Oral statement by China at the second substantive meeting of the Panel

Oral statement by China at the second substantive meeting of the Panel

1. 
   The central issue in this dispute is whether China's tariff provisions for motor vehicles have any meaningful effect. The complainants' argument leads to the conclusion that China cannot, in practice, apply its tariff for motor vehicles because importers can manipulate at will the boundary between a motor vehicle and parts of a motor vehicle to obtain the lowest rate of duty. The Panel must reject this argument and its conclusion.
   
2. 
   China's tariff provisions for motor vehicles must be interpreted to have meaningful effect under the terms of Article II of the GATT 1994. This necessarily entails drawing a line between motor vehicles and the parts of motor vehicles, and between the form and the substance of what is imported in order to reflect commercial reality of the transaction.
   
3. 
   The question before the Panel is whether the complainants have demonstrated that the manner in which China has drawn these two lines is inconsistent with China's WTO obligations. The complainants have failed to meet this burden, especially in light of their own practices and in light of the WCO's responses to the Panel's questions.
   

1. The line between complete motor vehicles and parts of motor vehicles

   1. 
      Within the HS, the line between parts and wholes is expressed in terms of the "essential character" test under GIR 2(a). The complainants have failed to demonstrate that the measures at issue are inconsistent with application of the "essential character" test.
      
   2. 
      The WCO's responses to the Panel's questions strongly confirm this conclusion. The WCO has explained that Chapter 87 of the HS "presents unique classification challenges" in light of its simultaneous provision for motor vehicles and for various parts and assemblies of motor vehicles. The WCO has explained that "the borderlines among these headings" have not been examined by the HS Committee.
      
   3. 
      The WCO response has made clear that there is a difficult issue of classification involved in distinguishing between motor vehicles and parts of motor vehicles, and that the application of GIR 1 does not, by itself, resolve this classification issue. The WCO has also confirmed that the application of the essential character test reflected in GIR 2(a) to a specific set of facts is "within the purview of national customs administrations."
      
   4. 
      The complainants opted not to raise a dispute concerning the application of Decree 125 to specific combinations of motor vehicle parts and components. They have also failed to offer a clear position on the factors that are relevant in applying the essential character test. The complainants have, therefore, failed to demonstrate that the challenged measures necessarily result in an improper application of the essential character test to motor vehicle parts and components.
      

2. The line between form and substance

   1. 
      Under GIR 2(a), the condition of goods "as presented" at the border defines the parameters in which customs authorities may evaluate the goods concerned. The interpretation of "as presented" defines the extent to which China can classify a shipment of auto parts and components on the basis of evidence that it is one of a series of shipments that, taken together, have the essential character of a motor vehicle and can be assembled into a motor vehicle within the parameters of the assembly operations described by GIR 2(a).
      
   2. 
      According to the WCO, the HS "is silent" on the meaning of the term "as presented". China considers that the central issue before the Panel, at this juncture, is how it should proceed to resolve the present dispute in light of the absence of an agreed interpretation of this term by the WCO, and in the absence of the complainants' failure to establish an interpretation of this term that plainly results from the application of customary principles of international law.
      
   3. 
      The question of whether the challenged measures result in proper classification of motor vehicles under GIR 2(a) is central to the resolution of the present dispute. Both sides of this dispute have placed significant weight on their respective understandings of the term "as presented." The complainants' basic thesis is that the challenged measures do not result in the collection of a valid customs duty because the charges are not based on the condition of auto parts and components "as presented" at the border. Therefore, in their view, the challenged measures impose "internal" charges subject to the disciplines of Article III and the TRIMs Agreement. China, on the other hand, considers that the measures are based on a proper understanding of the term "as presented," because the classification is based on the declaration of the importer that an entry of parts and components is related to other entries of parts and components through their common assembly into a complete article. China therefore considers that the challenged measures collect ordinary customs duties on motor vehicle parts and components on their importation into its customs territory, and that the collection of these duties is consistent with its rights and obligations under Article II.
      

1. The complainants have not articulated an interpretation of the term "as presented"

   1. 
      The complainants have offered only circular definitions of the term "as presented". Their definitions refer to goods "as presented" to customs or to the "state of a product upon arrival at the border". These definitions beg the question of what the term "as presented" means. They do not clarify whether the term refers solely to the physical characteristics of a single container, to the contents of multiple containers, or whether it can encompass a consideration of the documentary evidence accompanying the shipment.
      
