China – Measures Affecting Imports of Automobile Parts (WT/DS 339, 340, 342)

Third Party Oral Statement of Australia

Geneva, 23 May 2007

Members of the Panel,

1. Thank you for the opportunity to present Australia’s views on this matter.

Introduction

2. The essence of the complainants’ claims in this dispute is that China has re-introduced discriminatory internal charges and administrative requirements on imported auto parts. Given that the parties have already extensively canvassed the factual background to this dispute in their submissions, Australia does not propose to deal at length with the facts.

3. Rather, in its oral statement today Australia will focus on three key issues. Firstly, the proper characterisation of the challenged measures. Secondly, the interpretation of China’s tariff schedule. Thirdly, the general exception in Article XX(d) of GATT 1994.

Are the challenged measures border measures or internal measures?

4. The main contested issue before this Panel is whether the challenged measures are border measures subject to Article II or internal measures subject to Article III ofGATT 1994. It appears from China’s first written submission[1] that its only defence to the complainants’ claims under Article III of GATT 1994, Article 2 of the TRIMs Agreement, and PartI of China’s Accession Protocol is that the challenged measures are border measures. Given the significance of this question in the present dispute Australia will now spend some time examining the proper characterisation of the challenged measures.

5. The three complainants in this dispute have submitted a common factual background section. According to these facts, the challenged measures impose charges and administrative requirements on imported auto parts based on the use of those imported parts in vehicle manufacturing that takes place after importation, rather than on the state of the product upon presentation at the border. Australia understands that these imported parts have entered into commerce and are in free circulation within China once they have passed the border.

6. The commitment to binding tariff schedules provided for in Article II, and the national treatment obligation contained in Article III, are two of the core provisions in GATT1994. The demarcation between these two provisions has been examined in a number of previous GATT and WTO cases. In Australia’s view, the guidance contained in previous cases, when applied to the present facts, leads to the conclusion that China’s measures are internal measures and not border measures.

7. The purpose of Article III is to ensure that internal measures are not ‘applied to imported or domestic products so as to afford protection to domestic production’. According to the Appellate Body in Japan – Alcoholic Beverages, the intention of Article III is ‘to treat the imported products in the same way as the like domestic products once they had been cleared through customs. Otherwise indirect protection could be given’.[2]

8. In EEC – Parts and Components, a case with many similarities of fact to the present dispute, a GATT Panel had to grapple with the question of whether a particular charge was a border measure or an internal measure.[3] The impugned measure in that case imposed duties on finished products assembled or produced in the EEC rather than on imported parts or materials. In concluding that it was an internal measure the GATT Panel made two key points.

9. Firstly, the GATT Panel held that the policy reason for the measure, namely to eliminate circumvention of duties, was irrelevant in determining whether it was a border measure or an internal measure. However, it was relevant whether the charge was due at the time or point of importation or whether it was collected internally.

10. Secondly, the GATT Panel held that the designation of the measure under domestic law as a customs duty, along with treatment analogous to a customs duty, was not dispositive of its characterisation as a border measure. Otherwise contracting parties would be able to readily defeat the objective of Articles II and III, namely that discrimination against products from other contracting parties is only permissible by way of ordinary customs duties imposed on importation and not by way of internal taxes.

11. Belgian Family Allowances is another case in which a GATT Panel found that the levy in question was an internal measure. The fact that the levy depended on the internal use of the product, and was not charged at the time of importation, were influential in arriving at this result.[4] In EEC – Animal Feed Proteins a GATT Panel again lent support to the notion that in order to constitute a border measure a charge had to be collected at the time of, and as a condition to, the entry of the goods into the importing country.[5]

12. In each of these GATT cases referred to the reasoning was driven by considerations of substance over form. In Australia’s view such considerations should also factor highly in the Panel’s analysis in the present dispute. As the United States has quite correctly pointed out: ‘[i]t is not the label that a Member applies to its measure that determines whether an obligation under a covered agreement applies; rather it is the substance of the measure that matters’.[6]

13. In light of these previous cases, Australia supports the thrust of Canada’s arguments regarding the distinction between border measures and internal measures.[7] Broadly speaking, internal measures regulate internal trade, while border measures regulate the process of importation. Internal charges are imposed on activities occurring within the territory of a Member in relation to the normal internal trade of a product, while border charges are imposed at the time or point of importation. A Member may not, at its discretion, ‘deem’ imported products not to have entered into their internal commerce and thereby avoid its national treatment obligations, as China appears to have done in this case with the use of a ‘bond’ on imports at the point of importation.

