This is a supplemental posting to Henry’s earlier posting on China-Auto Parts.
FACTS
Under a special regime (such as Decree 125), China imposed 25% duty on those imported auto parts, which meet certain criteria, as if they were “complete vehicles,” subject to the complicated post-importation verification and other administrative procesures. Normal imported auto parts are levied 10% duty. China also imposed 25% duty on more ready-made parts (such as CKD and SKD) imported in a single shipment.
ISSUES
Major exporters of auto parts (US, EC and Canada) accused the Chinese measures of being discriminatory, akin to the domestic content requirement. Their complaints consisted of three main parts. First, the 25% charges were internal charges inconsistent with GATT Article III:2, while related complicated administrative measures (verification etc.) were internal measures inconsistent with Article III:4. Second, conditionally if those measures were border measures, they would be still inconsistent with Article II:1. Third, the 25% duty to CKD/SKD violated China’s commitment of 10% in the accession negotiation.
Panel Report
Panel side with the complainants in all three points.
Appellate Body Report
The AB upheld the panel as to the first point. The AB basically viewed the Chinese duties could not be “ordinary custom duties” under GATT Article II:1 since the “obligation” to pay duties was determined “after” products entered into the Chinese territory. (para. 158) Article II:1(b) provides that “the products (…) shall, on their importation into the territory to which the Schedule relates, (…) be exempt from ordinary customs duties in excess of those set forth and provided therein.” Therefore, by the process of elimination Chinese measures fell under Article II (internal measures). Having ruled so, the AB found it unnecessary to go to the second point.
The AB reversed the panel’s finding on the third point, for which China might declare a victory. The panel characterized the 25% duty on CKD/SKD as part of the Chinese measures in question and held that such duty was higher than the 10% level which China promised when it accessed the WTO. However, the AB ruled that the 25% charge system on CKD/SKD was completely exempt from the measures in question (Decree 125) and therefore disconnected from Paragraph 93 of the China Accession Working Party Report in which China had promised the 10% duty on CKD/SKD (paras. 244-45).
SOME THOUGHTS
1. Both the panel and the AB seemed to prioritize interests of “exporting countries” (against the de facto domestic content requirement) over those of “importing countries” (anti-circumvention). Maybe a bit divergent from the EC – Computer Equipment which took importing countries’ interests seriously.
2. In determining that the Chinese measures were “internal” measures, both the panel and the AB adopted quite a formalistic, textual approach, which consequently sidestepped the importing countries’ discretion issue in tariff classification (as to “completed vehicles”).
3. It remains to be seen how China will implement the AB report. It seems possible that China would amend the Decree 125 in a way which would avoid any post-importation administrative procedures yet still maintaining the 25% duty on certain auto parts. For example, if China frontloaded all the administrative procedures before the importation and penalized any misstatements by ex post verifications, China might have achieved the same effect.
4. As more foreign auto parts makers are contemplating building factories in China to produce cheaper domestic parts, the actual commercial impact of this decision might be limited. (This was the case at least before the global financial crisis.)
Finally, if you are interested in taking a look at an unsolicited amicus curia brief submitted to the AB (See para. 11), click here. It disagrees with the AB in major points.
