Second written submission of the European Communities

Second written submission of the European Communities

1. Introduction

   1. 
      China has conceded on the detailed arguments made by the European Communities under Article 2 of the TRIMs Agreement and Article III of the GATT 1994 since it does not even begin rebutting the prima facie case brought by the complainants. Instead, its entire defence strategy is based on the premise that the majority of the measures should only be examined under Article II of the GATT 1994 and on the basis of an unprecedented interpretation of the Harmonised System. The arguments put forward by China put in question the very basic principles of the WTO Agreement and the GATT 1994.
      

2. Factual background

   1. 
      China portrays a fundamentally flawed and unrealistic image of the automotive industry which "conspires" to circumvent China's tariff rates on whole vehicles. In reality, vehicle production is a highly complex process, involving a constant inflow of parts from various origins through long supply chains to manufacturing facilities where complex technologies are integrated. One single vehicle model can contain thousands of different parts from all over the world. Many of these would be used interchangeably in several different models if China's Measure did not require an artificial ex ante identification of their destination in a particular model.
      
   2. 
      After requiring manufacturers to artificially identify all the parts used in a specific vehicle model and to declare imported parts as complete vehicles (which in reality are just parts), China now boldly uses this as "evidence" of a circumvention conspiracy. This "anti-circumvention theory" was invented ex post to justify measures which were actually adopted to "[n]urture a group of relatively strong auto-parts manufacturers" (Article 4 of Policy Order 8). It also ignores that nothing is circumvented if vehicle manufacturers decide to import auto parts and manufacture them into vehicles in China.
      

3. Legal argument

   1. The violation of the TRIMs Agreement and the Accession Protocol of China relating to the TRIMs Agreement

      1. 
         The measures are inconsistent with Article 2 of the TRIMs Agreement in conjunction with paragraphs 1(a) and 2(a) of the Illustrative List and China's Accession Protocol to the WTO. Contrary to China's only defence in this respect, these claims do not require any ex ante determination of whether the measures are "internal" or not.
         
      2. 
         The European Communities reiterates that the measures are "investment measures" and "trade-related". For the reasons already set out in the first written submission of the European Communities, they are covered by paragraphs 1(a) and 2(a) of the Illustrative List to which Article 2.2 of the TRIMs Agreement refers. Therefore, they must be considered to be inconsistent with Articles III:4 and XI:1 of the GATT 1994 and, consequently, Article 2.1 of the TRIMs Agreement. China also violated its commitments in Part I, Articles 1.2 (in connection with paragraphs 203 and 342 of the Working Party Report) and 7.3 of its Accession Protocol.
         

   2. The violation of Article III of the GATT 1994

      1. 
         China has, in spite of the prima facie case established by the complainants and explicit requests from the Panel, still not responded to the claims under Article III of the GATT 1994. Instead, it bases its entire defence strategy, as for the claims under the TRIMs Agreement, on the premise that the measures are not "internal". China's obstructive silence with regard to the essence of the main claims in these proceedings can only mean that it concedes the inconsistency of its measures with Article III of the GATT 1994.
         

1. The "internal" nature of the measures

   1. 
      Contrary to China's view, the measures do not impose "ordinary customs duties" within the meaning of Article II: 1(b), first sentence of the GATT 1994.
      
   2. 
      "Ordinary customs duties" are financial charges in the form of a tax and imposed on products "on their importation into the territory". They need to be distinguished from internal charges under Article III:2 that are imposed on products already "imported into the territory". In a temporal sense, the term "on importation" means that ordinary customs duties are normally collected "at the time or point of importation" (see Interpretative Note Ad Article III). The term "on importation" also has a material aspect limiting it to charges due because of importation of the product, and not because of other events or criteria, e.g. the amount of local content in products into which the imported product is subsequently assembled.
      
   3. 
      China's attempts to extend the scope of the term "on importation" to cover an indefinite "process of importation" and all charges that "bear[] an objective relationship to the administration and enforcement of a valid customs liability" find no support in the wording, context and purpose of Article II:1(b), first sentence.
      
   4. 
      The charges imposed on imported auto parts under the measures are no ordinary customs duties, but internal charges. They are not collected at the time or point of importation, but internally after assembly and manufacture. This is not affected by the declaration and the duty guarantee to which China refers, inter alia since both focus on the way in which the imported parts will be used internally within China, rather than on the contents of a consignment upon importation.
      
   5. 
      Furthermore, the charges under the measures are not due because of importation of the auto parts. Their imposition rather depends on whether the imported auto parts are verified as automobile parts characterized as complete vehicles which in turn depends on whether the imported parts are assembled into vehicles with an insufficient level of local content. Irrespective of how auto parts are presented "on importation", charges are imposed on the basis of how the auto parts are used after importation in China.
      
