Schedule are as follows:
87.02 " Motor vehicles for the transport of ten or more persons, including the driver"
87.03 " Motor cars and other motor vehicles principally designed for the transport of
persons, other than those under heading 87.02, including station and racing
cars"
87.04 " Motor vehicles for the transport of goods"
7.661 All these three tariff headings have the term "motor cars and/or motor vehicles" in their
heading descriptions. "Motor car or motor vehicle"
1020 can in turn be defined as follows:
• Motor Car: a. (usually) four-wheeled road vehicle pow ered by an IC engine and designed for
passengers.1021

1016 References to "motor vehicles" in these reports also include the term "motor cars".
1017 The European Communities relies on the definitions of these terms as provided in the Shorter
Oxford English Dictionary, 2002 (5th edition), Volumes 1 and 2.
1018 China's first written submission, paras. 79-80.
1019 China's first written submission, para. 83.
1020 Motor is defined as "(a) electric motor (b) engine (c) motor car" ( Dictionary of Automobile
Engineering, Peter Collin Publishing, 1997, page 156).
1021 Dictionary of Automobile Engineering, Peter Collin Publishing, 1997, page 156.

• Motor Vehicle: Any automotive vehicle that does not run on rails; usually with rubber tyres;
such as cars, trucks, lorries and motorcycles.
1022

• Vehicle: (5) A means of conveyance, usu. with wh eels, for transporting people, goods, etc; a
car, cart, truck, carriage, sledge, etc. b. Any means of carriage or transport; a receptacle in
which something is placed in order to be moved.
1023

• Car: (6) A. usu. four-wheeled motorized vehicl e for use on roads, able to carry a small
number of people; an automobile.1024

• Motor: (3) a. A machine for producing motive power from some other form of energy, esp.
electrical energy; an engine, esp. that of a vehicle. b. A motor car, a motor vehicle.1025

These definitions show that "motor vehicle (or car)" is a "vehicle (or car)", which is powered by
engine and runs on roads, and not on rails. Although the ordinary meaning of "motor vehicle" seems
to indicate a complete vehicle in that it refers to a means of transporting people or goods, the Panel
considers it necessary to move on to examine the term "motor vehicles" in its context and in the light
of its object and purpose.

(iii) Context for the tariff term "motor vehicles"
What constitutes context for interpreting the tariff term "motor vehicles"?

7.662 The Appellate Body stated that the context of the term concerned in the relevant tariff heading
consists of the immediate, as well as the broader, co ntext of that term: the immediate context is the
other terms of the product description contained in the tariff heading at issue and the broader context
includes the other tariff headings in the relevant chapter of the member's schedule, as well as other
WTO Member Schedules.1026
7.663 The Appellate Body also conf irmed the Panel's finding in EC – Chicken Cuts that the
Harmonized System1027 is "context" under Article 31(2)(a) of the Vienna Convention for the purposes
of interpreting the WTO agreements, of which [a Member 's schedule] is an integral part and thus that
the HS is relevant for interpreting tariff commitments in the WTO Member's Schedules. 1028
Specifically, the Appellate Body states:
"The above circumstances confirm that, prior to, during, as well as after the Uruguay
Round negotiations, there was broad consen sus among the GATT Contracting Parties
to use the Harmonized System as the basis fo r their WTO Schedules, notably with
respect to agricultural products. In our view, this consensus constitutes an 'agreement'

1022 Dictionary of Automobile Engineering, Peter Collin Publishing, 1997, page 156.
1023 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 2, page 3512.
1024 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 1, page 342.
1025 Shorter Oxford English Dictionary, 2002 (5th edition), Volume 1, page 1841. Definitions of "motor
car" and "motor vehicle" are not provided in Shorter Oxford English Dictionary.
1026 Appellate Body Report on EC – Chicken Cuts, para. 193.
1027 Article 1(a) of the HS Convention provides th at the HS is comprised of the headings and
subheadings of the HS and their re lated numerical codes, the Section, Chapter and heading notes and the
General Rules.
1028 Appellate Body Report on EC – Chicken Cuts, para. 199.

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."
1029 (emphasis added)
7.664 In this regard, the United States high lights that what was at issue in EC – Chicken Cuts was
agricultural products and a Schedule of Concessions negotiated during the Uruguay Round. Although
acknowledging the relevance of the HS for the inte rpretation of China's Schedule in this case, the
United States submits that the HS should be examined in this case as part of "supplementary means of
interpretation" under Article 32 of the Vienna Convention rather than as context under Article 31(2)(a)
of the Vienna Convention. This is because, according to the United States, this dispute, unlike EC –
Chicken Cuts, does not concern agricultural products and al so because the dispute does not involve a
schedule negotiated during the Uruguay Round.
7.665 However, we do not consider that the Appellate Body's finding in EC – Chicken Cuts is
necessarily limited to agricultural products or Schedules of Concessions negotiated during the
Uruguay Round. While the United States only highlights two elements in the Appellate Body's
reasoning which refer to agricultural products, the A ppellate Body also noted several other general
elements in support of its conclusion that the HS is relevant "context" within the meaning of
Article 31 of the Vienna Convention .
1030 For example, the Appellate Body noted "the close link"
between the HS and several WTO Agreements 1031, which was "particularly true" for agricultural
products but not necessarily limited thereto. 1032 The Appellate Body also cited its finding in EC –
Computer Equipment, a case not concerning agricultural products , where the HS was used as a basis
for the preparation of the Uruguay Round negotiations.1033
7.666 Further, the Appellate Body noted that not only prior to and during but also "after" the
Uruguay Round negotiations, there was broad consen sus among the GATT Contracting Parties to use
the HS as the basis for their WTO Schedules, although notably with respect to agricultural products.
At the time of China's accession to the WTO in 2001, China was already a contracting party to the

1029 Appellate Body Report on EC – Chicken Cuts , para. 199. (footnote original: "In view of this
conclusion, we do not find it necessary to determine whether the Harmonized System could constitute a
'relevant rule of international law', within the meaning of Article 31(3)(c) of the Vienna Convention.")
1030 The Appellate Body referred to the following elements considered by the Panel in EC – Chicken
Cuts: the membership of the HS is extremely broad; th e HS was used as a basis for the preparation of the
Uruguay Round GATT schedules (e.g. EC – Computer Equipment); Decision by the Contracting Parties setting
out guidelines and "special procedures" to facilitate wide adoption of the HS; Decision by the Contracting
Parties on Procedures to Implemen t Changes in the Harmonized System; the reference in a number of WTO
Agreements that resulted from the Uruguay Round negotiations to the Harmonized System (Appellate Body
Report on EC – Chicken Cuts, paras. 196-197).
1031 In its reasoning, the Appellate Body also referred to other WTO Agreements such as the Agreement
on Rules of Origin (Article 9), the Agreement on Subsidies and Countervailing Duties (Article 27) and the
Agreement on Textiles and Clothing (Article 2 and the Annex thereto). This shows, in the view of the Appellate
Body, that "the close link between th e Harmonized System and the WTO Agreem ents (...) is also clear." The
Appellate Body considered that this close link between the HS and the WTO Agreements was "particularly true
for agricultural products", but in our view, the Appellate Body did not limit its consideration to agricultural
products (Appellate Body Report on EC – Chicken Cuts, paras. 197-198).
1032 Appellate Body Report on EC – Chicken Cuts, para. 198.
1033 Also see footnote 1030 above.

HS.
1034 This fact is indicated in the section on ordinary customs duties of the Working Party Report
on China's accession to the WTO.1035
7.667 The Appellate Body's holding in EC – Chicken Cuts could thus be read to support that the HS
is relevant "context" within the meaning of Article 31(2)(a) of the Vienna Convention to intepret
China's Schedule rather than a supplementary means of interpretation. More over, the United States'
argument that "China had not presented a basis for finding that there was a comparable 'agreement'
(like the one during the Uruguay Round on agri cultural products) among WTO Members concerning
China's tariff negotiations on industrial goods" seems to contradict its own statement that "China's
schedule is plainly based on the Harmonized System nomenclature." 1036 In any event, as the United
States clarifies, deciding where in the Vienna Convention the HS should fall under would have
systemic implications rather than practical implications in this case.
7.668 Therefore, the Panel will proceed to examine the context of the term "motor vehicles" to
determine whether CKD and SKD kits are classified as complete vehicles.
Other terms in the tariff headings for motor vehicles and other tariff headings in Chapter 87
7.669 Other tariff terms in tariff headings 87.02, 87.03 and 87.04 describe the purpose of vehicles
falling under each heading, such as the transport of persons or goods. Although a CKD or SKD kit
would consist of all or nearly all auto parts n ecessary to assemble a motor vehicle, it would not be

1034 China became a contracting party to the HS in 1992.
1035 Paragraph 89 of China's Working Party Report provides:

"B. IMPORT REGULATION
Ordinary Customs Duties
…
89. The representative of China sa id that China had adopted the
Harmonized Commodity Description and Coding System ("HS") as from 1
January 1992 and joined the International Convention on the Harmonized
Commodity Description and Coding System in the same year. There were
21 sections, 97 chapters and 7062 eight-digit tariff headings based on the
six-digit HS '96 version in the Customs Tariff for the year 2000. Tariff rates
were fixed by the State Council. Partial adjustment to the duty rates was
subject to deliberation and final deci sion by the State Council Tariff
Commission. The simple average of China's import duties in 2000 was 16.4
per cent. Among the 7062 tariff headings, tariff rates for 525 headings were
below 5 per cent, 1488 were between 5 per cent (inclusive) and 3027 were
above 15 per cent. Information on tariff rates for specific products and
import statistical data for recent years had been provided to the Working
Party." (Report of the Working Party on the Accession of China
(WT/ACC/CHN/49, 1 October 2001)

Canada also submits that "China is a signatory to the Harmonized System Convention (Exhibit JE-35).
Approximately 200 countries and Customs or Economic Unions, including Canada and China, base their
domestic tariff classification on the Harmonized System nomenclature (World Customs Organization, Fact
Sheet, 'The Harmonized System: The Language of International Trade' (Exhibit JE-36)). The tariff commitments
in China’s Schedule are based on China’s customs tariff, which replicates the Harmonized System up to the six-
digit subheading level (It is common that all domestic tari ff schedules differ after the six-digit level because the
Harmonized System only classifies up to the six-dig it subheading level)" (Canada's first written submission,
para. 139).
1036 United States' second written submission, paras. 30-31.