14. China has argued in this dispute that the challenged measures are designed to enforce its tariff schedule and prevent circumvention of its tariff bindings for motor vehicles.[8] However, China has not presented any evidence of a significant shift towards customs fraud in the automobile industry.[9] Furthermore, in Australia’s view China has not effectively distinguished its challenged measures from the anti-circumvention duties at issue in EEC – Parts and Components.[10] In particular, China asserts that imposing border charges after the time or point of importation is permissible, so long as the charge fulfils a liability that arose as a condition of importation.[11] Presumably, in an attempt to establish a nexus with importation, the measures at issue include a declaration made at the time of importation. However, this declaration appears to be entirely focused on the way in which the imported parts will be used internally within China, rather than on the contents of a consignment upon importation. In addition, the charge is actually enforced after the point of manufacture once it can be established that a manufactured vehicle contains a certain percentage of imported parts. Therefore, in Australia’s view, the liability attaches internally, after the vehicle has been manufactured.

15. Australia fully endorses the European Communities’ systemic concern that, if the processing and manufacturing of products after importation into the territory of a Member were generally accepted as an intermediate step before tariff classification, the whole system of tariff classification would be rendered meaningless.[12] In addition, Australia shares Japan’s systemic concern that acceptance of China’s position would reduce the scope of the national treatment obligations in Article III.[13] In Australia’s opinion such an interpretation would be incompatible with the object and purpose of both the WTO Agreement and GATT1994.

16. In summary, Australia – like the European Communities, United States, Canada, Argentina, Japan, and Mexico – is firmly of the view that China’s measures at issue are properly characterised as internal measures subject to the disciplines of Article III of GATT 1994.

What is the proper interpretation of China’s tariff schedule?

17. However, should the Panel determine that the challenged measures constitute border measures, Australia supports the complainants’ alternative argument that China’s measures violate ArticleII of GATT 1994.[14]

18. Article II contains a commitment to binding tariff schedules. The relevant provisions in the present dispute are ArticleII:1(a) and (b). Members will breach these provisions if they provide treatment less favourable to the commerce of other Members than the treatment afforded in the appropriate Schedule and if they impose duties in excess of what is provided for in the appropriate Schedule.

19. The complainants in this dispute claim that China’s measures at issue classify imported auto parts as deemed whole vehicles after importation, resulting in a tariff of 25%. They argue that this violates China’s commitment to apply a tariff of 10% on imported auto parts under Article II.[15] In its defence against this claim, China argues that it has been forced to impose the 25% tariff on the deemed whole vehicle to prevent countries attempting to circumvent the higher tariff by importing disassembled cars in multiple shipments.

20. The essence of China’s argument is that customs authorities should classify as a complete article any group of parts that has the essential character of that article, regardless of their state of assembly or disassembly.China argues that this is the case whether a group of parts enters the customs territory in one shipment or in multiple shipments.[16] China asserts that this position is supported by the ‘essential character’ rule contained in rule 2(a)of the General Rules for the Interpretation of the Harmonized System.[17]

21. The Appellate Body has expressly recognised that when interpreting tariff schedules the Harmonised System comprises ‘context’ within the meaning of Article 31(2)(a) of the Vienna Convention.[18] However, Australia does not share China’s interpretation of the ‘essential character’ rule for a number of reasons.

22. Firstly, China’s view disregards the fundamental principle that when goods are classified in the Harmonised System 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.

23. Secondly, China’s view disregards the significance of the crucial phrase ‘as presented’ contained in the ‘essential character’ rule. In fact, this phrase only appears once in China’s eighty-three page submission[19] when China quotes the ‘essential character’ rule in full.

24. Thirdly, Australia notes that China refers to Australian practice in its submission.[20] For the information of the Panel, Australian customs practice in relation to the ‘essential character’ rule underscores that the value of the parts in relation to the value of the completed good is irrelevant. Rather, what is required is an examination of the function, purpose and construction of the completed good to determine its essential character, and then an assessment whether the parts when assembled also exhibit that essential character. For example, the essential character of a motor vehicle might well be described as transporting people and goods using a motor. To be classified as a motor vehicle, a collection of parts in a shipment, when assembled, must also exhibit that essential character. If a shipment includes all the parts necessary to form a motor vehicle, other thanthe motor itself,the partswould not have the essential character of a motor vehicle, and could not be classified as such.[21]

25. Fourthly, China’s view undermines the ordinary meaning of the terms in its tariff schedule which provide for a clear separation between complete motor vehicles and parts thereof. In Australia’s view this is contrary to the principle of effectiveness in treaty interpretation.[22]

26. Therefore, in Australia’s opinion, on a proper interpretation of China’s tariff schedule, the challenged measures are inconsistent with Article II of GATT 1994.