   6. 
      For Article 29 of Decree 125, which provides for charges even if manufacturers purchase auto parts on the Chinese internal market from suppliers that previously imported them, China had to implicitly acknowledge that these are "internal" charges (allegedly justified under Article XX(d) of the GATT 1994). The European Communities considers that Article 29 of Decree 125 cannot be isolated in that respect from the remainder of the measures.
      

2. The violation of Articles III:4, III:2 and III:5 of the GATT 1994

   1. 
      As set out in detail in the first written submission of the European Communities, imported and domestic auto parts are "like" within the meaning of Articles III:4, III:2 and III:5 of the GATT 1994. The measures constitute generally applicable "laws, regulations and requirements affecting [the] internal sale, offering for sale, purchase, transportation, distribution, or use" within the meaning of Article III:4 and treat imported auto parts "less favourably" than like products of Chinese origin. As regards Article III:2, the internal charges applied to imported auto parts are "in excess of" those applied to the like domestic products. The measures are also inconsistent with Article III:5 since they constitute an "internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions" which "requires … that any specified amount or proportion" of auto parts used in the assembly and manufacture of vehicles "must be supplied from domestic sources" and not imported.⁵⁰
      

3. Accession Protocol

   1. 
      China also acted inconsistently with its obligations under the WTO Agreement as set out in its Accession Protocol, in particular Part I, Article 7.2 of the Accession Protocol by introducing non-tariff measures that are inconsistent with Article III, paragraphs 2, 4 and 5 of the GATT 1994 and not justified under the provisions of the WTO Agreement.
      

1. Alternatively: the measures are inconsistent with Article II:1 (a) and (b) of the GATT 1994

   1. 
      It is important to emphasise from the outset that China's arguments do nothing less than undermine the whole system of tariff classification and the object and purpose of the WTO agreement and the GATT 1994 namely "the security and predictability of the reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade".⁵¹
      

1. The HS in the context of WTO law

   1. 
      In the context of this case there is a rare point of agreement between the parties: the HS is relevant and constitutes context for purposes of interpreting tariff commitments in the WTO Members' Schedules. This has been confirmed by the Appellate Body.⁵² The European Communities considers that the HS could also fulfil the criteria in Article 31(3)(c) of the Vienna Convention as a "relevant rule[] of international law applicable in the relations between the parties".
      
   2. 
      However, there is considerable disagreement on how the relevant parts of the Chinese tariff schedules should be interpreted. More fundamentally, there is considerable disagreement on the very basic rules on which the HS is founded.
      
   3. 
      It is of paramount importance to underline that when goods are classified in the HS it is always done on the basis of the objective characteristics of the product at the time of importation, that is, as imported and presented to customs on a shipment-by-shipment basis. The intentions of the importer and differing duty rates are irrelevant. With the exception of China, this is the position shared by all parties to this dispute, including the third parties that have addressed Article II of the GATT 1994 in their submissions. More importantly, this position was confirmed by the Appellate Body in EC – Chicken Cuts:
      

2. GIR 1: Motor vehicles vs. parts thereof

   1. 
      GIR 1 is the backbone of the application and interpretation of the HS and, hence of the tariff schedules of most WTO members such as China's. The overwhelming majority of tariff classification situations are decided on the basis of GIR 1, which reads as follows:
      

1. 
   GIR 1 is very clear: there is a clear hierarchy between the rules. If the classification can be determined according to the terms of the headings and any relative Section or Chapter notes, other rules are simply not applicable.
   
2. 
   At the level of China's tariff schedules, there is no ambiguity on where complete vehicles, intermediate products and parts of complete vehicles should be classified. They are very clearly subject to different tariff headings.
   
3. 
   Therefore, the other rules and in particular GIR 2(a) on which China bases its entire defence strategy are simply not applicable at the level of the tariff headings and without considering a very specific shipment as presented to customs at the border.
   
4. 
   This means also that in the overwhelming majority of cases it is a simple task to interpret the notions of "motor vehicle" and "parts"⁵⁴ of such motor vehicles under Article 31 of the Vienna Convention as the European Communities has demonstrated in its first written submission. It is important not to lose sight of the simplicity of this case from the point of view of tariff classification at the level of China's tariff schedules: the fundamental difference between the ordinary meanings of the words in the tariff headings is confirmed by their context and object and purpose.
   

1. The exceptional situations in casu subject to GIR 2(a)

   1. 
      China bases its entire defence strategy on GIR 2(a). The European Communities considers that GIR 2(a) is of extremely limited relevance for the present case. Recourse to GIR 2(a), which is one of the "following provisions" within the meaning of GIR 1, can only be relevant in very specific individual cases "as presented" to customs, and not at the level of China's tariff schedules generally as China insists.
      