capable of fulfilling the purposes described in the headings until the auto parts included in the kit were
assembled into a motor vehicle in the importing country.
7.670 The terms in the tariff headings for auto part s (e.g. tariff headings 87.06-87.08, 84.07-84.09
and 85.03)
1037 do not provide guidance either on whether CKD or SKD kits should be classified as
complete motor vehicles. Based on the scope of CKD and SKD kits defined above, however, we note
that a CKD and SKD kit consists of a set of auto parts, which is much more complete and ready for
the assembly of motor vehicles, than individual uni ts of auto parts falling under tariff headings for
auto parts, including tariff headings 87.06 (" chassis fitted with engines") and 87.07 ("bodies
(including cabs)") that cover the so-called 'intermediate products'.
7.671 Therefore, we do not find that other terms in the tariff headings concerned (87.02, 87.03,
87.04) and the terms in the tariff headings for auto parts provide useful information on whether the
term "motor vehicles" is interpreted to include in its scope CKD and SKD kits.
Other Members' Schedules
7.672 Canada has provided examples of other WTO Me mbers' Schedules under which a CKD kit is
classified under the tariff headings for motor vehicles. For example, a CKD kit is classified under the
tariff headings for motor vehicles, such as tariff heading 8703.2110 in Malaysia's Schedule of
Concessions
1038, tariff heading 8703.2110.11 in In donesia's Schedule of Concessions 1039, and tariff
heading 8703.2131 in Vietnam' s Schedule of Concessions. 1040 Also, the Schedule of Concessions of
the East African Community shows that "Unassemb led and Disassembled" auto parts are classified
under, for example, tariff heading 8702.2010, which is a tariff heading for motor vehicles.1041
7.673 Overall, the evidence before us shows that in the Schedules of some WTO Members, CKD
and SKD kits are classified as complete vehicles.
Harmonized System
General Explanatory Notes for Chapter 87 and GIR 2(a)
7.674 The European Communities submits that under Chapter 87 of the HS, "fitting" and
"equipping" are important criteria of tariff classification as illustrated in the General Notes for Chapter
87.1042 Since nothing or very little is fitted or e quipped in a CKD kit, parts composing a CKD kit
remain parts until they are fitted and processed together as a complete vehicle. 1043 Further, as for a
SKD kit, the degree of fitting or equipping is not sufficient to make such SKD kits sufficiently
similar to a complete vehicle in order to have "the essential character" of a finished vehicle.1044

1037 See paragraph 7.660.
1038 Exhibit CDA-23.
1039 Exhibit CDA-24.
1040 Exhibit CDA-26.
1041 Exhibit CDA-27.
1042 The European Communities also argues that "fitting" and "equipping" are also decisive notions for
classification under tariff headings 87.06 and 87.07 of the HS (European Communities' first written submission,
para. 268).
1043 European Communities' first written submission, para. 270.
1044 European Communities' first written submission, paras. 272-273. The European Communities
acknowledges at the same time that the situation may be slightly more complex with regard to SKD kits than
CKD kits. Regardless, the European Communities argues that "even if engines and bodies, which themselves

7.675 We note that the United States and Canada acknowledge that CKD and SKD kits could be
classified as complete vehicles to the extent that a CKD or SKD kit can be considered as having the
essential character of a complete vehicle pursuant to the principle of GIR 2(a).
1045
7.676 China, on the other hand, argues that the European Communities' assertion in respect of CKD
kits that even a complete set of parts remain parts until they are fitted and processed together as a
complete vehicle is wrong under the second sentence of GIR 2(a). 1046 China also adds that it is
surprised by the European Communities' positio n given that the European Communities has
recognized in Indonesia – Autos that CKD kits for automobiles ar e classified as complete vehicles
under GIR 2(a). 1047 China submits that the European Comm unities also errs in arguing based on its
selective quotation of the General Explanatory No tes to Chapter 87 that there are only very
exceptional situations in which an incomplete or unfinished vehicle can be classified as a complete
vehicle. On the contrary, the two motor vehi cle-related examples provided in the General
Explanatory Notes to Chapter 87 are merely exam ples of how GIR 2(a) can be applied to motor
vehicles.1048
7.677 The Panel will begin its analysis by considering the language of the General Explanatory
Notes to Chapter 87 and GIR 2(a). The General Explanatory Notes to Chapter 87 provide:
"An incomplete or unfinished vehicle is classified as the corresponding complete or
finished vehicle provided it has the essential character of the latter (see Interpretative
Rule 2(a)), as for example,
(A) A motor vehicle, not yet fitted with the wheels or tyres and battery.
(B) A motor vehicle not equipped with its engines or with its interior fittings.
This Chapter also covers parts and accessories which are 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)."
1049
7.678 The General Explanatory Notes to Chapter 87 th erefore make a reference to GIR 2(a) and
provide two examples of incomplete or unfinished vehicles that are classified as complete vehicles in
accordance with the principle of GIR 2(a).

consist of parts falling as such under tariff line 87.08, would be packaged together with all the other necessary
parts for manufacturing a complete vehicle, the engines, bodies and other parts would remain subject to their
specific tariff lines and thus not classifiable as complete vehicles" (European Communities' first written
submission, para. 273).
1045 United States and Canada's responses to Panel question No. 205.
1046 China's first written submission, para. 90.
1047 China explains that in Indonesia – Autos, the European Communities invoked GIR 2(a) to explain
why CKD kits for automobiles must be considered "like" assembled complete vehicles for purposes of a like
product analysis under the SCM Agreement (para. 91 of China's first written submission). More specifically, in
that case, the European Communities submitted that "the mere fact that those CKD kits benefit from a lower
import duty rate does not necessarily mean that they are not classified within the same HS six-digit code as CBU
cars. If it was confirmed that the CKD kits exported from the EC are classified by Indonesia as parts and
components, rather than as passenger cars, the necessary implication woul d be that Indonesia does not follow
General Interpretative Rule 2(a)" (Panel Report on Indonesia – Autos, para. 8.236).
1048 China's first written submission, para. 92.
1049 Exhibit JE-37.

7.679 In turn, GIR 2(a) provides:
"Any reference in a heading to an article sha ll be taken to include a reference to that
article incomplete or unfinished, provide d that, as presented, the incomplete or
unfinished article has the essential character of the complete or finished article. It
shall also be taken to include a reference to that article complete or finished (or
falling to be classified as complete or finished by virtue of this rule), presented
unassembled or disassembled."
7.680 We understand that the text of GIR 2(a) sugg ests the following three situations where goods
are classified under the tariff headings for complete goods:
(a) "incomplete or unfinished product" presen ted "assembled", provided that, as
presented, the incomplete or unfinished pr oduct has the essential character of the
complete or finished product;
(b) "complete or finished" product presented "unassembled or disassembled"; and
(c) "incomplete or unfinished product" presented "unassembled or disassembled",
provided that, as presented, the incomplete or unfinished product has the essential
character of the complete or finished product.
7.681 In our view, the two examples provided in the General Explanatory Notes to Chapter 87 could
be considered as falling within the first situa tion foreseen under GIR 2(a) above since "a motor
vehicle not yet fitted with the wheels or tyres and ba ttery" and "a motor vehicle not equipped with its
engines or with its interior fittings", presented a ssembled to the customs authorities, constitute the
category of "incomplete or unfinished vehicles" that have the essential character of a complete
vehicle.
7.682 As we noted in paragraphs 7.639-7.647, CKD or SKD kits refer to a collection of auto parts
that are packaged into a kit and shipped together in a single shipment for the assembly into a motor
vehicle in the importing country. These sets of auto parts are imported completely unassembled in the
case of CKD kits and partially assembled in the case of SKD kits. Given that a CKD and SKD kit by
definition refers to all or nearly all auto pa rts and components necessary to assemble a complete
vehicle, the extent of auto parts comprising such a ki t meets, if not exceeds, th at of the incomplete or
unfinished motor vehicles provided as examples in th e General Explanatory No tes to Chapter 87 (i.e.
a motor vehicle not yet fitted with the wheels or tyres and battery and a motor vehicle not equipped
with its engines or with its interior fittings). Fu rther, as GIR 2(a) provides that an incomplete or
unfinished article presented "unassembled or disassembl ed" is also classified as the complete good
(under the third situation above in paragraph 7.680)
1050, the fact that CKD and SKD kits are presented
unassembled, namely without fixing and equipping as argued by the European Communities, does not

1050 In response to a question from the Panel whether a collection of auto parts in the form of CKD or
SKD kits as provided in Article 21(1) of Decree 125 could be considered as having "the essential character of
the complete or finished vehicle" in terms of GIR 2(a), the WCO Secretariat comments that the HS Committee
agreed that the HS should not impose a requirement that the subsequent assembly of the parts be "simple". For
that reason, the HS does not limit th e scope of GIR 2(a) to sets of parts for which the required assembly
operation falls below a certain level of complexity. The WCO Secretariat further mentions that absent guidance
from the nomenclature (i.e. legal provisions) or the Committee (i.e. interpretation of the nomenclature), it is
within the purview of national customs administrations to interpret these provisions (WCO's letter of 20 June,
page 4).

necessarily make such kits falling outside the scope of GIR 2(a).
1051 As China submits and we noted
above, the two examples provided in the General E xplanatory Notes for Chapter 87 illustrate how the
first sentence of GIR 2(a) operates, namely an "incomplete or unfinished" vehicle presented
"assembled" is classified as th e corresponding complete or finished vehicle provided it has the
essential character of the latter. We do not find in the text of these two examples that "fixing and
equipping" are important criteria of tariff classification as the European Communities submits.
Explanatory Note (VII) to GIR 2(a)
7.683 The European Communities further claims that Articles 2 and 21(1) of Decree 125 and
Article 13(a) of Announcement 4 are as such in violation of Article II of the GATT 1994 because they
require China's customs authorities to "always an d automatically" classify CKD and SKD kits as
complete vehicles and hence subject them to the higher duty. 1052 The European Communities submits
that China's measures are inconsistent with the pr inciple of GIR 2(a) since China classifies CKD and
SKD kits as complete vehicles even when their assembly into complete vehicles includes working
operations such as painting and curing of the body, which are not assembly operations. 1053 On that
basis, the European Communities argues that since the manufacturing processes to make a complete
vehicle using CKD or SKD kits in China usually re quires further working operations in the form of
painting and curing of the body, which exceed th e boundary of assembly operations within the
meaning of Explanatory Note (VII) to GIR 2(a), it is inconsistent to always and automatically classify
such CKD and SKD kits as complete vehicles. Ac cording to the European Communities, different
kits intended to become complete vehicles may n eed different further working operations depending
on the level of high technology electronics in the fi nal vehicle and thus 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 schedule
provides for tariff lines for different kind of kits.
1054
7.684 China, on the other hand, argues that whatever its state of prior assembly, both CKD and
SKD kits are assembled by means of the types of assembly operations specified in Explanatory
Note (VII) to GIR 2(a).1055 According to China, no party has di sputed that CKD and SKD kits can be
assembled into a complete vehicle by means of th e assembly methods detailed in Explanatory Note
VII and this is supported by the fact that nati onal customs authorities routinely classify CKD and
SKD kits for motor vehicles as "motor vehicles" in accordance with GIR 2(a). 1056 China submits that
the word "working" in "working operations" in Explanatory Note VII to GIR 2(a) should be presumed
to mean "making, manufacture, construction; the ma nner or style in which something is made," and
that if the components must be subjected to an additional "working operation" (i.e. a manufacturing

1051 In response to Panel question No. 218, the European Communities submits that "as presented" and
"presented unassembled or disassembled" in the first and second sentences of GIR 2(a) denote the same
meaning in time and that the second sentence of GIR 2(a) addresses the question of assembly. The European
Communities further elaborates that the two sentences of GIR 2(a) have separate Explanatory Notes that guide
their interpretation. According to the European Communities, Chapter 87 contains a lex specialis in the form of
an Explanatory Note under GIR 2(a), and under this lex specialis, the conditions of GIR 2(a) are clearly more
likely fulfilled in an individual case if the goods are presented in an advanced stage of assembly since the notion
of "fitting" is used in the examples. In sum, the European Communities' arguments relating to "fixing and
equipping" appear to be based on the Explanatory Notes to the second sentence of GIR 2(a), which are
addressed in the following section.
1052 European Communities' second written submission, para. 132.
1053 European Communities' second written submission, para. 130, referring to China's response to
Panel question No. 71.
1054 European Communities' response to Panel question No. 47.
1055 China's response to Panel question No. 71.
1056 China's response to Panel question No. 62.

