At long last, the panel report in China – Auto Parts has come out. Regarding my previous posting on this dispute, click here. For two "preview" postings by Simon, click here and here. For another posting on the interim report by Henry, click here. Unsurprisingly (yet still frustratingly) it is a very "long" report, about 380 pages in total. Yes, it may be commercially significant and politically sensitive. Nonetheless, its sheer length would simply scare potential readers away. And, the way it is written is not inviting as well. For a brighter future of the global trading community, these unfortunate aspects must be changed somehow. More people should actually "read" panel reports to broaden the circle of the community of (trade) law. (How about appointing "permanent" panelists? I know it may be politically infeasible, yet still has lots of merits.)
Any way, what is this case all about? First, some background. Did you know that China’s auto market ($19bn ) is the world’s third largest, only after the U.S. and Japan? This means a lot of money. So, it is no wonder that all the plaintiffs in this case (the U.S., the EC and Canada) are interested in exporting auto parts to China. Yet China also wants to develop its own auto industries, and this has recently been quite successful. (e.g., Chery) In the same vein, China may want to use more domestic auto parts in manufacturing made-in-China automobiles. Such consideration is reflected on the Chinese tariffs on autos and auto parts. If you export auto parts to China, you should pay an ad valorem tariff of 10%; if you export autos to China, the tariff is 25%. However, if you export many auto parts "in multiple shipments" to China and if the Chinese government decides according to its criteria (Article 21 of Decree 125) that these multiple parts are likely to be assembled into a complete auto in China, you should pay a 25% tariff ex post on your auto parts. In other words, in the latter case the Chinese government deems that you have actually exported a complete car, not merely its parts. (If you are really curious on how this system operates, see paras. 7.67-7.69) The way in which the system works is similar to the "local content requirement" according to the plaintiffs.
There are many issues in this case, but let us focus on most contentious ones. First, is this 25% charge an "ordinary custom duty" under GATT Article II:1 (b) or an internal charge (taxation) under Article III:2? China argued that it was a tariff and therefore it could do whatever it wants as a matter of tariff classification. The plaintiffs claimed that first, it was a discriminatory tax violating Article III:2, and then even if it was a tariff, as China argued, it still violated Article II:1 (b). The panel sided with the plaintiff in both counts. Of course, logically a charge cannot be a tariff and a tax at the same time. One might reasonably speculate that once the panel ruled that the Chinese measure violated Article III:2, it should stop there in the name of judicial economy. Yet the panel went on to rule on the Article II:1 (b) issue as well.
First, the panel viewed that the charge under the measure (some combination of the Decree 125 and the Announcement 4) was an "internal charge" under GATT Article III:2, citing several case laws.
[7.130. We also find useful guidance from previous GATT jurisprudence on the question of whether a charge is subject to the disciplines of Articles II or III of the GATT 1994. For example, in the GATT Panel Belgium – Family Allowances, the Panel considered that because a 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" as enough reason to characterize such a levy as an "internal charge" under Article III:2 (…)]
The panel basically viewed that "when or where the internal charge is collected is not necessarily the decisive criterion to indicate that it falls within the scope of Article III:2 of the GATT 1994." (para. 7.133). Nonetheless, for a charge to constitute an "ordinary custom duty," as China argued, the panel ruled, it should be levied "on" (at the time of) the importation. Therefore, according to the panel the strict temporal dimension is required only under Article II (tariff), not under Article III (domestic taxation).
[7.166 With the above conclusion in mind, we consider that, taken together, the terms "on their [products] importation" and "into the territory" in the first sentence of Article II:1(b) suggest that "ordinary customs duties" are charges which the obligation to pay accrues based on the products as they enter the customs territory of another Member. In particular, the strict temporal element of the word "on", which points to the precise moment of the action it modifies, indicates that an "ordinary customs duty" must be assessed on the basis of a good at the moment of importation.]