   2. 
      Apart from the very limited relevance of GIR 2(a) for the present case, the European Communities wishes to stress that China's defence strategy is based on an unprecedented reading of GIR 2(a). China has in the course of the proceedings put forward a wide range of evolving and often inconsistent arguments.
      
   3. 
      The European Communities considers that the "multiple shipments" theory invented by China ignores the plain wording of GIR 2(a), in particular that the classification must be determined on the basis of the article "as presented", and is not supported by the WCO Decision to which China refers. China also ignores the "essential character" element contained in GIR 2(a). Furthermore, China obviously construed its "multiple shipments" theory ex post since nothing in the wording of the measures refers to GIR 2(a). It is also worth noting that China appears to apply its "multiple shipments" theory exclusively in the automobile sector, and only since 2004 – which happens to coincide with the moment in which China decided to "[n]urture a group of relatively strong auto-parts manufacturers".⁵⁵ (Article 4 of the Automotive Policy Order). Furthermore, China's "multiple shipments" theory is not supported by any alleged anti-circumvention practice of WTO Members. The European Communities considers also that China's arguments on the importer's intention are contradictory and irrelevant for the case. Finally, the application by China of GIR 2(a) to CKD and SKD kits in a systematic way is not consistent with that rule, which is to be applied in casu.
      

2. Conclusion

   1. 
      The European Communities has demonstrated that under each of the criteria in Article 57 of Policy Order 8, Article 21 of Decree 125 and Article 13 of Announcement 4, the measures require to classify auto parts as complete vehicles in violation of the HS nomenclature and, as a result, impose on auto parts the higher 25 per cent duty on complete vehicles instead of the bound duty rate of 10 per cent for auto parts.
      
   2. 
      This establishes that the measures are as such inconsistent with China's obligations under Article II of the GATT 1994. The mere fact that there may be exceptional individual instances where a large combination of parts as presented to customs at the border in a single consignment would qualify as a complete vehicle pursuant to GIR 2(a) of the HS and in the light of the Chapter note to Chapter 87 cannot exempt the Chinese measures from being, as such, incompatible with Article II of the GATT 1994 when it has been established that their application will necessarily result in WTO violations.
      

1. No justification under Article XX(d) of the GATT 1994

   1. 
      China has not established that the violations of the GATT 1994 are justified under Article XX(d) of the GATT 1994. The measures fall neither under paragraph (d), nor do they satisfy the requirements of the chapeau of Article XX.
      
   2. 
      Contrary to China's allegation, the measures are not necessary to secure compliance with "China's tariff schedule relating to imports of 'motor vehicles'". The measures explicitly do not intend to secure compliance with China's tariff schedule, but to develop the Chinese auto parts industry. A justification of the Article II infringement is excluded since measures providing treatment less favourably than the schedule cannot secure compliance with the latter. The justification of the Article III infringement also fails. China has not demonstrated a real problem of tariff evasion. The measures are unsuitable to enforce the schedule since they impose charges amounting to complete vehicles tariffs in cases where there are no imports of complete vehicles. China has also failed to show that measures less burdensome than the local content requirements, administrative procedures and internal charges under the measures, for example investigations in individual instances of alleged evasion, would be insufficient to secure compliance with its tariff schedule.
      
   3. 
      China has not even attempted to show that its measures satisfy the chapeau of Article XX and consequently failed in its burden of proof. In any event, they do not since they result in both arbitrary and unjustifiable discrimination and also constitute a disguised restriction on trade. The primary purpose of the measures is to afford protection to domestic industry from imported competition.
      

2. The measures are inconsistent with Article 3 of the SCM Agreement

   1. 
      Were the Panel to find that the measures fall under Article II of the GATT 1994 and that China is entitled to impose the tariff rate for vehicles on the imports of auto parts, quod non, the measures would in any case be a prohibited subsidy pursuant to Articles 3.1(b) and 3.2 of the SCM Agreement.
      
   2. 
      The measures constitute a financial contribution within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement. Imported auto parts satisfying the local content requirements of the measures are charged at 10 per cent. The revenue "otherwise due" follows from the "definitive, normative benchmark" of Article 28 of Decree 125 which charges 25 per cent on imported auto parts that do not satisfy the local content requirements. China's statement that the 25 per cent duty and the 10 per cent duty treatment "are not the same 'fiscal situations' for purposes of making a proper comparison" is not further substantiated.
      
   3. 
      The measures also confer a benefit within the meaning of Article 1.1(b) of the SCM Agreement and are contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the SCM Agreement.
      

1. Conclusion

   1. 
      The measures are inconsistent with Article 2 of the TRIMs Agreement, Articles III:4, III:2 and III:5 of the GATT 1994 and China's Accession Protocol, and are not justified under Article XX(d) of the GATT 1994. In the alternative, they violate Article II of the GATT 1994 or Article 3 of the SCM Agreement.
      
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