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China – Measures Affecting Imports of Automobile Parts

  • JASPER WAUTERS (a1) and HYLKE VANDENBUSSCHE (a2)
Abstract
Abstract

This paper reviews the WTO Appellate Body Report on China – Measures Affecting Imports of Automobile Parts (WT/DS342/AB/R, 15 December 2008). This dispute concerns a set of regulatory measures imposing a 25% ‘charge’ on imported automobile parts used in the manufacture of motor vehicles in China. The main legal question in this case consisted of the nature of this charge as either a border charge subject to China's tariff concessions or an internal charge, subject to the basic nondiscrimination requirement of GATT Article III. In our report, we examine the reasoning of the Appellate Body relating to the difference between these two types of charges. We discuss the role and relevance of this distinction in the GATT/WTO legal system in general, and for the purposes of resolving this dispute in particular. We also address the important systemic question relating to the review of a Member's domestic laws for purposes of determining their GATT/WTO consistency. This was an important issue in this case, as China claimed that the Panel misunderstood the meaning of the relevant Decree and requested the Appellate Body to review the Panel's erroneous reading of this Decree. We discuss the Appellate Body's reasoning relating to the review of domestic laws by Panels and the Appellate Body and express concern over the distinction drawn by the Appellate Body between legal and factual elements of relevance in the interpretation of such laws.

The ‘economic bone’ in this case is less straightforward to split than the legal one. In legal terms, the Appellate Body's decision is a time-consistent one, but, in economic terms, it is not clear if it is also a welfare-optimal one. The main reason is that many questions relevant to the case were left unaddressed by the Appellate Body. Due to the lack of factual evidence to substantiate its allegations, the Panel's ruling remains rather speculative on certain accounts. For this purpose, we engage in our own examination of the facts, using mainly a unique dataset of Chinese firm-level data. We analyze issues of ownership in China's car industry, the growth of the import-competing Chinese industry over time, the elasticity of the demand for cars, and duty pass-through, etc. The purpose is to verify more closely who ‘benefits’ and who ‘loses’ from the Chinese import duty so as to understand the economic incentives involved. In this respect, we attempt to determine whether the economics support the conclusion that China pursued a beggar-thy-neighbor policy in the car-part industry.

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*Email: jwauters@geneva.whitecase.com
**Email: hylke.vandenbussche@uclouvain.be
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This paper reviews the WTO Appellate Body Report on China – Measures Affecting Imports of Automobile Parts (WT/DS342/AB/R, 15 December 2008) (hereinafter Appellate Body Report). It is prepared for the American Law Institute project on ‘Principles of Trade Law: The World Trade Organization.’

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1 These instruments are:

  • Policy on Development of the Automotive Industry (Order of the National Development and Reform Commission (No. 8)) (‘Policy Order 8’), which entered into force on 21 May 2004;

  • Administrative Rules on Importation of Automobile Parts Characterized as Complete Vehicles (Decree of the People's Republic of China, No. 125) (‘Decree 125’), which entered into force on 1 April 2005;

  • Rules on Verification of Imported Automobile Parts Characterized as Complete Vehicles (Public Announcement of the Customs General Administration of the People's Republic of China, No. 4 of 2005) (‘Announcement 4’), which entered into force on 1 April 2005.

2 An ‘assembly’ is defined in Article 4 of Decree 125 to include the vehicle body (including cabin) assembly, the engine assembly, the transmission assembly, the driving axle assembly, the driven axle assembly, the frame assembly, the steering system, and the braking system. The Panel found that an ‘assembly’ corresponds roughly to the major parts of a vehicle (Panel Reports, China – Measures Affecting Imports of Automobile Parts (WT/DS342/R) (hereinafter Panel Reports), paras. 7.88 and 7.89).

3 Although CKD and SKD kits are specifically mentioned in Article 21(1) of Decree 125, they are not defined under the challenged measures. The Panel found that, for purposes of this dispute, CKD and SKD kits refer to all or nearly all of the auto parts and components necessary to assemble a complete vehicle, which must be packaged and shipped in a single shipment, and which must go through the assembly process to become a complete vehicle once they have been imported into the importing country (see, Panel Reports, paras. 7.644–7.647).