operation) before they can be assembled into the complete article, then the components cannot be
classified as the complete article in accordance with GIR 2(a).
1057
7.685 The Panel notes that the European Communities' claim in this respect concerns two different,
but related, issues. First, the European Comm unities submits that China's measures are as such
inconsistent because they always and automatically classify CKD and SKD kits as complete vehicles
even though there are situations where certain CKD and SKD kits should not be classified as
complete vehicles. Second, most CKD and SKD ki ts imported into China go through the types of
operations that exceed the scope of assembly ope rations because they involve painting and curing of
the body. We will consider these two issues in turn.
7.686 First, regarding whether China's measures are as such inconsistent because they always and
automatically classify CKD and SKD kits as complete vehicles even though there are situations where
certain CKD and SKD kits should not be classified as complete vehicles, the European Communities,
as the party asserting a claim, bears the burden to prove that under the measures, China's customs
authorities "always and automatically" classify CKD and SKD kits imports as complete vehicles even
though certain shipments of CKD and SKD kits do not qualify to be classified as complete vehicles.
In order to show that the measures are as such in violation of China's WTO obligations with respect to
CKD and SKD kits, the European Communities must demonstrate the mandatory nature of the
measures at issue – i.e. under the measures, Ch ina's customs authorities have no discretion to
determine whether certain shipments of auto part s and components constitute CKD and SKD kits and
thus should be classified as complete vehicles. The European Communities has not proved that is the
case.
7.687 As examined above, the measures do not provide any standard definition for CKD and SKD
kits. However, we were able to define the scope of CKD and SKD kits based on the general
understanding of these product terms in the automobile industry.
7.688 Under Article 21(1) of Decree 125, China's customs authorities must classify auto parts
presented for classification, once categorized as a "C KD and SKD kits", as motor vehicles. This
means that China's customs authorities must first de termine whether a given shipment of auto parts
and components presented for classification fits the scope of a CKD or SKD kit. Once the customs
authorities decide, based on the content of each ship ment, that the auto parts presented constitute a
CKD or SKD kit, then they must classify the parts as motor vehicles under the measures.
7.689 In this connection, the European Communities argues that China's customs authorities do not
have discretion in making an initial decision whether a certain shipment of auto parts and components
fits the scope of a CKD or SKD kit. We do not fi nd any support for such a position. Rather, what
makes the measures at issue mandatory in respect of CKD and SKD kits is the fact that once the auto
parts presented for classification are determined to constitute a CKD or SKD kit, the customs
authorities must classify them as complete vehicles w ithout any discretion. This question, which is
before us, is distinguished from the question whethe r China's customs authoritie s' decision in a given
case that a shipment of auto parts constitutes a CKD or SKD kit is consistent with China's obligations.
The latter concerns whether the measures, "as applied" to a specific situation, are consistent.
7.690 Second, the European Communities submits a fa ctual claim that most CKD and SKD kits
imported into China go through the operation processes that exceed the scope of assembly operations
indicated in Explanatory Note (VII) to GIR 2(a). The European Communities' claim is based on

1057 China's response to Panel question No. 62.

China's response that the assembly operations of CKD and SKD kits involve, inter alia, painting and
curing of the body.
7.691 Explanatory Note (VII) to GIR 2(a) provides:
"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." (emphasis added)
7.692 We first note that the text of Explanatory Note (VII) to GIR 2(a) provides some examples, not
an exhaustive list, of the qualifying assembly pr ocesses under GIR 2(a). While agreeing that the
processes such as fixing with screws, nuts and bolts, riveting and welding are within the scope of
assembly processes, the European Communities conte nds that painting and curing of the body are not
assembly operations within the meaning of GIR 2(a).
7.693 With respect to a question from the Panel concerning the kind of manufacturing processes
involved to make a complete vehicle using CKD and SKD kits, the parties were generally of the view
that it is difficult to give a general answer as th e level of fitting and equipping will vary depending on
the circumstances and the content of the kit.
1058 In other words, the more assembled auto parts are
prior to their importation, the less operations w ill be required in their assembly into a complete
vehicle. The parties also seem to agree that a lthough the manufacturing of a complete vehicle using
CKD or SKD kits may not be considerably diffe rent from the general manufacturing process, the
assembly operations using CKD or SKD kits will be less complicated than those using parts in
general. In particular, we find the observation by the United States relevant in this regard. The
United States submits:
"An operation that assembles kits is different than a full-fledged, automobile
manufacturing plant with full logistical capabilities to handle bulk shipments of parts
(footnote omitted). And most auto manufacturing plants are not in the business of
assembling discrete kits" and that "[a]s a practical commercial matter, CKD and SKD
kits are an inefficient production method that is limited in use by manufacturers to
circumstances (1) when they are starting up a new assembly operation in a distant
location with no developed supplier base; or (2) when the number of vehicles
produced in a distant location is limited to only several thousand vehicles annually."
7.694 We further note the complainants' view on how the assembly processes required for CKD and
SKD kits are different from those for regular auto parts. For example, the European Communities
states in its response to a Panel question that CKD and SKD kits are imported because sometimes
there is no manufacturing capacity in the country of destination and essentially the necessary
investment is yet to be made for building up cars from bulk shipment of parts. According to the
European Communities, to move to imports of parts in bulk, it is necessary to have in the place of
destination the assembly and manufacturing plants to gether with a sufficiently developed informatics
system and people able to manage thousands of parts to be used in different models.
1059 Canada also

1058 Parties' responses to Panel question No. 70.
1059 European Communities' response to Panel question No. 255.

considers that a vehicle manufacturer does not need a full, dedicated assembly line to assembly CKD
kits into a complete vehicle.
1060
7.695 Further, China's explanation 1061 of the automobile assembly process relates to the general
automobile assembly process, and is not necessarily limited to the assembly of CKD and SKD kits.1062
In any event, we have not been presented with evidence supporting the view that painting and curing
the body are assembly operations. Therefore, we are not in the position to pronounce ourselves that
painting and curing of the body are processes necessary for the assembly of CKD or SKD kits
imported into China.
7.696 In this regard, our finding above is for the so le purpose of the present dispute based on the
evidence before us. Therefore, we are not determini ng whether, and if so, how the principle of
GIR 2(a) should be applied to a certain shipme nt of CKD or SKD kits based on the assembly
operations that such kits would require in the importing country.
7.697 In these circumstances, the Panel finds that the context of the term "motor vehicles", in
particular GIR 2(a), suggests that CKD and SKD kits could in principle be classified as complete
vehicles.
(iv) Object and purpose
7.698 We now consider whether interpreting the tariff te rm "motor vehicles" to include in its scope
CKD and SKD kits would undermine the object and purpose of the treaties concerned, namely the
WTO Agreement and the GATT 1994.
7.699 In this connection, the Appellate Body in EC – Chicken Cuts has provided clarification on the
scope of the object and purpose of the WTO Ag reement and the GATT 1994 within the meaning of
Article 31(1) of the Vienna Convention . The Appellate Body considered that although the starting
point for ascertaining "object and purpose" is the tr eaty itself in its entirety, Article 31(1) of the
Vienna Convention does not necessarily exclude taking into account the object and purpose of a
particular treaty term (a tariff term contained in a tariff heading of the European Counities' Schedule
of Concessions in that case), if doing so assists the interpreter in determining the treaty's object and
purpose on the whole.
1063 At the same time, the Appellate Body cautioned against interpreting WTO

1060 Canada's response to Panel question No. 255.
1061 China's response to Panel question No. 71.
1062 In response to a question from the Panel on the difference, if any, between "manufacturing" and
"assembling" with respect to CKD and SKD kits, China subm its that the scope of GIR 2(a), second sentence, is
defined by the reference to the types of assembly operations specified in Explanatory Note (VII) to GIR 2(a) and
that 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 (China's
response to Panel question No. 62). China also submits that no party has disputed that CKD and SKD kits can
be assembled into a complete motor vehicle by means of the assembly methods detailed in Explanatory
Note (VII) to GIR 2(a). According to China, this c onclusion follows from the fact that national customs
authorities routinely classify CKD and SKD kits as motor vehicles in accordance with GIR 2(a).
1063 Appellate Body Report on EC – Chicken Cuts , para. 238, referring to Sir Ian Sinclair, The Vienna
Convention on the Law of Treaties , 2nd edition (Manchester University Press, 1984), pages 130-135, which was
referenced in the Panel Report on the same dispute (Panel Report, footnote 153 to para. 7.105). Thus, according
to the Appellate Body, to the extent that one can speak of the "object and purpose of a treaty provision", it will
be informed by, and will be in consonance with, the object and purpose of the entire treaty of which it is but a
component (Appellate Body Report on EC – Chicken Cuts, para. 238, referring to the Appellate Body Report on
Argentina – Textiles and Apparel, where the Appellate Body states that "a basic object and purpose of the

law in the light of the purported "object and purpose" of specific provisions, paragraphs or
subparagraphs of the WTO agreemen ts, or tariff headings in Schedules, in isolation from the object
and purpose of the treaty on the whole.
1064 In particular, the Appellate Body shared the Panel's view
that "one Member's unilateral object and purpo se for the conclusion of a tariff commitment cannot
form the basis" for an interpretation of that commitment, because interpretation in the light of Articles
31 and 32 of the Vienna Convention must focus on ascertaining the common intention of the
parties.1065
7.700 One of the objects and purposes of the WTO Agreement and the GATT 1994 is the security
and predictability of the reciprocal and mutua lly advantageous arrangements directed to the
substantial reduction of tariffs and other barriers to trade. When considered against its context as
examined above, including some other Members' sc hedules, the tariff term "motor vehicles" would
seem to be interpreted to include in its scope CKD and SKD kits imports. The complainants
themselves have not denied that certain collections of auto parts, which would fall within the scope of
CKD and SKD kits, imported and presented to cust oms together in a single shipment could be
classified as complete vehicles. Therefore, inte rpreting "motor vehicles" to include CKD and SKD
kits would not seem to undermine the security and predictability of the reciprocal and mutually
advantageous arrangements between the Members. Although we are mindful that the overall
objective of the WTO Agreement and the GATT 1994 is directed to the "substantial reduction of
tariffs and other barriers to trade", tariff commitments reflected in a Member's Schedule are the
"reciprocal and mutually advantageous arrangement s", which include a committing Member's interest
in how specific commitments are arranged in its Schedule.
7.701 We now continue with our analysis of the term "motor vehicles" in light of other
interpretative tools under Article 31 of the Vienna Convention.
(v) Subsequent practice
7.702 Article 31(3)(b) of the Vienna Convention states:
"3. There shall be taken into account, together with the context:
(b) any subsequent practice in the appli cation of the treaty which establishes the
agreement of the parties regarding its interpretation."
7.703 As the Appellate Body observed in EC – Chicken Cuts, "'subsequent practice' in the
application of a treaty may be an important el ement in treaty interpretation because 'it constitutes
objective evidence of the understanding of the parties as to the meaning of the treaty'."
1066 In light of