The panel relied on a strict textualism to reach this conclusion, also looking at both the French and the Spanish version of Article II:1 (b). While the panel seemingly tried to create a semblance of taking into account the object and purpose of the WTO Agreement, I think it largely failed simply because of the lack of sufficient explanation in this regard. (See para. 7.211). Moreover, the panel’s accentuation on the "security and predictability" appeared to tilt toward the "exporting" countries (U.S., EU and Canada)’ concerns, not fully taking account of those of the "importing" country (China).
Once the panel viewed that the charge was an internal tax under Article III:2, the rest of the reasoning (like product etc.) was quite routine. (domestic and foreign auto parts are like and 25% tax only on the latter) As a next step, China tried to justify the measure with Article XX (d). China basically claimed that such measure was necessary to prevent "circumvention" of the tariff provisions of motor vehicles. However, the panel found that China failed to prove that the measure did potentially or actually "secure compliance" with its tariff schedules (paras. 7.314, 7.346) and that China could have thought of less trade-restrictive alternatives, such as "investigating individual cases as the need arises." (para. 7.364)
Turning to the panel’s response to the plaintiff’s conditional (alternative) claim that the charge also violated Article II:1 (b), the panel interpreted China’s tariff schedules on auto parts with the help of the expert organization (World Customs Organization (WCO)). The key issue here is "whether, under China's Schedule of Concessions, the tariff provisions for motor vehicles include in their scope auto parts imported separately in multiple shipments that are found to have the essential character of a motor vehicle based on their assembly into a motor vehicle." (para. 7.373) Interestingly, the panel interpreted itself the "General Interpretative Rules (GIRs)" for the Harmonized System (HS), although it did consult the WCO.
[7.393 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."]
So, whether China’s position is valid depends on how one interprets the GIR 2(a). Critically, the WCO viewed that the GIR 2(a) is quite open-ended. For example, "the WCO Secretariat adds that the HS is silent on "as presented" and the HS Committee has not considered its meaning except in the context of the issue of split consignments." (para. 7.408)
[7.409 The WCO Secretariat replies that during the HS Committee discussions at issue, the Committee reaffirmed its earlier decision that the possible treatment of split consignments as a single entity for purposes of GIR 2(a) was a matter to be handled exclusively at the discretion of each individual administration, taking into account national laws and regulations. This decision was never codified in legal or Explanatory Note texts, although it was informally noted by the Committee from time to time. The WCO Secretariat notes that, based on the Secretariat's experience, national regulations and laws appear to differ with respect to the applicability of GIR 2(a) to split consignments. The WCO Secretariat also notes that it would expect that those administrations which permit such consolidation of entries would consider requests for that treatment on a case-by-case basis, applying standards set forth in national laws and regulations.]
Despite the likely existence of the margin of appreciation in this area, the panel went ahead and found that "in light of the evidence discussed above, we are not persuaded that an interpretative rule on tariff classification under the HS was intended to address issues relating to the circumvention of tariff duties." (para. 7.449) Subsequently in the "object and purpose’ section, the panel once again revealed its export bias.
[7.460 Considered in this context, an interpretation of the tariff term "motor vehicles" to include auto parts and components imported in multiple shipments for assembly into a motor vehicle in the importing country could indeed undermine the objective and purpose of maintaining security and predictability of the reciprocal market access arrangements in China's tariff concessions. This is particularly so given that one of the objects and purposes of the WTO Agreement in general as well as of the GATT 1994 is directed to the substantial reduction of tariffs and other barriers to trade, as found by the Appellate Body.]
Final words. I would say the real commercial impact of this case (decision) would be rather limited. Many foreign and domestic car makers in China now wants to use cheaper domestic auto parts, rather than importing more expensive foreign ones. Moreover, more foreign auto parts makers are relocating in China to produce their own parts there. Nonetheless, China might want to appeal the panel decision if it would like the Appellate Body to correct some of the alleged "export biases" of the panel report, not only for the sake of this particular dispute, but rather for the sake of possible similar cases in the future.
Now the floor is open. What do you think?