4 Panel Reports, paras. 7.51–7.52. Third-party auto suppliers and auto-part manufacturers are not covered by this requirement, as they are subject to normal customs procedures and thus pay the import duty at the tariff rate applicable to auto parts at the time of importation (Panel Reports, para. 7.51).

5 Once production of the relevant vehicle model begins, the automobile manufacturer must submit a verification application to the relevant authorities. Following verification by the authorities, the automobile manufacturer must make a declaration of duty payable, and submit additional documentation in respect of all relevant complete vehicles assembled from when production of the vehicle model began. The authorities then proceed to classify the auto parts as complete vehicles and to collect the ‘duty’ and VAT for all imported auto parts used in assembling those complete vehicles.

6 The Panel explained that, although the measures at issue do not define CKD and SKD kits, it considered CKD and SKD kits under the measures to refer to all or nearly all of the auto parts and components necessary to assemble a complete vehicle, which must be packaged and shipped in a single shipment, and which must go through the assembly process to become a complete vehicle once they have been imported into the importing country (Panel Reports, paras. 7.644–7.647).

7 Paragraph 93 of China's WPR states as follows: ‘Certain members of the Working Party expressed 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 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%. The Working Party took note of this commitment.’

8 Panel Reports, para. 7.105.

9 Ibid.

10 Ibid., para. 7.185.

11 Ibid., para. 7.204.

12 Ibid., para. 7.205.

13 Ibid., para. 7.207.

14 Ibid.

15 Ibid., para. 7.212. The Panel excluded from the scope of this finding the ‘charge’ imposed on CKD and SKD kits imported under Article 2(2) of Decree 125, which it considered to be an ordinary customs duty.

16 Ibid., para. 7.223.

17 Ibid., para. 7.272.

18 Ibid., para. 7.523.

19 Ibid., para. 7.365.

20 Ibid., para. 7.346. China did not appeal the Panel's finding under Article XX(d).

21 Ibid., para. 7.312. The Panel noted 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 parts. Further, as submitted by the complainants, the text of the preamble of Policy Order 8 also shows that the main reason for introducing the Policy is to further develop China's automotive industry (Ibid., para. 7.306).

22 Ibid., para. 7.326

23 Ibid., para. 7.337.

24 Ibid., para. 7.346.

25 Ibid., para. 7.361.

26 Ibid., para. 7.736.

27 Ibid., para. 7.758. The Panel exercised judicial economy with respect to the claims under the TRIMs Agreement, Article III:5 of the GATT 1994, and Articles 3.1(b) and 3.2 of the SCM Agreement.

28 The text of GIR 2(a) provides:

Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. 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.

29 Appellate Body Report, para. 139.

30 Ibid., para. 152.

31 Ibid., para. 155.

32 Ibid., para. 158.

33 Ibid., para. 161.

34 Panel Reports, paras. 7.128 and 7.129.

35 Ibid., para. 7.132 (original emphasis).

36 Appellate Body Report, para. 171.

37 Ibid., para. 172.

38 Ibid., para. 173. The Appellate Body refers to the scenario where an automobile manufacturer does not import parts directly, but instead purchases them from an independent third-party supplier within China who paid 10% import duty on the imported parts, while the manufacturer may be liable to pay 25% duties depending on the amount of imported parts used in the assembly of the vehicle (Ibid., para. 174).

39 Ibid., para. 182.

40 Ibid., para. 184.

41 Ibid., paras. 195–196.

42 Ibid., para. 209.

43 Ibid., para. 225.

44 Ibid., para. 235.

45 Ibid., para. 238.

46 Ibid., para. 243.

47 Ibid., para. 245.

48 Appellate Body Report, Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items (WT/DS56/AB/R, adopted 22 April 1998), para. 47.

49 Appellate Body Report, Japan – Taxes on Alcoholic Beverages (WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996), DSR 1996:I, pages 16–17; 109–110 (original footnotes omitted). See also Appellate Body Report, United States – Tax Treatment for ‘Foreign Sales Corporations’ – Recourse to Article 21.5 of the DSU by the European Communities (WT/DS108/AB/RW, adopted 29 January 2002), para. 204. The GATT Panel in Italy–Agricultural Machinery also provides insight on the object and purpose of Article III, stating that ‘the intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the like domestic products once they had been cleared through customs. Otherwise indirect protection could be given’ (GATT Panel Report, Italian Discrimination Against Imported Agricultural Machinery (adopted 23 October 1958), para. 11).