GATT 1994 [was] reflected in Article II" (Appellate Body Report on Argentina – Textiles and Apparel ,
para. 47)).
1064 Appellate Body Report on EC – Chicken Cuts, para. 239.
1065 Appellate Body Report on EC – Chicken Cuts, para. 239, referring to the Appellate Body Report on
EC – Computer Equipment , para. 84; and Sinclair, pages 130-131, as referred to in the Panel Report on EC –
Chicken Cuts (footnote 536 to para. 7.236). In EC – Chicken Cuts , the European Communities argued that the
notion of "long-term preservation" characterizes the four processes mentioned in heading 02.10, that is, "salted",
"in brine", "dried", and "smoked". In conclusion, the Appellate Body did not find an error with respect to the
Panel's finding that an interpretation of the term "salted" in the tariff commitment under heading 02.10 of the EC
Schedule, as including the criterion of long-term preservation, "could undermine the object and purpose of
security and predictability", which underlie both the WTO Agreement and the GATT 1994.
1066 Appellate Body Report on Chicken Cuts , para. 255, citing Yearbook of the International Law

this principle, the Appellate Body in that case clarified various issues arising from a treaty
interpreter's examination of "subsequent practice".
7.704 First, regarding the question of "what" may qualif y as practice, the Appellate Body stated that
although not each and every party must have engaged in a particular practice for it to qualify as a
"common" and "concordant" practice, it would be difficult to establish a "concordant, common and
discernible pattern" on the basis of acts or pronouncements of one, or very few parties to a
multilateral treaty, such as the WTO Agreement.
1067 The Appellate Body further found that if only
some of WTO Members have actually engaged in a certain practice, that circumstance may reduce the
availability of such "acts and pronouncements" for purposes of determining the existence of
"subsequent practice" within the meaning of Article 31(3)(b).
7.705 Furthermore, in addressing the question of "whose practice" is relevant to establish agreement
on the interpretation of the relevant provision, the Appellate Body found in EC – Chicken Cuts that
although the issue in that dispute concerned the scope of a tariff commitment contained in the WTO
Schedule specific to the European Communities, the relevant headings are common to all WTO
Members and thus exclusive reliance on the importing Member's classification practice as constituting
subsequent practice cannot be justified.1068
7.706 Accordingly, on the basis of the guidance pr ovided as above by the A ppellate Body on the
assessment of subsequent practice for interpreting a treaty provision (China's commitments under its
Schedule), the Panel will consider how China has been classifying CKD and SKD kits since its
accession to the WTO as well as how the complainants and other WTO Members have been
classifying such kits.
China's practice since its accession to the WTO
7.707 The complainants submit that China has been treating CKD and SKD kits as parts by
applying the lower tariff rates applicable to parts since its accession to the WTO. 1069 T h e

1067 Appellate Body Report on EC – Chicken Cuts, para. 259.
1068 Appellate Body Report on EC – Chicken Cuts , paras. 259-260, 265-266. The Appellate Body
states in the relevant part of its report on EC – Computer Equipment:

"[t]he fact that Members' Schedules are an in tegral part of the GATT 1994 indicates that,
while each Schedule represents the tariff commitments made by one Member, they represent a
common agreement among all Members" (emphasis in original, para. 109).

"The purpose of treaty interpretation is to establish the common intention of the parties to the
treaty. To establish this intention, the prior practice of only one of the parties may be relevant,
but it is clearly of more limited value than the practice of all parties. ..." (emphasis in original,
para. 93).

The Appellate Body also clarified the question of "what product range" is relevant for purposes of
establishing "subsequent practice". The Appellate Body viewed that the relevant product range included the
"entire" range of the products classifiable under the tariff heading concerned in that case as well as other
relevant alternative tariff headings , and not only the classification practice relating to the subset of such
products covered by the measures challenged in that dispute (Appellate Body Report on EC - Chicken Cuts ,
paras. 267-270).
1069 Complainants' responses to Panel question No. 254. See also footnote 1101.

complainants, however, have not been able to provide documentary evidence to support such a
practice by China.
1070
7.708 On the contrary, China argues that it has classified CKD and SKD kits as motor vehicles and
assessed CKD and SKD kits at the applicable duty rates for motor vehicles both prior and subsequent
to its accession to the WTO.1071 To support its position, China provi des an import declaration form in
which a CKD kit import by Shanghai GM in 2004 w as classified as motor vehicles and assessed the
duty rate applicable for motor vehicles.1072
7.709 The Panel first notes a subtle difference in the terms used by the parties in their respective
arguments: the complainants refer to how China has been treating CKD and SKD kits, whereas
China submits that it has always classified CKD and SKD kits as motor vehicles and assessed them at
the applicable duty rates for motor vehicles.
7.710 In response to a question from the Panel whether tariff treatment is always linked to tariff
classification, the complainants submit that tariff classification is normally 1073, generally 1074, or
always1075 related to tariff treatment.
7.711 China submits that tariff treatment – i.e. the a pplicable duty rate – is always linked to tariff
classification. According to China, tariff classi fication of a good precedes the determination of the
duty rate that applies since it is impossible to determine the correct rate of duty without first
determining the classification of the good.1076
7.712 We also understand that interpreting a Member's Schedule of Concessions in order to
determine the Member's tariff commitment contai ned in a tariff heading is linked to tariff
classification because the Member's Schedule is structur ed in the form of nomenclature, which in turn
is governed by classification rules. In respect of the complainants' claim under Article II of the GATT
1994 on China's tariff treatment of CKD a nd SKD kits under the measures, we must interpret China's
Schedule to determine China's tariff commitment with respect to such kits. This requires us to
examine first whether CKD and SKD kits are classified as motor vehicles under China's Schedule.
7.713 Turning now to China's practi ce since its accession to the WTO, we are not presented with
evidence showing that China has been classifying CKD and SKD kits as parts. The only evidence of
China's classification practice in this regard is the import declaration form submitted by one importer
– Shanghai GM – as presented by China. 1077 According to this declaration form, a CKD kit imported
by Shanghai GM was classified as a motor vehi cle under tariff heading 8703.2334.90, which is a
subheading at the ten digit level under tariff headi ng 87.03 for "motor cars and other motor vehicles
principally designed for the transport of persons (o ther than those of head ing No. 87.02), including
station wagons and racing cars". Under these circ umstances, we do not have sufficient evidence to
conclude that China has been classifying CKD and SKD kits as parts since its accession to the WTO,
as argued by the complainants.

1070 Complainants' responses to Panel question No. 254.
1071 China's response to Panel question No. 254.
1072 China's response to Panel question No. 254, referring to Exhibit CHI-48.
1073 European Communities' response to Panel question No. 259(d).
1074 United States' response to Panel question No. 259(d).
1075 Canada's response to Panel question No. 259(d).
1076 China's response to Panel question No. 258.
1077 Exhibit CHI-48.

Complainants' practice since China's accession to the WTO

7.714 All the complainants submit that they do not use the terms or have a tariff line for "CKD and
SKD kits" in their Schedules. 1078 Rather, classification of goods is conducted in the condition of
goods as imported on a case-by-case basis.
7.715 Specifically, the European Communities considers that an SKD kit would appear more
likely to fulfil the conditions to be classifiable as a complete vehicle as the parts would be presented
to the customs with a certain degree of "fitting and eq uipping" and that 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 ope ration beyond assembly for completion into the
complete vehicle is necessary in accordance with Explanatory Note (VII) to GIR 2(a).
7.716 The United States submits that to the extent the United States understands the terms "CKD or
SKD kits" as defined by China under Decree 125, it classifies merchandise in its condition as
imported. If a group of components are entered together that may form an assembly, it would be
classified under the heading that d escribe that assembly. If a group of components do not constitute
an assembly, they are individually classified.
7.717 Canada submits that what is relevant for tariff cl assification is the application of GIR 2(a)
and that certain collection of parts may only properl y be described as CKD or SKD kits where all or
nearly all of the parts necessary to construct a whol e vehicle are presented to customs together in one
shipment.1079 Canada further argues that China's custom s officials have the discretion either to
classify CKD or SKD kits as parts, or to classify them at the six-digit level as a whole vehicle.1080
7.718 China submits that consistent with GIR 2(a), cu stoms authorities routinely classify CKD kits
(for autos and other articles) as the complete article. 1081 China refers to instances where the
complainants have classified CKD and SKD kits as complete vehicles by application of GIR 2(a):
Canada Border Services Agency cl assified unassembled kits consisting of all the parts necessary to
assemble a complete motor vehicle as a complete motor vehicle
1082; and the European Communities
classified, through its Binding Tariff Information (B TI), completely disassembled Bentley Mark VI
sports car as a motor vehicle.1083
7.719 The Panel thus notes that the evidence provided by Ch ina shows that the complainants have
also classified CKD and SKD kits as complete motor vehicles. In fact, the complainants themselves
do not deny that a collection of auto parts constitu ting all or nearly all the parts necessary to assemble
a motor vehicle could be classified as a motor vehicl e in accordance with the principle of GIR 2(a), if
they are imported and presented to customs together in a single shipment.

1078 Complainants' responses to Panel question No. 47.
1079 Canada's response to Panel question No. 33.
1080 Canada submits that if China classifies CKD or SKD kits at the six-digit level as a complete
vehicle, 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 per cent duty.
1081 China's first written submission, para. 90, footnote 65. China also refers to a classification decision
by the United States in which the US Customs and Border Protection classified unassembled pistol kits missing
one part as complete pistols based on the principle of GIR 2(a) (NY M83114, Tariff classification of incomplete,
unassembled pistols from Austria (10 May 2006) (CHI-16)).
1082 Memorandum D10-14-45, Tariff Classification of Kit Cars (9 March 2007) (Exhibit CHI-17).
1083 BTI GB115951081 (16 November 2006) (Exhibit CHI-18).

Other WTO Members' practice since China's accession to the WTO

7.720 As the Panel observed above in paragraphs 7.672, so me WTO Members have separate tariff
lines for CKD and SKD kits under the tariff headings for motor vehicles in their Schedules. Canada
points out that these countries, except for Australia and the Philippines 1084, charge lower tariff rates
for CKD and SKD kits imports than for complete motor vehicles. 1085 In our view, however, charging
lower tariff rates for CKD and SKD kits than for motor vehicles does not change the fact that these
Members classify them under the tariff headings for motor vehicles. Specific tariff commitments
contained in the tariff headings of these Member s' Schedules are the results of the specific
negotiations between the subject Member and other Me mbers. Overall, the evidence indicates that at
least some other WTO Members, such as Malaysia, Indonesia, Vietnam, the East African Community,
Australia and the Philippines, classify CKD and S KD kits as "motor vehicles", and that the tariff
treatment these Members accord to CKD and SKD kits may vary.
7.721 In conclusion, the Panel finds, based on the available ev idence before it, that the
classification practices of at least some WTO Members show that CKD and SKD kits are classified as
motor vehicles.1086
(vi) Supplementary means of interpretation
7.722 Article 32 of the Vienna Convention states:
"Supplementary means of interpretation
Recourse may be had to supplementary me ans of interpretation, including the
preparatory work of the treaty and the circumstances of its conclusion, in order to
confirm the meaning resulting from the applica tion of Article 31, or to determine the
meaning when the interpretation according to Article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd or unreasonable."
7.723 In EC – Chicken Cuts , the Appellate Body stated that the purpose of its analysis under
Article 32 in that case was to ascertain whethe r WTO Members have agreed on the criterion

1084 Australia and the Philippines impose tariffs on CKD and SKD kits at largely the same rate as that
for assembled vehicles (Canada's response to Panel question No. 256).
1085 Canada's response to Panel question No. 256.
1086 The Panel is aware of the Appellate Body's finding that previous panel reports are not "subsequent
practice" within the meaning of Article 31(3)(b) of the Vienna Convention. Nonetheless, we note that the Panel
in Indonesia – Autos found that CKD kits are "like" assembled complete cars in the context of the Subsidies
Agreement. The Panel stated: "We do no t consider that an unassembled product ipso facto is not a like product
to that product assembled. Recalling the view of the Appellate Body that tariff classification may be a useful
tool in like product analysis ( Alcoholic Beverages (1996), op. cit., Appellate Body Report, page 21 (original
footnote 743)), we note that, under the General Rules for the Interpretation of the Harmonized System: 'Any
reference in a heading to an article shall be taken to include a reference to that article complete or unfinished,
provided that, as presented, the incomplete or unassembled article has the essential ch aracter of the complete or
unfinished article.' We think that a comparable approach to the relation between assembled and unassembled
products makes good sense in the context of this dispute. 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 prop erly be considered to have characteristics
closely resembling those of a completed car" (Panel Report on Indonesia – Autos, para. 14.197).

