Dispute Settlement Case Study Prepared for ITRN603

by Geraldine Govea, Daniel Hernandez, and

Victor Duncan

Contents
Case History and Context
The Main WTO Issue
Positions of Involved Parties
Panel/AB Decisions/Recommendations
Implementations
Our Dispute Observations
Time for Comments and Questions

DS340 Case Origins

Under normal circumstances, auto firms would expect

to pay a lower tariff at the point of entry for imported
auto parts than they would for complete vehicles.
If an automobile produced in China was comprised of
at least 60% imported parts, the imported parts
became reclassified as complete vehicles.
Because complete vehicles were charged higher
tariff rates a the point of entry, producers were then
subject to a post-entry charge for imported parts as if
they were complete vehicles.
The measures enacted were seen by some exporters
to be inconsistent with Chinas WTO obligations.

Case History: Proceedings

March-April, 2006: Complainants

requested consultations
Consultations failed to resolve dispute

September 15, 2006: Complainants

requested panel formation
Panel formed October 26, 2006

July 18, 2008: Panel circulated report

September 15, 2008: China submitted to
AB appeal to Panel decision
December 15, 2008: AB circulated report

Case History: Proceedings

January 12, 2009: DSB adopted AB
report
February 11, 2009: China informed DSB
of its intention to conform

Political & Business Context

China joined WTO in 2001
Chinas government initiated measures
to protect domestic auto parts
manufactures
The U.S., along with other parties, made
the case that Chinas measures were
inconsistent with WTO obligations

Politics of Chinas Auto Industry

Company

Ownership

Dongfeng Motor

State

FAW Group

State

SAIC Motor

State

Changan

State

BAIC Auto

State

Jianghuai (JAC)

State

Brilliance Auto

State

BYD

Private

Chery

Private

Geely

Private

Great Wall

Private

Politics of U.S./Canada/EC
Auto Industries

Foreign auto makers dominate Chinas

market

Taken from Wall Street Journal (online.wsj.com)

Statistical information on case findings

https://www.fas.org/sgp/crs/row/R43071.pdf

Statistical information cont.

Prior to 2006, Chinese vehicle imports have always

been greater or at par with its exports.
Between 2006-2008, Chinas vehicle exports
increased dramatically, which can be associated to
additional internal charges added at customs in
China.
2006 was when the United States began complaints
against China in the WTO.
In 2009 China declared that it had brought its
measures into conformity with the DSB
recommendations and rulings. Graph supports the
claim and shows that since 2009, Chinese
automobile imports have increased beyond its
exports.

https://www.fas.org/sgp/crs/row/R43071.pdf

The main WTO issues in the most

recent proceeding

Violation of the sub- principle of National Treatment (GATT

Article III)
The Appellate Body upheld the Panel's findings that the measures

violated: (i) Art. III:2 because they imposed an internal charge on

imported auto parts that is not imposed on like domestic auto parts;
and (ii) Art. III:4 because they accorded imported parts less
favorable treatment than like domestic auto parts by, inter alia,
subjecting only imported parts to additional administrative
procedures

GATT Article II: Schedule of Concessions

The Panel found that, even if the charge were an ordinary customs

duty, it was still inconsistent with Art. II:1(a) and (b) because it
corresponded to the tariff rate for motor vehicles (25%), in excess of
the applicable tariff rate for auto parts (10%) under China's
Schedule.

Principal issues continued

GATT Article XI: General Elimination of Quantitative

Restrictions
No prohibitions or restrictions other than duties, taxes or other

charges, whether made effective through quotas, import or

export licenses or other measures, shall be instituted or
maintained by any contracting party on the importation of any
product of the territory of any other contracting party or on the
exportation or sale for export of any product destined for the
territory of any other contracting party.

Principal issues continued

TRIMS agreement on Quantitative Measures

(Article II)
Without prejudice to other rights and obligations under

GATT 1994, no Member shall apply any TRIM that is

inconsistent with the provisions of Article III or Article XI of
GATT 1994.
An illustrative list of TRIMs that are inconsistent with the
obligation of national treatment provided for in paragraph
4 of Article III of GATT 1994 and the obligation of general
elimination of quantitative restrictions provided for in
paragraph 1 of Article XI of GATT 1994 is contained in the
Annex to this Agreement

Decree of the Peoples

Republic of China , No. 125

Decree 125 establishes a uniform system for

determining whether an automobiles shipment
of parts should be classified as either a semiknocked down kit or a complete-knocked
down kit.

Article 21(1) of Decree 125 provides:

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.

Decree 125 continued

Under Decree 125, the duty on a part is assessed

following assembly and production, rather than directly
upon importation (cf. Arts. 7, 11, 27-35).