50 Appellate Body Report, European Communities – Customs Classification of Frozen Boneless Chicken Cuts (WT/DS269/AB/R, WT/DS286/AB/R, adopted 27 September 2005), para. 243.

51 Panel Reports, para. 7.201.

52 In this case the 1952 GATT Panel reached the following conclusion:

After examining the legal provisions regarding the methods of collection of that charge, the Panel came to the conclusion that the 7.5% levy was collected only on products purchased by public bodies for their own use and not on imports as such, and that the levy was charged, not at the time of importation, but when the purchase price was paid by the public body. In those circumstances, it would appear that the levy was to be treated as an ‘internal charge’ within the meaning of paragraph 2 of Article III of the General Agreement, and not as an import charge within the meaning of paragraph 2 of Article II. GATT Panel Report, Belgian Family Allowances (allocations familiales) (‘Belgium–Family Allowances’), G/32, adopted 7 November 1952, BISD 1S/59.

53 GATT Panel Report, European Economic Community – Regulation on Imports of Parts and Components (‘EEC–Parts and Components’), adopted 16 May 1990, BISD 37S/132.

54 Panel Report, Argentina – Measures Affecting the Export of Bovine Hides and Import of Finished Leather (WT/DS155/R, adopted 16 February 2001), para. 11.145 (emphasis added, original footnote omitted).

55 Panel Report, Argentina–Hides and Leather, para. 11.145.

56 For example, the GATT Panel on EEC–Parts and Components came to the following conclusion: ‘The text of Articles I, II, III and the Note to Article III refers to charges ‘imposed on importation’, ‘collected … at the time or point of importation’ and applied ‘to an imported product and to the like domestic product’. 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. This reading of Articles II and III is supported by their drafting history and by previous panel reports (e.g. BISD 1S/60; 25S/49, 67)'. GATT Panel report, EEC–Parts and Components, para. 5.6.

57 GATT Panel Report, EEC – Measures on Animal Feed Proteins, L/4599, adopted on 14 March 1978, 25S/49, para. 4.16.

58 Panel Report, India – Measures Affecting the Automotive Sector (WT/DS146/R, WT/DS175/R, adopted 5 April 2002), para. 7.257.

59 Article 13 of Council Regulation (EEC) No. 2423/88 as discussed in GATT Panel report, EEC–Parts and Components, paras. 2.2–2.7.

60 GATT Panel Report, EEC–Parts and Components, para. 5.5

61 The Panel equally rejected the defense that such an anti-circumvention provision was necessary to secure compliance with its GATT-consistent antidumping laws, since the challenged general antidumping Regulation of the EEC did not establish obligations that require enforcement; it merely established a legal framework for the authorities of the EEC. Therefore, in the view of the GATT Panel, the anti-circumvention duties do not serve to enforce the payment of antidumping duties and cannot be justified under GATT Article XX (d). GATT Panel Report, EEC–Parts and Components, para. 5.18.

62 According to the GATT Panel, ‘the fact that the EEC treats imported parts and materials subject to anti-circumvention duties as not being “in free circulation” therefore cannot, in the view of the Panel, support the conclusion that the anti-circumvention duties are being levied “in connection with importation” within the meaning of Article II:1(b)’, GATT Panel Report, EEC–Parts and Components, para. 5.7.

63 Appellate Body Report, para. 158.

64 Ibid., para. 161.

65 Ibid., para. 163.

66 Panel Report, para. 7.105.

67 The Appellate Body Report, India – Additional and Extra-Additional Duties on Imports from the United States (WT/DS360/AB/R, adopted 17 November 2008), found that Indian ‘Additional Duty would not be justified under Article II:2(a) of the GATT 1994 insofar as it results in the imposition of charges on imports of alcoholic beverages in excess of the excise duties applied on like domestic products. Consequently, this would render the Additional Duty inconsistent with Article II:1(b) to the extent that it results in the imposition of duties on alcoholic beverages in excess of those set forth in India's Schedule of Concession’. Appellate Body Report, India–Additional Duties, para. 214. In other words, it seems that the Appellate Body was saying that a charge imposed at the border which is not consistent with the non-discrimination requirement of Article III.2, even if it perhaps has the character of an internal charge, would be inconsistent with Article II.1(b) on border measures.