("preservation") for the term "salted" advanced by the European Communities with respect to the
tariff commitment under the tariff heading of the EC Schedule at issue (i.e. tariff heading 02.10).
7.724 Following the same logic, the purpose of the Pane l's analysis under Article 32 is to confirm
whether WTO Members have agreed on including CKD and SKD kits in the scope of China's tariff
commitment under the tariff headings for motor vehicles of China's Schedule.
7.725 Regarding the scope of supplementary means of interpretation to which an interpreter may
have recourse under Article 32, the Appellate Body stated that Article 32 does not define it
exhaustively and thus that an interpreter has a certain flexibility in considering relevant supplementary
means in a given case so as to assist in ascerta ining the common intentions of the parties.
1087 More
specifically, regarding the question of what types of events, or acts, and other instruments may be
taken into account as circumstances of conclusion under Article 32, the Appellate Body considered
that customs classification practice prior to the conclusion of a treaty could form part of the
circumstances of the conclusion of a treaty, and that in this connection, even documents published,
events occurring, or practice followed subsequent to the conclusion of a treaty could give an
indication of what were, and what were not, the "comm on intentions of the parties" at the time of the
conclusion.
1088
7.726 Therefore, we will examine China's classificati on practice for CKD and SKD kits prior to as
well as at the time of its accession to the WTO as part of the circumstances of the conclusion of
China's accession to the WTO.
7.727 The European Communities submits that prior to joining the WTO, China imposed
substantially lower tariff rates on CKDs and SKDs than on imported whole vehicles
1089 and that at the
time it joined the WTO, China did not have a separate tariff line for auto parts that were either fully or
partly unassembled and were shipped together for assembly and further processing into a whole
vehicle within China. The European Commun ities notes that China committed to a Schedule of
Concessions that, by 1 July 2006, imposed a bound tariff rate on most auto parts at 10 per cent or
lower, and on most vehicles at 25 per cent. Furt hermore, according to the European Communities,
China agreed that if it did introduce a separate tari ff line for CKD and SKD kits, the tariff rate would
be no more than 10 per cent.
1090

1087 Appellate Body Report on EC – Chicken Cuts , para. 283. More specifically, the Appellate Body
recalled its statement in a previous cas e that the "circumstances of [the] conclusion" of a treaty includes, "in
appropriate cases, the examination of the historical background against which the treaty was negotiated"
(Appellate Body Report on EC – Chicken Cuts , para. 284, citing its report on EC – Computer Equipment,
para. 86). Further, the Appellate Body clarified that an "event, act or instrument" may be relevant as
supplementary means of interpretation not only if it has actua lly influenced a specific aspect of the treaty text in
the sense of a relationship of cause an d effect, but also if it helps discern what the common intentions of the
parties were at the time of the conclusion with respect to the treaty or specific provision. Thus, it found that not
only "multilateral" sources, but also "unilateral" acts, instruments, or statement of individual negotiating parties
may be useful in ascertaining "the reality of the situatio n which the parties wished to regulated by means of the
treaty" and, ultimately, for discerning the common in tentions of the parties (Appellate Body Report on EC –
Chicken Cuts, para. 289).
1088 Appellate Body Report on EC – Chicken Cuts, paras. 304-305.
1089 The European Communities refers to this fact in Exhibit JE-25, page 189.
1090 European Communities' first written submission, pa ra. 274. The European Communities refers to
paragraphs 93 and 342 of China's Working Party Report (Exhibit JE-26), and Part I:1.2 of the Accession
Protocol (Exhibit JE-1).

7.728 The United States submits that China did maintain separate tariff lines for CKD and SKD
kits from 1992 to 1995. According to the United States, these tariff lines were the same as the
scheduled tariff rates applicable to motor vehicles.
1091 However, instead of applying these rates,
China negotiated the applicable tariff rates for CKD and SKD kits with an individual auto
manufacturer, which resulted in the tariff rates fo r CKD and SKD kits substantially below those for
motor vehicles for certain auto manufacturers. 1092 After 1995, China elimin ated the tariff lines for
CKD and SKD kits, but still did not apply the tariff rates applicable to motor vehicles for CKD and
SKD kits and continued to apply tariff rates for CK D and SKD kits (and parts) that were negotiated
between an individual auto manufacturer and the Chinese authorities, as it did in the period from 1992
to 1995. In the view of the United States, China continued these tariff practices through the time of
China's accession to the WTO and post-accession un til China began to implement the measures at
issue in this dispute.
1093
7.729 Canada submits that in China's 1995 Customs Tari ff, parts to manufacture certain vehicles
could be classified as unassembled (i.e. CKD), which would result in the payment of lower duties than
for an assembled vehicle. 1094 According to Canada, starting in 1996, references to CKDs were
removed from China's customs tariff, and China's ev idence on how CKD kits were treated after this
point is contradictory. China asserts without evid ence either that CKD and SKD kits were prohibited
from importation, or that they were classified as whole vehicles. However, Canada argues that

1091 United States' comments on China's response to Panel question No. 2, referring to Exhibit CHI-30.
1092 United States' comments on China's response to Panel question No. 3. The United States submits
that the key factors in the negotiation were the amount of the auto manufacturer's investment in China and the
extent to which the auto ma nufacturer used local content in the assemb ly of its vehicles, both at the time of
negotiation and under the auto manufacturer's future plan s. According to the United States, "normally, an auto
manufacturer with a larger amount of investment and a larger percentage of local content would be able to
negotiate 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 the Ch inese authorities viewed as
committed to China based on these factors, the negotiate d tariff rates for CKDs and SKDs were substantially
below the tariff rates for motor vehicles. In addition, the Chinese authorities would normally apply the same
negotiated tariff rates for parts, as the negotiated tariff ra tes were often also below the tariff rates for parts set
forth in China's tariff schedule."
1093 United States' comments on Chin a's responses to Panel question Nos. 2, 254, also referring to
Exhibit JE-25, page 189; Response to Panel question No. 254. The United States considers that China's tariff
practices relating to CKD an d SKD kits (and parts) during the peri od from 1992 until China's accession to the
WTO at the end of 2001 help to explain why paragr aph 93 of the Working Part y Report accompanying China's
Protocol of Accession reads the way it does [Paragraph 93 of the Working Party Report: "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. If China created such tariff lines, the
tariff rates would be no more than 10 per cent."]: "When negotiating this provision in the years leading up to
China's WTO accession, WTO Members, including the Unite d States, knew that China had separate tariff lines
for CKD and SKD kits that scheduled tariff rates that were the same as those for motor vehicles from 1992 to
1995, and that China eliminat ed these tariff lines effec tive 1 January, 1996. WTO Me mbers also knew that the
Chinese authorities had nevertheless been applying substantially lower tariffs for CKD and SKD kits (and parts)
than for motor vehicles, both when China had separate tariff lines for CKD and SKD kits and when it did not. In
negotiating paragraph 93, therefore, WTO Members wanted to ensure that China would continue to treat CKD
and SKD kits 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."
1094 Canada refers to Exhibit CHI-30, subheadings 8704.1010 and 8704.1020.

evidence shows that parts imported into China as CKDs and SKDs were not charged the whole
vehicle rate, but were classified as parts.
1095
7.730 China submits that in 2001, immediately prio r to its accession to th e WTO, the average
applied tariff rate for "motor vehicles" was 63.6 per cent and the average applied tariff rate for "auto
parts" was 24.7 per cent. According to China, there were no separate tariff lines for "CKD and SKD
kits" in China's Tariff Code and CKD and SKD kits were classified as complete vehicles according to
GIR 2(a) and were assessed at the tariff rates id entical to those applicable to the corresponding
complete vehicle model. In 2002, right af ter China's accession to the WTO, the average bound tariff
rate for "motor vehicles" was 49.4 per cent, and the average bound tariff rate for "auto parts" was 20.4
per cent. There were no separate tariff lines fo r "CKD and SKD kits" in China's Tariff Code, and
these were classified as motor vehi cles in accordance with GIR 2(a). 1096 China has classified CKD
and SKD kits as motor vehicles and assessed CKD and SKD kits at the applicable tariff rates for
motor vehicles both prior
1097 and subsequent to its accession to the WTO.1098
7.731 The Panel notes from the parties' arguments as well as the evidence before us that China
maintained separate tariff lines for CKD and SKD kits in its Schedule from 1991 to 1995 under the
tariff headings for motor vehicles. The complainants do not dispute this fact, but argue that China still
charged lower tariff rates for CKD and SKD kits than for motor vehicles.
7.732 For the period from 1996 to 2001 (China's accessi on to the WTO), all th e parties agree that
separate tariff lines for CKD and SKD kits ceased to exist in China's Schedule. In fact we find
language in the text of 1994 China's Automobile Policy Order that prohibits CKD and SKD kits
imports.1099 Regardless of the prohibition of CKD and SKD kits imports, China does not deny that
such kits were still imported. The complainants and China however dispute how China in fact
"treated" CKD and SKD kits during this period: th e complainants submit that regardless of whether
China maintained separate tariff lines for CKD and S KD kits in its Schedule, China normally applied

1095 Canada refers to China's first written submission, paras. 40, 184; the factual background section
jointly submitted by the complainants; Canada's first written submission, footnote 36; Canada's response to
Panel question No. 61(a).
1096 China's response to Panel question No. 2. The average applied tariff rate for "motor vehicle" was
42.2%, and the average tariff rate for "auto parts" was 18.1% in 2002.
1097 China explains, however, that prior to its accession to the WTO, China:

"… maintained policies that allowed a limited number of auto manufacturers to obtain
temporary reductions in the duty rates for motor vehicles that would ordinarily apply to the
importation of CKD/SKD kits. These reduced rates for a limited number of auto
manufacturers were not the rates for parts, and were not based on a classification of
CKD/SKD kits as parts. After the expiration of these reductions in the applicable duty rate,
these manufacturers would revert to paying the applicable motor vehicle rate for CKD/SKD
imports, in accordance with the ordinary classification of CKD/SKD kits. …" (China's
comments on complainants' responses to Panel question No. 254).

