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 China’s 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
 China’s government initiated measures
to protect domestic auto parts
manufactures
 The U.S., along with other parties, made
the case that China’s measures were
inconsistent with WTO obligations

Politics of China’s Auto Industry
Company
Ownership
Dongfeng Motor
State
FAW Group
State
SAIC Motor
State
Chang’an
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 China’s
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, China’s 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 People’s Republic
of China , No. 125

Decree 125 establishes a uniform system for
determining whether an automobile’s 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).

WTO’s Appellate Body dutifully agrees with
China’s 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).
China’s 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
China’s 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 China’s 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
China’s 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
Canada’s Stance









Argument: China’s 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.
China’s 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 Panel’s 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
China’s commitment under paragraph 93 of China’s 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 Body’s 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 China’s 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, China’s 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 world’s
largest automobile market in 2009, Canada’s 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 Obama’s 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