The level of the duty on imported parts thus depends on

their final assembly into a completed vehicle in China. If
the imported parts will be incorporated in a car, which,
pursuant to Decree 125, does not have sufficient local
content, the imported parts will be subject to customs
duties that are normally payable on a completely built up
imported car (cf. Decree 125, Arts. 21 and 22); the final
duty on the parts is only assessed after their assembly
into entire automobiles (cf. Art 28); whether a part bears
the features of a complete vehicle is determined after the
parts have been assembled (cf. Art 5).

Decree 125 continued

The charges are applicable primarily to automobile

manufacturers, rather than the importers of
specific auto parts.

Manufacturers are responsible for the payment of

duties even if the parts were purchased in the
domestic market from the suppliers that previously
imported them (cf. Decree 125, Arts. 27-35).

Decree 125 continued

Verification by customs authorities at the site of the

manufacturer (cf. Decree 125, Arts. 17-20) occurs
following assembly and production. When viewed
in combination with the other elements listed here
it certainly confirms the internal character of the
measures.

Finally, duties are levied according to how

imported auto parts are incorporated in domestic
production (cf. Decree 125, Arts. 21-24).

The contested issue of U.S.

Complaint by the United States (WT/DS340).

On 30 March 2006, the European Communities

and the United States, and on 13 April 2006,
Canada, requested consultations with
China regarding China's imposition of measures
that adversely affect exports of automobile parts
from the European Communities, the United
States and Canada to China.

Third Parties: Argentina; Australia; Brazil; Japan;

Mexico; Chinese Taipei; Thailand

The specific WTO agreement

and specific provisions
involved.

GATT 1994: Art. II, II:1, III, III:2, III:4, III:5, XI:1
Subsidies and Countervailing Measures: Art. 3,
3.1(b), 3.2
Trade-Related Investment Measures (TRIMs): Art.
2, 2.1
Protocol of Accession: Part I, para. 1.2, Part I,
para. 7.2, Part I, para. 7.3

The consistency of the contested

national act with WTO
obligations.

We find that the United States claims are

consistent with WTO obligations, mainly, the
principal on National Treatment (GATT Art. II,
III, and XI).

WTOs Appellate Body dutifully agrees with

Chinas inconsistency in practicing WTO
obligations and recommended that the DSB
request China to bring its measures, found in
this Report, and in the US Panel Report as
modified by this Report, to be inconsistent with
the GATT 1994, into conformity with its
obligations under that Agreement (254).

Chinas Stance

Harmonized System (HS)

China argues that although the Harmonized system is not formally a part of the
Marrakesh Agreement Establishing the WTO, it is closely linked to it and provides the
rules and classification of parts which are absent from the GATT 1994
HS provides the decision-making rules for resolving a wide variety of classification
issues
HS section GIR (a) 2 specifies that an unassembled or disassembled article is
classified as the complete article instead of its component parts
The charge under the measures (Policy Order 8, Decree 125, and Announcement 4) is
based on a valid application of GIR (a) 2 to multiple shipments of parts and
components that are linked to each other through their common assembly into the
same motor vehicle
Using this classification, the charge is seen as an ordinary customs duty since it is
based on a proper determination of the product that is subject to the duty assessment
Consistency of the measures with Article III: 4 of the GATT 1994
On this point, China argues that any influence auto manufacturers have on using
domestic over imported auto parts derives solely from the structure of bound rates in
Chinas Schedule of Concessions that creates an incentive for automobile
manufacturers to assemble vehicles in China from imported parts and components
that, in their entirety, do not have the essential character of a motor vehicle under GIR
2 (a)

The European Communities

Argument

Argument: Under Chinas measures, imported auto

parts that are used in the manufacture of vehicles for
sale in China are subject to charges equal to the
tariffs for complete vehicles, if they are imported in
excess of certain thresholds
The measures are specifically inconsistent with the
following:
Articles II:1 (a), II:1 (b), III:2, III:4, III:5 of the GATT
1994
Articles 2.1 and 2.2 of the TRIMS Agreement
Article 3 of the SCM Agreement
Chinas obligations under its Accession Protocol

The Argument Brought Forth by

the United States

Argument: The measures introduced by

China appear to penalize manufacturers for
using imported auto parts in the
manufacture of vehicles for sale in China
The measures are inconsistent with the
following legal texts:
Article 2 of TRIMs Agreement
GATT 1994 Articles II and III
SCM Agreement Article 3
The Protocol of Accession

Canadas Stance

Argument: Chinas imposed measures cause different charges

on vehicles manufactured in China depending on the domestic
content of the automobile parts used in the manufacture, thus
providing domestic manufacturers with an advantage if they use
domestic parts
In addition, when enterprises utilize domestic parts they gain an
advantage in foreign investment as a result of the measures
Further, China would apply the measures to not only completed
vehicles, but also CKD (completely-knocked down) and SKD
(semi-knocked down) kits.
Chinas measures are inconsistent with:
The Protocol of Accession
Articles II and III of the GATT 1994
Article II of the TRIMs Agreement
Article II of the Rules of Origin [para. (b), (c), and (d)]
Article III of the SCM Agreement