Scope of the general exception under Article XX(d) GATT 1994?

27. China also asserts 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 laws.[23]

28. Australia, like Japan[24] and Argentina[25], finds China’s Article XX(d) arguments unconvincing. China’s assertion that the ‘challenged measures have little or no restrictive impact on international trade’[26] does not sit comfortably with the material contained in the complainants’ common factual background section. According to this material the challenged measures are impacting on the complainants’ trade. Moreover, the challenged measuresare adversely affecting the business of the Australian automotive components and parts industry.

29. Australia notes that China has not addressed the requirements of the chapeau of Article XX. This is significant as according to the Appellate Body the purpose of the chapeau is to prevent ‘abuse of the exceptions of Article XX’.[27] Further, as a respondent seeking to invoke an exception, China bears the burden of proof under Article XX.[28]

Conclusion

30. Members of the Panel, in conclusion Australia submits that:

  • Having regard to prior GATT and WTO cases, the Panel should find that China’s measures at issue are internal measures that are inconsistent with Article III of GATT1994.
  • If the Panel determines that the challenged measures constitute border measures, it should find that, on a proper interpretation of China’s tariff schedule, the measures are inconsistent with Article II of GATT 1994.
  • Finally, the Panel should not afford China’s measures protection under ArticleXX(d) of GATT 1994.


[1] First Written Submission of the People’s Republic of China, 17 April 2007, paras. 169-174.

[2] Italy – Agricultural Machinery, Report of the GATT Panel, para. 11; cited with approval in Japan – Alcoholic Beverages II, Report of the Appellate Body, p. 16.

[3] EEC – Parts and Components, Report of the GATT Panel, paras. 5.4-5.8.

[4] Belgian Family Allowances, Report of the GATT Panel, para. 2.

[5] EEC – Animal Feed Proteins, Report of GATT Panel, paras. 4.13-4.18.

[6] First Written Submission of the United States of America, 13 March 2007, para. 4.

[7] First Written Submission of Canada, 13 March 2007, paras. 78-86.

[8] First Written Submission of the Peoples Republic of China, 17 April 2007 paras. 3 and 43.

[9] See also Third-Party Submission of Japan, 27 April 2007, para. 2.

[10] See also Third-Party Submission of Japan, 27 April 2007, para. 19.

[11] First Written Submission of the Peoples Republic of China, 17 April 2007 paras. 49-70.

[12] First Written Submission by the European Communities, 13 March 2007, para. 140.

[13] Third-Party Submission of Japan, 27 April 2007, para. 22.

[14] First Written Submission by the European Communities, 13 March 2007, paras. 207-281; First Written Submission of the United States of America, 13 March 2007, paras. 116-122; First Written Submission of Canada, 13 March 2007, paras. 131-150.

[15] First Written Submission by the European Communities, 13 March 2007, para. 280; First Written Submission of the United States of America, 13 March 2007, para. 119; First Written Submission of Canada, 13 March 2007, para. 144.

[16] First Written Submission of the Peoples Republic of China, 17 April 2007 para. 2

[17] Annexed to International Convention on the Harmonized Commodity Description and Coding System 1983.

[18] EC – Chicken Cuts, para. 199.

[19] First Written Submission of the Peoples Republic of China, 17 April 2007 para. 84

[20] First Written Submission of the Peoples Republic of China, 17 April 2007 para. 65

[21] Minister for Industry and Commerce v Zyfert and Collector of Customs for NSW v Putale Pty Ltd in Full Federal Court of Australia

[22] US – Gasoline, Appellate Body Report, p. 23

[23] First Written Submission of the Peoples Republic of China, 17 April 2007 paras. 201-214.

[24] Third-party Submission of Japan, 27 April 2007, paras. 49-56.

[25] Third-Party Submission of Argentina, 27 April 2007, paras. 28-36.

[26] First Written Submission of the Peoples Republic of China, 17 April 2007 paras. 213.

[27] US – Shrimp, para. 116.

[28] US – Shirts and Blouses, Appellate Body Report, p. 14

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