1098 China's response to Panel question No. 254. In support of its submission, China puts forward two
specific CKD import entries: one from 2001, before China acceded to th e WTO (CHI-47), and one from 2004,
after China had joined the WTO (Exhibit CHI-48).
1099 Article 43 of China's 1994 Policy Order (Exhibit JE-24) provides:

"Article 43 An automobile enterprise shall not engage in assembly through import of
semi-knocked-downs (SKD) or completely knock-downs (CKD)".

Also see footnote 172 and paragraph 7.3 above.

tariff rates substantially lower than those for comp lete motor vehicles to CKD and SKD kits based on
the negotiations China reached with individual au tomobile manufacturers in China, whereas China
submits that it always classified CKD and SKD kits imports as complete motor vehicles and applied
the corresponding tariff rates to CKD and SKD kits.
1100
7.733 The complainants' argument is therefore that China normally "treated" CKD and SKD kits
imports with substantially lower tariff rates than complete motor vehicles since 1996 and prior to
China's accession to the WTO. However, the compla inants have not been able to provide specific
evidence that can support their position, not to mention any evidence indicating how China
"classified" CKD and SKD kits during this period.1101
7.734 On the other hand, China has provided us with a copy of an import declaration form showing
that a CKD kit import was "classified" as and assessed at the tariff rate for a complete motor vehicle
prior to its WTO accession.
7.735 In sum, the evidence before us (i.e. China's tariff schedule from 1991 to 1995 and an import
declaration form classifying a CKD kit as a motor vehicle prior to China's accession) demonstrates
that prior to and at the time of China's accession to the WTO, China classified CKD or SKD kits as
motor vehicles. Therefore, in our view, China's classification practice in respect of CKD or SKD kits
prior to and at the time of China's accession conf irms our conclusion above that CKD and SKD kits
could fall within the scope of China's commitment unde r the tariff headings for motor vehicles of its
Schedule of Concessions.

1100 See, however, footnote 1097 above, containing China's explanation that prior to its accession to the
WTO China "allowed a limited number of auto manufacturers to obtain temporary reductions in the duty rates
for motor vehicles that would ordinarily apply to the importation of CKD/SKD kits."
1101 In this regard, we note that the complainants refer to two articles – one on "Market and Institutional
Regulation in Chinese Industrialization, 1978-94" (Exhib it JE-25) and another on "Different Strategies of
Localization in the Chinese Auto Industry: The Cases of Shanghai Volkswagen and Tianjin Daihatsu" (Exhibit
CDA-28) – to support their position that China has been treating CKD and SKD kits imports with lower tariff
rates than complete motor vehicles. In our view, howev er, these articles do not define the term "CKD or SKD
kits" and use the term more in a general sense without ne cessarily confining its scope to a particular collection
of auto parts that could be considered as falling within the scope of a CKD or SKD kit as discussed in this
dispute. According to these articles, imported parts could be considered as constituting CKD or SKD kits even
if the final assembled vehicle would consist of 40 per cent of domestic parts and 60 per cent of imported parts.
However, we recall our finding above in paragraph 7.644 that the term CKD and SKD kit is understood as
referring to "all, or nearly all, of the auto parts and components necessary to assemble a complete vehicle". For
this reason, it is not clear to us whether these articles are referring to imported CKD and SKD kits as defined in
these reports.
We also have taken note of Canada's argument based on the import statistics for motor vehicles from
Canada (Exhibit CDA-32) that CKD kits imports from Canada could not have been classified as motor vehicles
unless they were valued at US$12 each, because 23,000 CKD kits were imported to China in 1999 when the
value of imports of motor vehicles (HS headings 87.02 to 87.05) from Canada in 1999 was only US$279,000.
However, Exhibit CDA-32 shows that the sum of imported motor vehicles falling under HS heading 87.02 to
87.05 amounts to more than US$5 million. Due to the inaccuracy of the data referred to by Canada, we cannot
draw any conclusion from this specific evidence on how China classified CKD kits in 1999.
Finally, Canada has not provided any documentary evidence regarding China's treatment of CKD and
SKD kits after its accession in its response to Panel question No. 61(b).
At the same time, we note China's explanation that prior to its accession to the WTO China "allowed a
limited number of auto manufacturers to obtain temporary reductions in the duty rates for motor vehicles that
would ordinarily apply to the importation of CKD/SKD kits" (see footnote 1097 above).

(c) Conclusion
7.736 For the reasons set forth above, the Panel considers that the term "motor vehicles" under
relevant tariff headings of 87.02, 87.03 and 87.04 does not preclude CKD and SKD kits from its scope
under China's Schedule. Therefore, we find that the complainants have not proved that China's tariff
treatment of CKD and SKD kits under Article 2(2) of Decree 125 and Article 13(a) of
Announcement 4 is inconsistent with China's obligation under Article II:1(b) of the GATT 1994.
4. Is China's treatment of CKD and SKD kit imports under the measures consistent with
China's commitment under paragraph 93 of China's Working Party Report?
7.737 As noted above in paragraph 7.648, under th e measures, China accords CKD and SKD kits
the tariff rate applicable to motor vehicles (i.e. 25 per cent on average).
7.738 The United States and Canada submit that China's tariff treatment of CKD and SKD kits
under the measures is inconsistent with its commi tment under paragraph 93 of China's Working Party
Report.
1102
7.739 China argues that it has not violated its commitment under paragraph 93 of the Working
Party Report since the condition underlying China's commitment under paragraph 93 has not
occurred.
7.740 All parties agree that China's commitments unde r its Working Party Report are enforceable in
WTO dispute settlement proceedings.
1103 The Accession Protocol is an integral part of the WTO
Agreement pursuant to Part I, Article 1.2 of the Accession Protocol. In turn, paragraph 342 of China's
Working Party Report incorporates China's commitm ents under its Working Party Report, including
paragraph 93, into the Accession Protocol. Therefore, China's commitment in paragraph 93 of the
Working Party Report is also an integral part of the WTO Agreement.
1104
7.741 Accordingly, the Panel will interpret China's commitment under paragraph 93 of the Working
Party Report in accordance with th e interpretative rules of the Vienna Convention to determine
whether China has acted inconsistently with commi tments under paragraph 93 of the Working Party
Report.
(a) What is China's commitment under paragraph 93 of the Working Party Report?
7.742 Paragraph 93 of the Working Party Report provides:
"Certain members of the Working Party ex pressed particular concerns about tariff
treatment in the auto sector . In response to questions about the tariff treatment for
kits for motor vehicles, the representative of China confirmed that China had no tariff

1102 While referring to paragraph 93 of China's Working Party Report in support of its argument under
Article II:1 of the GATT 1994 in respect of CKD and SKD kits, the European Communities has not made a
separate claim under paragraph 93 of the Working Party Report. (European Communities' first written
submission, para. 274). Also, see the European Communities' request for the establishment of a panel
(WT/DS339/8). See also footnote 987 above.
1103 Parties' responses to Panel question No. 154.
1104 United States' first written submission, paras. 119 , 120; Canada's first written submission, paras.
75-77, 149. China cons iders it appropriate for dispute settlement pane ls to take into acco unt the context of a
commitment made in a working party report, and to ex ercise special care in inte rpreting these commitments
(China's first written submission, para. 189).

lines for completely knocked-down kits for motor vehicles or semi-knocked down
kits for motor vehicles. If China created su ch tariff lines, the tariff rates would be no
more than 10 per cent. The Working Party took note of this commitment." (emphasis
added)
7.743 Under paragraph 93 of China's Working Party Re port, therefore, China is committed to the
application of the "tariff rates" of no more than 10 per cent to CKD and SKD kits, if China creates
separate tariff lines for such kits. In other words, China's commitment is conditioned upon the
creation of separate tariff lines for CKD and SKD k its, which did not exist at the time of China's
accession to the WTO. To determine whether China has violated its commitment under paragraph 93,
we will first consider whether the condition un derlying China's commitment under paragraph 93 has
been satisfied.
(b) Has China created tariff lines for CKD and SKD kits?
7.744 All the parties have initially agreed that China has not created separate tariff lines for CKD
and SKD kits in its Schedule in the sense that Chin a has not formally created separate tariff lines by
amending its Schedules.1105
7.745 The United States and Canada have nevertheless claimed that China has created a tariff line
for CKD and SKD kits by introducing the measures at issue. According to the United States and
Canada, the measures do in effect specify a tariff line for CKD and SKD kits that imposes a 25 per
cent customs duty and thus they have de facto created a tariff line for CKD and SKD kits.1106
7.746 China submits that a Member cannot create a new tariff line de facto and that the process of
creating a new tariff line involves amending the Member's Schedule to include the new tariff line. 1107
Specifically, China has explained that under China's domestic law, the Ministry of Finance issues a
revised tariff schedule each year, which reflects China's Schedule of Concessions. 1108 If China were
to introduce a new tariff line, it would include the new tariff line in the next tariff schedule issued by
the Ministry of Finance. The Chinese Finance Ministry has not issued any revised tariff schedule with
a new tariff line for CKD and SKD kits. China ar gues that, by its ordinary meaning, paragraph 93
contains a premise and a conditional commitment: na mely at the time of accession, China did not

1105 Parties' response to Panel question No. 61(a). Specifically, regarding whether China has created
tariff lines for CKD and SKD kits, the parties have provided the following responses: China has responded,
"No. China has not created separate tariff lines for CKD and SKD kits"; the European Communities has
responded, "No, the European Communities is not aware of any formal tariff line created by China for CKD and
SKD kits. ..."; the United States has responded, "the United States is not aware of any tariff lines in China's
tariff schedule for CKD or SKD kits. ... "; and Canada has responded, "China does not have a formal tariff line
for either 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. ..."
1106 United States' first written submission, para. 121; Canada's first written submission, para. 150. The
United States submits that to the extent that the charges imposed by the measures are considered to be tariffs,
the measures would in effect specify a tariff line for CK Ds and SKDs that imposes a 25 per cent tariff, rather
than a 10 per cent tariff as required under the Working Party Report. Canada submits that the Working Party
Report makes it clear that China committed to charging no more than 10 per cent for parts imported as CKD kits
and SKD kits. Since 10 per cent is the tariff rate for the vast majority of parts, whereas the rate for whole
vehicles is 25 per cent, the necessary interpretation is that China would continue to treat CKD and SKD kits as
parts, charging no more than 10 per cent. China’s failure to do so violates its obligations under the WTO
Agreement.
1107 China's responses to Panel question Nos. 137 and 259(b).
1108 China's response to Panel question No. 259.