The Panels
Recommendation
Separated its findings in the form of a single document containing three
separate reports for the European Communities, the United States, and
Canada respectively
Three common elements among all three countries:
a)
Regarding imported auto parts in general: Policy Order 8, Decree 125,
and Announcement 4 are inconsistent and unjustified
b)
In the alternative, assuming that the measures fall within the scope of
the first sentence of Article II: I (b) of the GATT 1994, the measures
are not justified and are inconsistent with Articles II and XX of the
GATT 1994
c)
With respect to CKD and SKD kits; Policy Order 8, Decree 125, and
Announcement 4 are not inconsistent with Article II:1 (b) of the GATT
1994
-The mentioned measures were also found to be inconsistent with
Chinas commitment under paragraph 93 of Chinas Working Party Report
Recommendation: The Panel recommends that the Dispute
Settlement Body (DSU) bequest China to these inconsistent measures
as listed above into conformity with its obligations under the GATT
1994 and the WTO Agreement

The Appellate Bodys Decision

Through the issuing of a single document

consisting of three reports, the Appellate Body
(AB) made the following recommendation for
the European Communities, the United States,
and Canada:
A recommendation that the DSB request
China to bring its measures, found in the
AB December 15, 2008 Report and in the
panel reports as modified in the AB report,
to be inconsistent with the GATT 1994, into
conformity with its obligations under the
GATT 1994

Implementation Timeline &

Procedures

February 11, 2009

China informed the DSB at the DSB Meeting that it intended to implement
the DSB rulings and needed an adequate amount of time to do so.
February 27, 2009
The European Communities, the United States, and Canada informed the
DSB that the appropriate amount of time is 7 months and 20 days, with a
maximum expiration date of September 1, 2009
August 31, 2009
China informed the DSB that on August 15, 2009 both its Ministry of
Industry and Information Technology and National Development and Reform
Commission had issued a joint decree to stop the implementation of
relevant provisions concerning the importation of auto parts in the
Automobile Industry Development Policy
On August 28, 2009 the General Administration on Customs and relevant
agencies had declared a joint decree to repeal Decree 125
Seeing as all these new decrees would come into effect on September
1, 2009 China declared that it had brought its measures into
conformity with the DSB recommendations and rulings

Observations: International
Considerations

Third Parties: Japan, Australia, Mexico, Chinese Taipei, Thailand, Argentina, and Brazil
Argentina
Sided with the complainants that the measures are not justified under Article XX of the
GATT 1994
Japan
Had a substantial trade interest as a result of being one of the major trading partners of
China in the automobile sector
Mexico
As an automobile parts producer, Mexico participated as a third party due to its trade
interest in the case
Australia
Substantial trade and commercial interests due to increasing volume of trade between
Australia and China (exports to China increased from AUD 70 million in 2004 to AUD
284 million in 2005)
Brazil
Raised certain questions such as: how should the Panel characterize Chinas Policy
Order 8, Decree 125, and Announcement 4 as a matter of WTO Law?

Observations of the Dispute in

the Global Trading System

U.S.-China Relations since the dispute:

Despite the resolution in 2009, Chinas use of export
bases has resulted in the accumulation of $1 billion
in subsidies between 2009 and 2011 to auto and
auto parts exporters
Canada-China Relations:
As China overtook the United States as the worlds
largest automobile market in 2009, Canadas vehicle
exports amounted to USD $49 million in 2009
EU-China Relations:
The European Communities (specifically, the EU 27)
exports of auto parts to China in 2012 amounted to
653,807.6 Kg

Questions?

Sources

USTR report on Obamas challenge to China on this case: http://www.ustr.gov/aboutus/press-office/press-releases/2012/september/obama-administration-challengeschina-auto-subsidies

Canada-China Business Council article: http://www.ccbc.com/zh-hant/research-reports2/sectoral-research/canada-china-relationship/

European Commission Trade Market Access Database:

http://madb.europa.eu/madb/statistical.htm?from=form&format=0&ahscode1=87080000
00&cb_reporters=EU27&cb_partners=0720&list_years=2012&list_years=2011&list_yea
rs=2010&cb_measures=iv&cb_measures=iq&cb_measures=ev&cb_measures=eq&cb_
measures=isq&cb_measures=esq&submit=Search

GATT 1994, TRIMS, Protocol of Accession

WTO Dispute Settlement File for DS340:

http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds340_e.htm

Dispute Summary
Report to the Panel, including all annexes
Report to the Appellate Body