68 The exception could consist of parts ‘presented as complete vehicles’ under the General Rules for the Interpretation of the Harmonized System, namely, GIR 2(a), which provides:

Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. 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.

However, as explained through lengthy argumentation by the Panel, this does not justify China's imposition of duties for complete vehicles on parts which it has determined as having the essential character of a complete vehicle based on their subsequent assembly. Panel Report, Section D.

69 GATT Panel Report, Canada – Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, DS 17/R, adopted 18 February 1992, 39 S/75–76, para. 5.6.

70 Appellate Body Report, para. 224.

71 Ibid., para. 225.

72 [footnote original] See, for instance, Appellate Body Report, United States – Section 211 Omnibus Appropriations Act of 1998 (WT/DS176/AB/R, adopted 1 February 2002), para. 106.

73 [footnote original] The Appellate Body Report, United States – Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (WT/DS244/AB/R, adopted 9 January 2004), stated that ‘[i]f the meaning and content of the measure are clear on its face then the consistency of the measure can be assessed on that basis alone. If, however, the meaning … is not evident on its face, further examination is required’ (Appellate Body Report, US–Corrosion-Resistant Steel Sunset Review, para. 168). See also Appellate Body Report, United States – Countervailing Duties on Certain Corrosion-Resistant Carbon Steel Flat Products from Germany (WT/DS213/AB/R, adopted 19 December 2002), paras. 156 and 157.

74 Appellate Body Report, para. 225. Following its review of the Decree, the Appellate Body concluded that the Panel's construction of Article 2(2) of the Chinese Decree that the kits were exempted from the administrative aspects of the measure but still subject to the charge imposed by the Decree ‘amounts in our view to legal error’ (Appellate Body Report, para. 238).

75 In our view, there are two different questions at play: First, what does the measure – i.e., the municipal law in question – mean, and what does it require authorities to do? This seems to be a determination of what in fact is required under the law, as interpreted by the domestic courts, etc. A second question is whether what is required by municipal law may correctly be qualified as a violation of the obligations set forth in the international agreement. That second question is clearly a legal assessment, as it involves the application of the international law, as interpreted on the basis of the principles of the Vienna Convention on the Law of Treaties, to the facts as determined by the Panel when determining the meaning of the municipal law. Of course, as with any ‘measure’, a review that concerns only the second question is limited, as the review of the Panel's application of the law to the facts is based on the assumption that the Panel correctly determined what the facts are. But maybe that limitation was precisely what Article 17.6 DSU intended to impose on the Appellate Body. The arguments offered by the Appellate Body for a more expansive review authority are not very convincing, as the determination of the implications of a Member's municipal law are not more ‘legal interpretations’ than is the determination of the implications of any other measure. It seems that the Appellate Body is simply keen to review a Panel's interpretation of the meaning of municipal law, while with regard to other types of ‘measures’, it feels comfortable hiding behind the argument that it is not reviewing the factual determinations of the Panel unless an Article 11 DSU claim has been made. In any case, the Appellate Body construed a way out of the limitation imposed by Article 17.6 DSU through the use of Article 11 DSU (‘objective assessment of the matter’) as the avenue to bring factual determinations before the Appellate Body. The Appellate Body could have used the same avenue to address a Panel's interpretation of the meaning of municipal law.

76 For an interesting discussion of the question of the treatment of national law in WTO law, see Bhuiyan S. (2007), National Law in WTO Law, Effectiveness and Good Governance in the World Trading System, Cambridge University Press, pp. 207243.

77 Permanent Court of International Justice, Certain German Interests in Polish Upper Silesia, [1926], PCIJ Rep., Series A, No. 7, p. 19, as referred to with approval in Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical Products (WT/DS50/AB/R, adopted 16 January 1998), para. 65. Also see GATT Panel Report, US–Tobacco, para. 75. This statement by the PCIJ is often quoted without much consideration of what seems to have been meant by it. Basically, it seems that the PCIJ meant to say that an international tribunal does not have to take ‘judicial notice’ of a country's municipal law but may require proof of the meaning of municipal law and review evidence relating to the meaning of the law. It also implies that an international tribunal is to examine the meaning of municipal law in the domestic factual context – i.e., in the light of its application by the administrative authorities, the interpretation offered by domestic courts, etc. See Brownlie I. (2008), Principles of Public International Law, 7th Edition, Oxford University Press, pp. 3839.