maintain separate tariff lines for CKD and SKD kits, and that if China were to create separate tariff
lines for CKD and SKD kits after accession, the tari ff rates would be no more than 10 per cent. On
the basis of this interpretation, China argues that since it has not created separate tariff lines for CKD
and SKD kits, whether through the challenged meas ures or otherwise, the condition underlying the
commitment made in paragraph 93 of the Working Party Report has not occurred.
1109
7.747 In its comments on China's response to a Panel question after the second substantive meeting,
however, Canada submits that China has, for the first time, provided evidence of its classification and
duty assessment of CKD kits in response to a qu estion from the Panel and that this evidence
establishes that China in fact created se parate tariff lines for CKD and SKD kits: 1110 China's own
evidence from December 2004 (Exhibit CHI-48) shows that the shipment in question was classified
under a separate tariff line (8703.2334.90) – "CKD for Buick 2800cc cars". Introducing tariff lines at
the "national level" (i.e. beyond the six-digit le vel) is precisely how WTO Members create separate
tariff lines for unassembled vehicles. Therefore, according to Canada, paragraph 93 of China's
Working Party Report requires China to apply a 10 pe r cent duty rate for those tariff lines. Moreover,
Canada submits that to confirm that China's in troduction of tariff lines for CKD kits was not limited
to 2800cc cars, Canada has obtained a copy of China's Customs Tariff for 2005, which shows that 10-
digit tariff lines ending in ".90" are generally for CKD and SKD kits (or "complete sets of
assemblies", as they are described in the tariff).
1111
7.748 First, the Panel notes that the condition giving rise to China's obligation in paragraph 93 is
the "creation" of tariff lines, not modification of a Member's Schedule of Concessions. 1112 T o
determine whether China has created tariff lines for CKD and SKD kits, we will begin our analysis by
describing tariff lines in Members' Schedules.
7.749 The majority of the WTO Members, including China, are also contracting parties to the HS
Convention.1113 In this context, although no legal definition of "tariff lines" appears to exist in the HS
Convention, those Members who are HS contracting parties are required to r espect the HS codes at
the six-digit level in accordance with Article 3 of the HS Convention. 1114 Member countries are

1109 China further submits that the complainants' e ffort to establish China's pre-accession practice of
classifying CKD and SKD kits as part s and assessing these entries at the tariff rates for parts is fundamentally
irrelevant – in no event is it possible to interpret paragraph 93 as committing China to continue something that it
was already doing, and in no event is it possible to read the express conditionality of the commitment out of
paragraph 93 (China's comments on the complainants' responses to Panel question No. 254). China argues that
as irrelevant as it is, the complainants have not, in fact, presented any evidence of this alleged practice.
1110 Canada's comments on China's response to Panel question No. 254.
1111 Canada's comments on China's response to Panel question No. 254, referring to "Customs Import
and Export Tariff of the People's Republic of China, 2005, Economic Science Publishing House" (Exhibit
CDA-48).
1112 Modification of a Member's Schedule is addressed in Article XXVIII of the GATT 1994.
Article XXVIII:1 provides:

"1. On the first day of each three-year period, ... a contracting party ... may, by
negotiation and agreement with any contractin g party with which such concession was
initially negotiated and with any other contracting party determined by the CONTRACTING
PARTIES to have a principal supplying interest ..., and subject to consultation with any other
contracting party determined by the CONTRACTING PARTIES to have a Substantive
interest in such concession, modify or with draw a concession included in the appropriate
schedule annexed to this Agreement."

1113 See paragraph 7.665 above.
1114 Article 3(1)(a) of the HS Convention provides:

however allowed to create their own headings and subheadings beyond the six-digit level. Canada
also submits that it is common customs practice to have separate tariff lines beyond the six-digit
level.
1115 In addition, according to the HS Classifica tion Handbook, further su bdivisions of the HS
nomenclature have to be introduced at the nati onal level since the goods or categories of goods
referred to in the national Customs tariff of ten do not coincide with the HS categories. 1116 Therefore,
for the purpose of our analysis of China's commit ment under pargraph 93 of China's Working Party
Report, we understand "a tariff line" to mean a horizontal line in a tariff schedule that provides a
specific heading number, regardless of the number of digits (i.e. be it at the eight-digit or ten-digit
level), and a specific tariff rate for the product described under that heading.
7.750 As noted above, all the parties do not dispute that China did not have separate tariff lines for
CKD and SKD kits in its Schedule of Concessions at the time of accession to the WTO. 1117 Canada
has however presented a copy of China's Customs Import and Export Tariff for 2005 in which
separate tariff headings at the ten-digit level are included for "complete sets of assemblies" for motor
vehicles.
1118 For example, under tariff heading 87.03 ("Motor cars and other motor vehicles

"(a) Each Contracting Party u ndertakes, except as provided in subparagraph (c) of this
paragraph, that from the date on which this Convention enters into force in respect of it, its
Customs tariff and statistical nomenclatures shall be in co nformity with the Harmonized
System. It thus undertakes that, in respect of its Customs tariff and statistical nomenclatures:

(i) it shall use all the headings and subheadings of the Harmonized System without
addition or modification, together with their related numerical codes;

(ii) it shall apply the General Rules for the interpretation of the Harmonized System and
all the Section, Chapter and Subheading Notes, and shall not modify the scope of the Sections,
Chapters, headings or subheadings of the Harmonized System; and

(iii) it shall follow the numerical sequence of the Harmonized System".

1115 Canada's second written submission, para. 67.
1116 Exhibit CDA 16 ( HS Classification Handbook , Part II, Chapter 4, page II/27). Canada's second
written submission, para. 67, footnote 79; Canada's response to Panel question No. 259(d). Also see Panel
Report on EC – Chicken Cuts, para. 7.11.
1117 A copy of China's Schedule of Concessions, submitted as attachment to the complainants' first
written submissions (Exhibit JE-2), confirms the absence of separate tariff lines for CKD and SKD kits at the
time of China's accession to the WTO.
1118 Exhibit CDA-48 (Customs Import and Export Tariff of the People's Republic of China, 2005,
Economic Science Publishing House) (Canada's comments on China's response to Panel question No. 254,
footnote 135). After the second substantive meeting, the Panel sent out a second set of written questions to the
parties. The parties submitted their responses to this second set of questions on 26 July 2007, and were given an
opportunity to provide their comments on each others' responses to Panel questions by 9 August 2007 in
accordance with the Panel's timetable in this dispute. It is in its comments on China's response to Panel question
No. 254 that Canada submitted a copy of Customs Import and Export Tariff of the People's Republic of China,
2005 published by the Economic Science Publishing House, as Exhibit CDA-48. Afterwards, the Panel posed
one additional question to the parties (Panel question No. 304) on 6 August 2007. The parties provided their
responses to this additional question by 31 August 2007 and their comments on each others' responses by 10
September 2007. China has not provided the Panel with any comments on the status or content of Exhibit
CDA-48 since Canada provided a copy of Exhibit CDA-48 on 9 August 2007.
The Panel further notes that paragraph 13 of the Panel's working procedures provides:

"The parties shall submit all factual evidence to the Panel no later than during the first
substantive meeting, except with respect to factual evidence necessary for purposes of

principally designed for the transport of persons"), ther e are tariff headings at the ten-digit level such
as 8703.2130.90 and 8703.2334.90 with the description code indicating "complete sets of assemblies".
Considering that the same tariff heading 8703.2334.90, which is shown in the import declaration form
mentioned in the following paragraph, is describ ed as "CKD for Buick 2800cc cars", we consider it
reasonable to understand that the description "complete sets of assemblies" in China's Customs Import
and Export Tariff for 2005 refers to CKD and SKD kits.
7.751 We also recall China's acknowledgment that it has been classifying CKD and SKD kits as
complete vehicles since the entry into force of the m easures. This is evinced by an import declaration
form submitted by an automobile manufacturer in China, in which the shipment was classified under
the tariff line 8703.2334.90 as "CKD for Buick 2800cc cars".
1119
7.752 In light of the available evidence above, ther efore, we consider that China has created
separate tariff lines for CKD and SKD kits in its tari ff schedule at the ten-digit level and thus has met
the condition under paragraph 93.
7.753 Furthermore, even setting aside the evidence s howing China's creation of tariff lines for CKD
and SKD kits, the United States and, initially, Canada also argued that China's measures de facto
created tariff lines for CKD and SKD kits. What the co mplainants argue in this context is that China
has "in fact" created tariff lines for CKD and SKD kits, which did not exist at the time of China's
accession to the WTO, by implementing the measures at issue.
7.754 As examined in paragraph 7.648 above, CKD a nd SKD kits are classified as motor vehicles
under China's measures, namely Article 21(1) of Decree 125, which consequentially leads to the
imposition on such kits of the tariff rates applicable to motor vehicles. 1120 In this respect, the question
is therefore whether a tariff line can be deemed created when a Member introduces a measure through
which it effectively classifies a good under a specific tariff line and applies a tariff rate under that
tariff line, which deviates from the commitment it made at the time of accession.
7.755 We consider that the answer is positive, as under the measures, China mandates its customs to
classify CKD and SKD kits under tariff lines for motor vehicles. Specifically, Article 21(1) of
Decree 125 provides that imports of CKD or SKD kits for the purpose of assembling vehicles must be
characterized as complete vehicles. In turn, under the measures, "auto parts characterized as complete
vehicles" are subject to the tariff rates for motor vehicles.
1121 Moreover, China has itself explained
that an automobile manufacturer who declares imports of CKD or SKD kits as auto parts
characterized as complete vehicles under Article 2(2) of Decree 125 pays the duty at the tariff rates

rebuttals, answers to questions or comments on answers provided by others. Exceptions to
this procedure will be granted upon a showing of good cause. In such cases, the other parties
shall be accorded a period of time for comment, as appropriate."

Therefore, it would seem that China could have invoked this provision to provide its comment, if any
or necessary, on the status and/or content of this evid ence (a copy of Customs Import and Export Tariff of the
People's Republic of China, 2005) submitted by Canada. In any event, in the absence of any contention by
China on this evidence submitted by Canada, we see no reason to question the validity of the content of this
evidence.
1119 Exhibit CHI-48.
1120 China's comments on the complainants' responses to Panel question No. 259(b). China points to
Canada's statement that it does not believe that there is a legal concept of de facto creating a new tariff line
(Canada's response to Panel question No. 259(b)).
1121 Article 28 of Decree 125 provides that the customs shall classify "imported auto parts characterized
as complete vehicles" as motor vehicles and base the tariff on rates applicable to complete vehicles.

applicable to complete vehicles at the time of importation.
1122 We also recall China's statement that
the legal obligation of auto manufacturers to pay the applicable customs duties on imports of auto
parts that have the essential character of a motor vehicle is set forth in Decree 125. 1123 Therefore, we
are of the view that under the circumstances surrounding the measures at issue in this dispute, a tariff
line for CKD and SKD kits can be deemed created through the measures since China effectively
classifies such a kit under specific tariff lines and app lies the tariff rates applicable under such tariff
lines under the measures.
7.756 In this connection, we note China's argument that it has not created tariff lines for CKD and
SKD kits because it has not amended its Schedule as required under China's domestic law to create
new tariff lines. What is at issue in the presen t dispute is however China's commitment under the
WTO Agreement, not whether China has satisfied its domestic procedures for creating new tariff
lines. As China submits, satisfaction of the cond ition underlying the commitment in paragraph 93
rests with China as it is up to China to decide whether it wants to create tariff lines for CKD and SKD
kits, which did not exist at the time of accession. However, once China has decided to initiate an
action by enacting the measures at issue in 2004 and 2005 (3-4 years later from its accession to the
WTO in 2001), through which it systematically giv es CKD and SKD kits imports certain tariff lines,
that very action, in our view, effectively creat es tariff lines for CKD and SKD kits. Interpreting
otherwise would render meaningless China's commit ment contained in para graph 93 of China's
Working Party Report since China will always be able to resort to its domestic legal system to argue
that it has never amended its Sche dule and thus no tariff lines have been created. Given that the
manner in which to create new tariff lines is some thing entirely within the discretion of China under
its domestic legal system, we consider that the subs tantive effect of China's measures must be taken
into account in assessing the realization of th e condition underlying China's commitment in
paragraph 93. Therefore, we are not persuaded by China's argument in this respect.
7.757 In light of the foregoing, therefore, we find that by creating separate tariff lines for CKD and
SKD kits in its tariff schedule and by enacting the measures at issue, China has fulfilled the condition
underlying China's obligation in paragraph 93 to apply no more than 10 per cent of tariff rates to CKD
and SKD kits.1124
(c) Conclusion
7.758 For the reasons set forth above, the Panel finds that China has violated its commitment under
paragraph 93 of China's Working Party Report, wh ich is an integral part of the WTO Agreement 1125,
that it will apply tariff rates of no more than 10 pe r cent to CKD and SKD kits if China creates tariff
lines for CKD and SKD kits.

