Last week, I did a short post summarizing the soon-to-be-circulated WTO panel report in China - Auto parts. I focused on the complainants' claims, based on a quick read of the EC/U.S. first submissions. Then an anonymous commenter pointed out that China raised an Article XX(d) defense. China's submissions are not online (as far as I know), but the subsequent EC/U.S. submissions made reference to it. The Article XX(d) defense is even more interesting than the claims, so now I'm going to describe this part of the case briefly as well.
Article XX(d) sets out an exception for measures that are:
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;
Recall that China has a 10% tariff duty on auto parts, but a 25% duty on automobiles. To reduce the amount of duties paid, foreign companies have an incentive to export parts rather than completed automobiles. The parts can then be assembled into finished automobiles after they arrive in the country. In response to this possibility, China adoped measures under which some imported parts that are subsequently assembled into automobiles after entry are not treated as parts for duty purposes, but rather are treated as automobiles subject to the 25% tariff. The justification is that by importing auto parts that are then assembled into automobiles, the exporter is evading the 25% rate for automobile imports.
Noting again that I have not seen the Chinese submissions, China's argument appears to be along the following lines. The 25% tariff on automobiles is a measure that is consistent with the GATT. The measures at issue here, which extend the 25% tariff to certain imported parts that are assembled into automobiles in China, "secure compliance" with the 25% automobile duty by ensuring that foreign companies do not evade this duty.
Thus, two interesting and important questions for the Panel will be: (1) do these measures "secure compliance" with the 25% tariff? And (2) are they "necessary" to do so?
And, of course, there is the Article XX chapeau to get past, too.