78 Appellate Body Report, US–Carbon Steel, para. 157 (footnote omitted); Appellate Body Report, Dominican Republic – Measures Affecting the Importation and Internal Sale of Cigarettes (WT/DS302/AB/R, adopted 19 May 2005), para. 111 and Appellate Body Report, United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services (WT/DS285/AB/R, adopted 20 April 2005), para. 138.

79 Appellate Body Report, Dominican Republic–Import and Sale of Cigarettes, paras. 112–115.

80 Panel Report, United States – Sections 301–310 of the Trade Act of 1974 (WT/DS152/R, adopted 27 January 2000), para. 7.18.

81 GATT Panel Report, US–Tobacco, para. 75.

82 M. Irish (2004), The Auto Pact: Investment, Labour and the WTO, Kluwer Law International.

83 Blonigen A. (2002), ‘Tariff-jumping antidumping duties’, Journal of International Economics, 57(1); Haaland J. and I. Wootton (1998), ‘Antidumping jumping: reciprocal antidumping and industrial location’, Weltwirtschaftliches Archiv, 134(2).

84 The product level trade data set we use is UN Comtrade for imports and exports of complete motor vehicles (HS codes 8702, 8703, 8704) and motor vehicle parts (HS codes 8706, 8707, 8708).

85 Javorcik Beata Smarzynska (2004), ‘Does foreign direct investment increase the productivity of domestic firms? In search of spillovers’, The American Economic Review, 94(3): 605627.

86 In the original Panel Report, the Chinese delegation spoke of an industrial policy strategy.

87 Baldwin Robert E. (1969), ‘The case against infant-industry tariff protection’; The Journal of Political Economy, 77(3): 295305.

88 Sandra Poncet, Walter Steingress, and Hylke Vandenbussche (2008). ‘Financial constraints in China: firm-level evidence’; CORE DP 2008/79; Guariglia Alessandra and Sandra Poncet (2008), ‘Could financial distortions be no impediment to economic growth after all? Evidence from China’, Journal of Comparative Economics, 36(4): 633657.

89 The firm-level data set we used is Oriana with variables on 200,000 firms in which we identify the firms in the car manufacturing sector and in car parts. Oriana does not use a product classification but a sector level classification NAICS. The correspondence with the HS codes suggest that the complete motor vehicles producers are in NAICS (2002) codes 336111, 336112, 336120, and 336214 while the car parts firms belong to NAICS (2002) 336211, 336312, 336322, 336330, 336340, 336350, and 336399. One of the serious limitations that we face is that we only have good quality data for 2003 to 2006. Another limitation is that firm-level data set does not have imports at the firm level. The exports values are firm-level, but are not split up by destination countries or by product.

90 Appellate Body Report.

91 See footnote 75 for more information.

92 Paul Krugman (1984), ‘Import protection as export promotion: international competition in the presence of oligopoly and economies of scale’, in Henry Kierzkowski (ed.), Monopolistic Competition and International Trade, Oxford: Oxford University Press.

93 Baldwin, ‘The case against infant-industry tariff protection’.

94 H. Kasahara and B. Lapham (2008), Productivity and the decision to import and export: theory and evidence', CESifo working paper no. 2240; J. Konings and H. Vandenbussche (2009), ‘Antidumping protection hurts exporters: firm-level evidence from France’, CEPR discussion paper no. 5678.

This paper reviews the WTO Appellate Body Report on China – Measures Affecting Imports of Automobile Parts (WT/DS342/AB/R, 15 December 2008) (hereinafter Appellate Body Report). It is prepared for the American Law Institute project on ‘Principles of Trade Law: The World Trade Organization.’

The views expressed in this paper are those of the author only and do not represent the views of the firm that he works for. We thank Marco Bronckers for a useful discussion and Rob Howse for comments on an earlier version.

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