1122 China has also stated that since its adoption of the measures, all imports of CKD and SKD kits have
been made under Article 2(2) of Decree 125. Also s ee paragraph 7.72 above and China's response to Panel
question No. 15.
1123 China's response to Panel question No. 48.
1124 In this connection, we recognize that whether separate tariff lines for CKD and SKD kits can be
deemed created through the introduction of the measures within the meaning of paragraph 93 is a separate
question from how China classifies CKD and SKD kits (i.e. either as "motor vehicles" or as "auto parts"). As
we noted earlier, China's commitment concerned is the tariff treatment of no more than 10 per cent for CKD and
SKD kits if China creates tariff lines for such kits, regardless of how China classified such kits.
1125 See paragraph 7.740.

G. O
THER CLAIMS
7.759 In this section, the Panel addresses the remaining claims brought by the complaining parties.
1. European Communities (DS339)
7.760 The European Communities claims that China has acted inconsistently with its obligations
under the WTO Agreement, as set out in Part I, pa ragraphs 1.2, 7.2 and 7.3 of China's Accession
Protocol, by introducing measures that are incons istent with Article III of the GATT 1994 and the
TRIMs Agreement. Having found that the measures concerned in this disput e are inconsistent with
Article III:2 and III:4 of the GATT 1994 and having exercised judicial economy with respect to the
European Communities' claim under the TRIMs Agre ement, the Panel does not consider it necessary
to rule on the European Communities' claims concerning China's obligations under the Accession
Protocol.
2. United States (DS340)
7.761 The United States claims in its request for the est ablishment of a panel that to the extent that
the measures impose a charge on the importation of au to parts, China has acted inconsistently with
Article XI:1 of the GATT 1994. However, in respon se to a question from the Panel, the United States
has clarified that it does not pursue this claim in this proceeding.1126
7.762 The United States also claims th at China has acted inconsistently with its obligations under
the WTO Agreement, as set out in Part I, paragrap hs 1.2, 7.2 and 7.3 of China's Accession Protocol,
by introducing measures that cannot be justifie d under Article III of the GATT 1994 and the TRIMs
Agreement. Having found that the measures are in consistent with Article III:2 and III:4 of the
GATT 1994 and having exercised judicial economy w ith respect to the Unite d States' claim under the
TRIMs Agreement, the Panel does not find it n ecessary to rule on the United States' claims
concerning China's obligations under the Accession Protocol.
3. Canada (DS342)
7.763 Canada claims that China has acted inconsistently with Part I, paragraphs 1.2, 7.2 and 7.3 of
China's Accession Protocol, through measures incons istent with Article III of the GATT 1994 and the
TRIMs Agreement. Having found that the measures concerned in this disput e are inconsistent with
Article III:2 and III:4 of the GATT 1994 and having exercised judicial economy with respect to
Canada's claim under the TRIMs Agreement, the Panel does not consider it necessary to rule on
Canada's claims under China's Accession Protocol.
7.764 Furthermore, given that the Panel has found w ith respect to CKD and SKD kits that the
measures are inconsistent with China's obligations under paragraph 93 of the Working Party Report, it
is not necessary for the Panel to examine Canada's conditional claim that the measures constitute a
non-violation nullification and impairment under Article XXIII:1(b) of the GATT 1994.
VIII. CONCLUSIONS AND RECOMMENDATIONS
8.1 The Panel recalls the United States' request pur suant to paragraph 18 of the Panel's Working
Procedures that the Panel issue its findings in the form of a single document containing three separate
reports with common sections on th e Panel's conclusions and recommendations for each complaining

1126 United States' response to Panel question No. 165.

party.
1127 The European Communities and Canada we re in agreement with the Untied States'
request.1128 In accordance with the requ ests by the complaining parties, we therefore provide three
separate sets of conclusions and recommendations.
A. COMPLAINT BY THE EUROPEAN COMMUNITIES (DS339): CONCLUSIONS AND
RECOMMENDATIONS OF THE PANEL
(a) With respect to imported auto parts in general, the Panel concludes:
(i) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article III:2, first sentence of the GAT T 1994 in that they subject imported
auto parts to an internal charge in exces s of that applied to like domestic auto
parts;
(ii) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article III:4 of the GATT 1994 in that they accord imported auto parts less
favourable treatment than like domestic auto parts; and
(iii) Policy Order 8, Decree 125 and Announcement 4 are not justified under
Article XX(d) of the GATT 1994 as measures that are necessary to secure
compliance with laws or regulations which are not inconsistent with the
GATT 1994.
(b) In the alternative , assuming that the measures fall within the scope of the first
sentence of Article II:1(b) of the GATT 1994, with respect to imported auto parts in
general, the Panel concludes:
(i) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article II:1(a) and Article II:1(b), first sentence of the GATT 1994 in that
they accord imported auto parts treatment less favourable than that provided
for in the appropriate Part of China's Schedule of Concessions; and
(ii) Policy Order 8, Decree 125 and Announcement 4 are not justified under
Article XX(d) of the GATT 1994 as measur es that are necessary to secure
compliance with laws or regulations which are not inconsistent with the
GATT 1994.
(c) with respect to CKD and SKD kits, the Panel concludes:
(i) Policy Order 8, Decree 125 and Announc ement 4 are not inconsistent with
Article II:1(b) of the GATT 1994.
8.2 With respect to the European Communities' claims that Policy Order 8, Decree 125 and
Announcement 4 are inconsistent with the TRIMs Agreement and Article III:5 of the GATT 1994, the
Panel has decided to exercise judicial economy.

1127 See Section II.D above.
1128 European Communities' comments on the draft descriptive part of the Panel Report (4 October
2007); Canada's comments on the draft descriptive part of the Panel Report (4 October 2007).

8.3 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment. The Panel concludes that , to the extent that the measures listed above are
inconsistent with the GATT 1994, they have nullified or impaired benefits accruing to the European
Communities under those agreements.
8.4 Accordingly, the Panel recommends that the Di spute Settlement Body request China to bring
these inconsistent measures as listed above into conformity with its obligations under the GATT 1994.
B. C
OMPLAINT BY THE UNITED STATES (DS340): CONCLUSIONS AND RECOMMENDATIONS OF
THE PANEL
(a) With respect to imported auto parts in general, the Panel concludes:
(i) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article III:2, first sentence of the GAT T 1994 in that they subject imported
auto parts to an internal charge in exces s of that applied to like domestic auto
parts;
(ii) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article III:4 of the GATT 1994 in that they accord imported auto parts less
favourable treatment than like domestic auto parts; and
(iii) Policy Order 8, Decree 125 and Announcement 4 are not justified under
Article XX(d) of the GATT 1994 as measures that are necessary to secure
compliance with laws or regulations which are not inconsistent with the
GATT 1994.
(b) In the alternative , assuming that the measures fall within the scope of the first
sentence of Article II:1(b) of the GATT 1994, with respect to imported auto parts in
general, the Panel concludes:
(i) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article II:1(a) and Article II:1(b), first sentence of the GATT 1994 in that
they accord imported auto parts treatment less favourable than that provided
for in the appropriate part of China's Schedule of Concessions; and
(ii) Policy Order 8, Decree 125 and Announcement 4 are not justified under
Article XX(d) of the GATT 1994 as measur es that are necessary to secure
compliance with laws or regulations which are not inconsistent with the
GATT 1994.
(c) with respect to CKD and SKD kits, the Panel concludes:
(i) Policy Order 8, Decree 125 and Announc ement 4 are not inconsistent with
Article II:1(b) of the GATT 1994; and

(ii) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
China's commitment under paragraph 93 of China's Working Party Report,
which is an integral part of the WTO Agreement.
1129
8.5 With respect to the United St ates' claims that Policy Order 8, Decree 125 and Announcement
4 are inconsistent with Article III:5 of the GA TT 1994, TRIMs Agreement and SCM Agreement, the
Panel has decided to exercise judicial economy.
8.6 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment. The Panel concludes that , to the extent that the measures listed above are
inconsistent with the GATT 1994 and China's commitment under its Working Party Report, they have
nullified or impaired benefits accruing to the United States under those agreements.
8.7 Accordingly, the Panel recommends that the Di spute Settlement Body request China to bring
these inconsistent measures as listed above into conformity with its obligations under the GATT 1994
and the WTO Agreement.1130
C. COMPLAINT BY CANADA (DS342): CONCLUSIONS AND RECOMMENDATIONS OF THE PANEL
(a) With respect to imported auto parts in general, the Panel concludes:
(i) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article III:2, first sentence of the GAT T 1994 in that they subject imported
auto parts to an internal charge in exces s of that applied to like domestic auto
parts;
(ii) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article III:4 of the GATT 1994 in that they accord imported auto parts less
favourable treatment than like domestic auto part; and
(iii) Policy Order 8, Decree 125 and Announcement 4 are not justified under
Article XX(d) of the GATT 1994 as measures that are necessary to secure
compliance with laws or regulations which are not inconsistent with the
GATT 1994.
(b) In the alternative , assuming that the measures fall within the scope of the first
sentence of Article II:1(b) of the GATT 1994, with respect to imported auto parts in
general, the Panel concludes:
(i) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
Article II:1(a) and Article II:1(b), first sentence of the GATT 1994 in that
they accord imported auto parts treatment less favourable than that provided
for in the appropriate part of China's Schedule of Concessions; and
(ii) Policy Order 8, Decree 125 and Announcement 4 are not justified under
Article XX(d) of the GATT 1994 as measur es that are necessary to secure

1129 See paragraphs 7.740 and 7.758 above.
1130 See paragraphs 7.740 and 7.758 above.

compliance with laws or regulations which are not inconsistent with the
GATT 1994.
(c) with respect to CKD and SKD kits, the Panel concludes:
(i) Policy Order 8, Decree 125 and Ann ouncement 4 are inconsistent with
China's commitment under paragraph 93 of China's Working Party Report,
which is an integral part of the WTO Agreement.
1131
8.8 With respect to Canada's cl aims that Policy Order 8, D ecree 125 and Announcement 4 are
inconsistent with Article III:5 of the GATT 1994 an d the TRIMs Agreement, the Panel has decided to
exercise judicial economy.
8.9 Under Article 3.8 of the DSU, in cases where there is an infringement of the obligations
assumed under a covered agreement, the action is considered prima facie to constitute a case of
nullification or impairment. The Panel concludes that , to the extent that the measures listed above are
inconsistent with the GATT 1994 and China's commitment under its Working Party Report, they have
nullified or impaired benefits accruing to Canada under those agreements.
8.10 Accordingly, the Panel recommends that the Di spute Settlement Body request China to bring
these inconsistent measures as listed above into conformity with its obligations under the GATT 1994
and the WTO Agreement.1132

1131 See paragraphs 7.740 and 7.758 above.
1132 See paragraphs 7.740 and 7.758 above.