Measures Affecting Imports of Automobile Parts to China

1. Patrick Ashby, Elias Chamoun & Matthew Cochrane • ITRN 603 • March 2, 2009 Measures Affecting Imports of Automobile Parts to China

2. History and Context of DS340 • March 30, 2006 • The United States and the European Communities (and Canada in April 2006) requested consultations with China • THE ISSUE: China’s imposition of measures that adversely affect exports of automobile parts to China

3. History and Context of DS340 • From the eventual reports of the Appellate Body: • “The measures impose a 25 percent charge on imported auto parts used in the manufacture of motor vehicles in China, if the imported auto parts are ‘characterized as complete vehicles’ according to specified criteria prescribed under the measures.” • “The amount of the charge is equivalent to the average tariff rate applicable to complete motor vehicles under Schedule CLII.”

4. History and Context of DS340 • September 15, 2006 • After failed consultations, the United States, the European Communities, and Canada each requested the establishment of a Panel • The DSB established a single on Panel October 26 pursuant to Article 9.1 of the DSU • Third party rights were reserved by Argentina, Australia, Brazil, Japan, Mexico, Thailand, and Chinese Taipei

5. History and Context of DS340 • The Panel • The U.S., European Communities, and Canada requested the Director-General to determine the composition of the Panel on January 19, 2007 • The Panel was assembled on January 29, 2007 • On July 18, 2008—after much delay due to the complexity of the issue—the Panel reports were circulated to Members. 

6. History and Context of DS340 • Why the delay? • On July 16, 2007, the Chairman of the Panel said it would not be able to complete the report in six months • On January 24, 2008, the Chairman again postponed the report to March and didn’t issue the final report until July • Other than claiming “the complexity of the issues involved,” WTO documents never state why there were delays • Transparency issues?

7. History and Context of DS340 • The Panel’s Conclusions • With respect to the complaint by the U.S. (WT/DS340), the Panel concluded China’s actions were inconsistent • Panel recommended the DSB request China to bring their measures into conformity with GATT 1994 and the WTO Agreement. • Panel also found China’s actions to be inconsistent regarding the complaints by the European Communities and Canada

8. History and Context of DS340 • China’s Appeal • China appealed the Panel’s decision on September 15, 2008, questioning the legality and the interpretation of its recommendation to the DSB • China qualifies its regulations as “customs duties” that are consistent with Article III, Section 2 • But three months later the Appellate Body upheld the Panel’s decision, ruling that the measures at issue were inconsistent with GATT 1994

9. History and Context of DS340 • China’s Appeal • The Appellate Body similarly recommended that the DSB request China bring its auto import measures into conformity with GATT 1994 • The DSB adopted the Appellate Body report and the Panel report on January 12, 2009

10. The Main WTO Issue in DS340 • National Treatment Principle • Cannot discriminate between domestic- and foreign-produced goods • WHY THIS MATTERS TO THE U.S.: America is number one in terms of overall exports and imports to China • The number four export from the U.S. is automobile-related goods • $681 million in U.S. auto exports to China

11. Contested Issue of International Law • In DS340, the U.S. argues China’s measures are in violation of these provisions: • Articles II and III of GATT 1994 • “Each contracting party shall accord to the commerce of the other contracting parties treatment no less favorable than that provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.” • “The products…shall, on their importation…be exempt…from all other duties or charges of any kind imposed on or in connection with the importation.”

12. Contested Issue of International Law • In DS340, the U.S. argues China’s measures are in violation of these provisions: • Article II of the TRIMs Agreement says no member shall apply a trade related investment measure that violates Article III or Article XI of GATT 1994. • Imported products cannot be treated differently than other “like products” of national origin • Only “duties, taxes, or other charges” can be levied against imported products

13. Contested Issue of International Law • In DS340, the U.S. argues China’s measures are in violation of these provisions: • Protocol of Accession • The Working Party Report (paragraph 93) • If China created tariffs for completely knocked-down kits (CKD) or semi-knocked down kits (SKD), the rates had to be at or less than 10 percent.

14. Contested Issue of International Law • In DS340, the U.S. argues China’s measures are in violation of these provisions: • Article 3.1 and 3.2 of the Subsidies and Countervailing Measures (SCM) Agreement • Subsidies to promote the use of “domestic over imported goods” are prohibited

15. Position of the Main Parties in DS340 • The United States: • The measures penalize manufacturers for using imported auto parts in the manufacture of vehicles for sale in China • “Although China bound its tariffs for auto parts at rates significantly lower than its tariff bindings for complete vehicles, China would be assessing a charge on imported auto parts equal to the tariff on complete vehicles, if the imported parts are incorporated in a vehicle that contains imported parts in excess of thresholds.”

16. Position of the Main Parties in DS340 • China: • The charge under the measures was an ordinary customs duty and not an internal measure • “Officials from the Chinese Ministry of Commerce say that the reason that China drafted the auto component import management rule was to prevent individuals illegally evading supervision by taking advantage of the tax differences between components and complete vehicles.” –China Sourcing News

17. Winners and Losers from DS340 • Consequences of China’s first loss at the WTO • Winners • Auto parts exporters from the U.S., European Communities, and Canada • Consumers of automobiles in China (lower costs sans tariffs) • Losers • Domestic automobile producers in China

18. Our Observations Concerning DS340 • We agree with the WTO ruling • China was in clear violation of the national treatment principle (as outlined in the previously mentioned contested laws) by discriminating against foreign auto parts in favor of domestically produced auto parts. • “China’s rebuttal submission, though lengthy, adds very little to the substantive discussion of the issues in this dispute. Rather, China’s submission mostly relies on rhetorical devices.” –U.S. oral statement at second Panel meeting, July 23, 2007

19. Our Observations Concerning DS340 • We agree with the WTO ruling • China’s decision to implement the rulings and recommendations of the DSB was wise and prudent, but its vagueness on the timeframe is reason to be vigilant. • On February 11, 2009, China informed delegations that it intended to implement the DSB’s recommendations and had begun evaluating options for doing so • A separate follow-up commission may be warranted to ensure Beijing is in compliance with the DSB’s ruling

20. Sources • “China Gets WTO Ruling on Auto Parts Dispute” (December 2008), China Sourcing News. • “China informs DSB of its intention concerning implementation of auto parts rulings,” WTO.org. • “China: Measures Affecting Imports of Automobile Parts,” WTO.org. (and related documents) • “China: Measures Affecting Imports of Automobile Parts—Executive Summary of Oral Statement of U.S. at Second Panel Meeting,” USTR.gov • Klapper, Bradley S. “China appeals auto parts ruling, first WTO loss.” Boston Herald, 15 September 2008. • “WTO to Examine China's Tariffs on Auto Parts.” The Wall Street Journal, 30 October 2006.