Part 1.7.3 of the Accession Protocol

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Bradley Feige
Ian Ginger
Will Gray
Outline
Background
 Chronology
 Main Issues
 Panel Decision
 Implementation
 Trade Policy Issues
 Conclusion

Historical Context

With accession to WTO in 2001 China agreed
to lower trade barriers for imported autos and
auto parts

After accession China raised barriers to trade
China wanted to develop and protect their auto
industry

 Specifically tap into the auto parts industry
 Growing middle class market

$19 Billion vehicle market (in 2006)
 Expansion of 9.5% over the past five years
Background Information
Approximately 88% of imports came from USA,
and EU
 In 2005:

 EU shipped $2 billion in vehicle parts
 US shipped $681 million in 2005
 Canada shipped $50 million

US exports to China in 2005:




64% Parts and access for motor vehicles
18.9% Vehicles for transportation of people
15.3% Other Vehicles
4.4% Special purpose motor vehicles
Historical Context

Requires GM, VW, Renault and others to purchase
40% from local suppliers
 More expensive and lower quality

If a car is constructed with more than 60% of
imported parts:
 All used imported parts had to be registered to local
customs agents
 Imposed a 25% tariff on each part
 10% on completed cars
 Tried to prevent foreign firms circumventing higher taxes

Violated China’s agreement to reduce tariffs on auto
imports as agreed upon in 2001.
Implementation of Tariff

In 2005 China’s Ministry of Finance and the Ministry of
Commerce issued Measures for the Administration of
Importation of Automotive Parts and Components for
Complete Vehicles.

Followed by Rules for Determining Whether Imported
Automotive Parts and Components Constitute Complete
Vehicle.
 Knock-Down Kits (CKDs)
 Semi Knock-Down Kits (SKDs)
US, EU, and Canada

Discouraged Chinese manufactures from using
imported parts

Unfairly discriminates against foreign auto part
producers

Put pressure on foreign auto part producers to
relocate to China

Job Loss

Loss of Revenue
Timeline of Filings

March 30, 2006 – The EU (DS339) and the
US (DS340) simultaneously submit requests
for consultation with China

April 14, 2006 – Canada (DS342) submits its
own request for a consultation with China on
substantially the same issue

July 18, 2008 – The Panel issues its report
largely ruling in favor of Canada, the EU and
the US
Timeline of Filings

December 15, 2008 – The Appellate Body
issues its own report mostly upholding the
Panel’s rulings

February 27, 2009 – China reports that it will
implement the ruling, and parties agree to
give China until September 1, 2009 to do so

August 15 and 28, 2009 – Chinese ministries
issue various laws and regulations changing
the relevant rules to agree with WTO
agreements
Claimed Violating Chinese Laws

Policy 8 Policy on the Development of the Automotive Industry
(May 2004)
 Establishes the legal basis for Decree 125 and Announcement 4,
requires various ministries to formulate rules regarding import of
automobiles and auto parts.

Decree 125 on the Administrative Rules for Importation of
Automotive Parts and Components for Complete Vehicles (April
2005)
 a joint ministerial decree that, among other things, sets the criteria upon
which imported auto parts should be considered a complete vehicle.

Announcement 4 on the Rules for Determining whether
Imported Automotive Parts Constitute the Complete Vehicles
(April 2005)
 provides further detail on the rules set out in Decree 125 and further
implements Policy 8.
Claimed Violated WTO
Articles
Per Country
Art. II:1 Art.
Art.
Art.
Art.
Art. X:1 Art.
Art. XXIII: Art. 2.1 &
Art. 2.2 Art. 3.1 (b)
(a) and III:1 of III:2 of III:4 of III:5 of and X:3 XI:1 of 1(b) of
para. 1(a) & of
and 3.2 of
(b) of GATT GATT GATT GATT (a) of
GATT GATT
2(a) of Annex TRIMS the SCM
GATT
GATT
1 of TRIMS
Agreement
United
States
(DS340)
x
Canada
(DS342)
x
European
Union
(DS339)
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Part. 1.7.2
of the
Accession
Protocol
Part. 1.7.3 Para. 203 Para. 93
of
of
of
Accession Working Working
Protocol Party
Party
Report
Report
x
x
x
x
x
x
x
x
x
x
x
x
x
x
x
Principle WTO Articles Under
Scrutiny