   2. 
      As the complaining parties in this dispute, the burden is on the complainants to establish that the challenged measures are inconsistent with China's obligations under the relevant provisions of the covered agreements. In the absence of any articulation of the term "as presented," and in the absence of any substantiation of this term in accordance with customary principles of international law, the complainants have no basis to assert that Decree 125 is inconsistent with the HS or with international customs practice.
      

2. The complainants' implicit interpretation of GIR 2(a) lacks foundation

   1. 
      The complainants implicitly propose an interpretation of GIR 2(a) requiring customs classification according to the form in which the importer "presents" a collection of parts and components. On this interpretation, importers can "present" parts and components of an article in whatever form they wish, and customs authorities must accept the proposed classification without regard to other evidence which shows that the importer is importing parts and components that have the essential character of the complete article.
      
   2. 
      The complainants have failed to provide any support for the proposition that GIR2(a) precludes the consideration by customs authorities of whether multiple shipments of parts and components are related to each other through their common assembly into a complete article. The complainants have merely asserted this interpretation of GIR 2(a). It is an interpretation that fails to give effect to the role that GIR 2(a) plays within the HS, as it leaves the relationship between complete articles and parts of those articles entirely at the discretion of the importer. It is, moreover, an interpretation that is contradicted by the complainants' own arguments and customs practices.
      

1. Three paths toward the resolution of this dispute

   1. 
      The complainants have advanced claims that the challenged measures violate Article III and the TRIMs Agreement, as well as Article II. In order to establish any of these claims, the complainants must demonstrate that the challenged measures do not collect ordinary customs duties that China is allowed to collect under its Schedule of Concessions. The complainants have failed to meet this burden. China, by contrast, has demonstrated that it is consistent with the context of GIR 2(a) to interpret the term "as presented" in a manner that allows customs authorities to draw a line between the substance of what an importer brings into the customs territory and the form in which it does so.
      
   2. 
      The WCO has advised the Panel that there is no agreed interpretation of the term "as presented" in GIR 2(a). This suggests that there is a known and unresolved ambiguity within GIR 2(a) concerning the line between form and substance in the classification of parts and components. The ambiguity in GIR 2(a) is suggested not only by the absence of an authoritative interpretation of the term "as presented" within the WCO, but also by the complainants' inability to articulate and substantiate what this term means under established international norms, or by reference to other interpretive principles under the Vienna Convention. China does not consider that it is consistent with Article 3.2 of the DSU to resolve these types of policy questions within the context of dispute settlement.
      
   3. 
      There are three possible ways forward for the Panel to resolve this case. First, the Panel could find that the complainants have failed to meet their burden of demonstrating the inconsistency of the measures at issue with China's WTO obligations.
      
   4. 
      Second, the Panel could recognize that China, unlike the complainants, has articulated an understanding of the term "as presented" in GIR 2(a), and has demonstrated that this interpretation is supported by the interpretive principles of the Vienna Convention. This interpretation supports China's position that the challenged measures are consistent with its rights and obligations under Article II.
      
   5. 
      Third, the Panel could that find that the resolution of this dispute is contingent upon the interpretation of a term that, at present, remains ambiguous. This is precisely the circumstance in which the doctrine of in dubio mitius is applicable. In the present context, the application of this doctrine supports an interpretation of the term "motor vehicles" in China's Schedule of Concessions, and an interpretation of the term "as presented" in GIR 2(a), that preserves China's sovereign authority to define and enforce the boundaries between motor vehicles and parts of motor vehicles, and to ensure that all of its tariff provisions have effect. By the same principle, the complainants' implicit interpretation of these terms, which would deprive China's tariff provisions for motor vehicles of any meaningful effect, must be rejected as inconsistent with the doctrine of in dubio mitius. This ambiguity can be resolved, either by the WCO (as the WCO has suggested) or by the General Council in accordance with Article IX:2 of the WTO Agreement. Once there is a clear resolution of this issue, it would be possible for a WTO dispute settlement panel to evaluate Decree 125 in relation to the standards that are adopted.
      