Article II of GATT – requires member
laws to treat other members’ commerce
no less favorable than what is agreed
upon in the original member’s schedule
of concessions

Article III of GATT – applies National
Treatment principle to internal tax laws
as well.
Principle WTO Articles Under
Scrutiny
Part 1.7.2 of the Accession Protocol – “…China shall
eliminate and shall not introduce, re-introduce or apply
non-tariff measures that cannot be justified under the
provisions of the WTO Agreement…”
 Part 1.7.3 of the Accession Protocol – “… China shall
ensure that the distribution of import licenses, quotas,
tariff-rate quotas, or any other means of approval for
importation, the right of importation or investment by
national and sub-national authorities, is not conditioned
on: whether competing domestic suppliers of such
products exist; or performance requirements of any
kind, such as local content, offsets, the transfer of
technology, export performance or the conduct of
research and development in China.”

Principle WTO Articles Under
Scrutiny

Paragraph 93 of 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 or semi-knocked
down kits for motor vehicles. If China created such tariff lines, the
tariff rates would be no more than 10 per cent.”

Paragraph 203 of Working Party Report – “The representative of
China confirmed that upon accession, … China would … eliminate
foreign-exchange balancing and trade balancing requirements,
local content requirements and export performance requirements…
Permission to invest, import licences, quotas and tariff rate quotas
would be granted without regard to the existence of competing
Chinese domestic suppliers…”
Decision

July 18, 2008
 Policy Order No. 8, Decree 125, and
Announcement 4 are inconsistent with Article
III:2 of GATT as they impose an internal charge
in excess of that on like domestic products
 They are also inconsistent with Article III: 4 as
they give less favorable treatment to imported
parts than similar domestic parts
 They are not justified according Article XX(d) as
measures that are necessary to secure
compliance with laws or regulations inconsistent
with GATT
Decision

With respect to CKDs (Knock-Down Kit)
and SKDs (Semi Knock-Down Kits):
 (i) Policy Order 8, Decree 125 and Announcement 4 are not
inconsistent with Article II:1(b) of the GATT 1994; and
 (ii) Policy Order 8, Decree 125 and Announcement 4 are
inconsistent with China's commitment under paragraph 93 of
China's Working Party Report
Decision

With respect to the United States' claims that
Policy Order 8, Decree 125 and Announcement 4
are inconsistent with Article III:5 of the GATT
1994, TRIMs Agreement and SCM Agreement, the
Panel decided to exercise judicial economy.

With its findings the Panel recommended that the
DSB request that China bring all inconsistencies
into conformity with its obligations under GATT
1994 and the WTO
Decision

On 15 September 2008
 China notified its decision to appeal to the
Appellate Body certain issues of law covered in
the Panel reports and certain legal
interpretations developed by the Panel.

December 15, 2008
 The Appellate Body upholds the Panel’s
decision
Implementation

February 11, 2009
 China informs the DSB that it would
implement its recommendations but would
need reasonable time to do so
 Reasonable time is agreed upon as being 7
months and 20 days

August 28, 2009
 China informs DSB that the General
Administration on Customs and relevant
agencies had promulgated a joint decree
repealing Decree 125

August 31, 2009
 China informs DSB that the 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.
Trade Policy Issues
Access of the U.S. automobile industry
to the Chinese market
 China’s attempt to create “export bases”
from which its seeks to increase its
exportation of a variety of goods

Effect of auto industry barriers
Employment in the US auto sector
industry dropped 10.2 % in 2008 and an
additional 23% in 2009.
 China’s auto part exports to the US have
increased 43% from 2004 to 2009

Further Implications
DS 440 regarding dumping and
subsidies on US auto imports filed
against China in 2012
 DS 450 regarding subsidies on autos
and auto parts filed against China in
2012

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