1. ARGUMENTS OF THE THIRD PARTIES

1. 
   The arguments presented by Argentina, Australia, Brazil, Japan and Mexico in their written submissions and oral statements are reflected in the summaries below.⁶³
   

1. Third Party Submission by Argentina

   1. The challenged measures are not border measures under Article II of the GATT 1994

      1. 
         One of the main points in dispute is whether the measures⁶⁴ at issue constitute either border measures governed by Article II of the GATT 1994 or rather internal taxes ruled by Article III:2 of the GATT 1994 or internal regulations referred to in Article III:4 of the GATT 1994.
         
      2. 
         In order to be considered a border measure under Article II:l(b) such measure should be a duty or duties charged upon "importation into the territory" or in "connection with the importation".⁶⁵ Under the measures in dispute, a duty for whole vehicles is charged upon assembly of the imported parts. The fact that the duty is charged after the verification by the authorities and once the vehicle was manufactured is a feature that tells that the condition for the application of the duty is the assembly and manufacture of the vehicle and not the importation of the parts.
         
      3. 
         China suggests that its measures are conditioned upon importation because the auto parts are not in free circulation up until the point where the parts and components are assessed at the tariff rate for motor vehicles if the manufacturer uses the imported parts and components as part of a larger collection of imported parts having the essential character of a motor vehicle.⁶⁶ The panel in EEC -Parts and Components understood that the treatment of imported goods as not being "in free circulation" cannot support the conclusion that the duties are being levied "in connection with importation" within the meaning of Article II:l(b).⁶⁷
         
      4. 
         Furthermore, China seeks to demonstrate that the charges collected after the importation are border measures because the collection is administrated by Customs. Argentina considers this should be carefully assessed since a Member could circumvent its Article III of the GATT 1994 obligations simply by appointing the Customs Office as the collector agency of an internal charge.
         
      5. 
         The manner in which the measures at issue in this dispute work suggests that they are internal taxes and internal regulations applicable only to imported parts. Therefore such measures fall under the provisions of Article III:2 and Article III:4 of the GATT 1994. If the Panel were to find any inconsistency of the measures with the above mentioned provisions regarding national treatment, a finding on the consistency of China's measures with Part 1, paragraph 7.2 of the Accession Protocol of China would also be relevant.
         

   2. China's measures are not similar to anti-dumping or countervailing anti‑circumvention measures

      1. 
         Argentina considers it is not appropriate to make a parallelism between ordinary customs duties and antidumping or countervailing anti-circumvention measures. China makes such parallelism in order to justify its measures as being anti-circumvention measures.
         
      2. 
         Under an antidumping or countervailing anti-circumvention measures the duties are charged at the border at the time of importation and not subsequently or dependent upon their incorporation to whole parts. The difference between China's measures and AD/CVD anti-circumvention measures suggests that China's measures are not anti-circumvention ones, and that therefore there is not a common, consistent or discernible practice.⁶⁸
         
      3. 
         Admitting that China's measures are imposed to prevent circumvention of ordinary customs duties⁶⁹ would lead to include within Article II of the GATT 1994, measures that involve burdensome administrative procedures prior and after importation only applicable to manufacturers of imported parts, as well as duties charged conditioned upon how and which imported parts the manufacturer decides to fit in the final product. This would allow restrictions to imports of other Members' goods not committed in their Schedules of Concessions under-covered by the protection of an alleged anti‑circumvention measure.⁷⁰
         

   3. The measures are not justified under Article XX(d).

      1. 
         China states that the challenged measures are justified under Article XX(d) of the GATT 1994 as measures that are necessary to secure compliance with China's customs law.⁷¹ In order for a measure to be considered "necessary" under Article XX(d) one of the features involved in the "weighing and balancing" is the respective impact of the measure on international commerce.⁷²
         
      2. 
         The differential treatment granted to imported parts results in a restriction on the entry of imported parts in the Chinese automobile market. The Appellate Body in Korea -Various Measures on Beef found that: "A measure with a relatively slight impact upon imported products might more easily be considered as 'necessary' than a measure with intense or broader restrictive effects.''⁷³ The effects the challenged measures have on imported parts result in a restriction to commerce. Therefore the "necessity" test is not satisfied, preventing China to justify the measures under Article XX (d).
         
      3. 
         Finally, if the Panel where to analyse the justification of the measures under the chapeau of Article XX, Argentina considers pertinent the rulings of the Appellate Body in US - Shrimp and US -Gasoline regarding the prevention of "abuse of the exceptions of Article XX."⁷⁴
         
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