3.40 Japan argued that it was also possible to regard duties provided for in Article 13:10 of Council Regulation (EEC) No. 2423/88 as internal charges if one considered the following aspects of the duties applied under Article 13:10. Article 13:10 provided for the imposition of duties:

Article 13:10(b) provided that:

Thus, the express language of Article 13:10 indicated that the duties imposed under this provision could be considered to be internal charges on finished products assembled within the EEC. However, according to Article 13:10(c), the rate of duty applied to such finished products depended upon the value of the imported parts or materials contained in the product assembled within the EEC. While duties were formally imposed upon products produced or assembled within the EEC (i.e. on domestic products) these duties were indirectly imposed on imported parts and were used to afford protection to domestic production. Japan pointed out that the interpretation of the duties imposed pursuant to Article 13:10 of Council Regulation (EEC) No. 2423/88 as internal charges on imported parts was consistent with the reasoning of the Panel established in the dispute concerning the Belgian family allowances. In this connection Japan referred to the following passage of the Report of this Panel:

Duties applied pursuant to article 13:10 of Council Regulation (EEC) No. 2423/88 were, in effect, imposed only on parts or materials purchased by certain manufacturers located within the EEC for their own use. Furthermore, these duties were imposed at the time when the finished products incorporating the imported parts or materials left the factory and not at the time of importation of the parts or materials. Thus, it was consistent with past GATT practice, as evidenced by the Panel Report on the Belgian Family Allowances, to consider these duties as internal charges. Japan further noted that customs authorities collected not only customs duties but also collected internal charges in some cases; thus, duties collected by customs authorities were not necessarily customs duties.

3.41 Japan noted that Article III:1 of the General Agreement provided that:

Article III:2 provided that:

The duties applied by the EEC pursuant to Article 13:10 of Council Regulation (EEC) No. 2423/88 could be considered internal charges which were levied directly on finished domestic products and indirectly on imported parts. As internal charges on the domestic finished products these duties were inconsistent with Article III:1 of the General Agreement in that they constituted direct charges on domestic products designed to afford protection to domestic production. As internal charges applied indirectly on imported parts or materials, these duties were inconsistent with Article III:2 of the General Agreement.

3.42 Japan considered that, if one regarded the duties applied under Article 13:10 as internal charges, they were inconsistent not only with Article III:1 and 2 but also with Article I:1 and III:4 of the General Agreement. These charges violated the principle of Most-Favoured-Nation treatment laid down in Article I:1 in that they were imposed on a discriminatory basis on parts imported from a specific country. Furthermore, Article 13:10(a) provided that the value of parts or materials used in the assembly operation and originating in the country of export of the finished product subject to duty must exceed the value of all parts of materials used by at least 50 per cent; this criterion for the application of duties was inconsistent with Article I:1 of the General Agreement because it meant that parts imported from a specific country received less favourable treatment than parts imported from third countries. This criterion was also inconsistent with Article III:4 of the General Agreement which provided that:

The inconsistency of this criterion with Article III:4 resulted from the fact that it entailed a treatment of parts imported from a specific country which was less favourable than the treatment of domestically produced parts.

3.43 The EEC argued that measures applied under Article 13:10 of Council Regulation (EEC) No. 2423/88 were not internal measures within the meaning of Article III of the General Agreement. If, however, the Panel were to take a different view, it would have to disregard the arguments made by Japan relating to Articles I, II and VI of the General Agreement. If these measures were to be considered under Article III, the relevant question would be whether they involved the least possible degree of inconsistency with this Article. In this respect the EEC made the following observations. Insofar as there was any inconsistency with Article III:1 and 2, as a result of the fact that the allegedly internal measures discriminated against imports, such discrimination against imports was necessary and justifiable under Article XX(d) because these measures were intended to secure compliance with anti-dumping duties, which by their very nature involved discrimination against imports. Japan also appeared to argue that measures under Article 13:10 were discriminatory within the meaning of Article III insofar as duties were levied only on products assembled by companies which had a relationship with exporters of the finished product subject to anti-dumping duties and not on all purchasers of the parts imported for assembly or for other purposes. To the extent that there was any discrimination in this area, such discrimination only resulted from the necessity under Article XX(d) not to go further than what was necessary to eliminate circumvention of anti-dumping duties which by definition were similarly discriminatory. In addition, since only parties subject to an anti-dumping duty could circumvent such a duty, anti-circumvention measures could normally only be applied where the relevant assembly operation was carried out on behalf of such parties, i.e. by parties related to or associated with the exporter subject to duty.

3.44 To illustrate this latter point, the EEC made a distinction between three types of importation of parts. Firstly, importation of parts took place for replacement purposes or for use in the production of finished products the importation of which was not subject to anti-dumping duties. In these cases there was generally no question of circumvention of anti-dumping duties and no duties could be imposed under Article 13:10 in these cases. Secondly, parts could be imported by or on behalf of parties related to or associated with exporters whose exports of the finished product were subject to anti-dumping duties. If all relevant criteria of Article 13:10 were met, circumvention of anti-dumping duties could be established in such cases and duties could be imposed under Article 13:10. Finally, parts could be imported by importers and assemblers who were unrelated to exporters whose products were subject to anti-dumping duties. From a corporate standpoint these companies were in a position which was very different from that of related assemblers. Since only parties subject to an anti-dumping duty could circumvent such a duty, anti-circumvention measures could normally only be applied where the relevant assembly operation was carried out on behalf of such parties, i.e. by parties related to or associated with the exporters whose products were subject to anti-dumping duties. The situation would be different if the party carrying out assembly operations was not really independent but, for example, merely a sub-contractor of the exporter. The logical implication of the argument of Japan was that anti-circumvention duties should be imposed on parties engaged in assembly operations of a finished product irrespective of the relationship of such parties with exporters whose exports of the like product were subject to anti-dumping duties. Interestingly, in bilateral discussions between Japan and the EEC prior to the adoption of Council Regulation (EEC) No. 1761/87 in June 1987 the possibility to apply anti-circumvention duties in this manner had been discussed and rejected by Japan.

3.45 The EEC argued that measures taken under Article 13:10 of Council Regulation (EEC) did not involve any local content requirements and were not inconsistent with Article III:4 and 5. The text of Article 13:10 did not contain any reference to a local content requirement. Under this provision, a finding that circumvention of anti-dumping duties had taken place could not be made if more than 40 per cent of the value of all parts or materials used in the assembly process of the product in question did not originate in the country of export of the like product the importation of which was subject to anti-dumping duties. The specific origin of parts which did not originate in the country of export of the finished product subject to anti-dumping duties was irrelevant for the purpose of determining whether circumvention occurred. The EEC had never imposed duties under Article 13:10 on the ground that 40 per cent or more of the parts or materials used in an assembly process did not originate in the EEC. In the nineteen cases in which investigations under Article 13:10 had been terminated without imposition of duties, the value of parts originating in the EEC and the value of parts in third countries other than Japan had been considered together to arrive at a total percentage of the value of parts used of non-Japanese origin. The proportion of parts originating in the EEC and parts originating in third countries other than Japan had varied from case to case. In some cases more than 40 per cent of the value of all parts used in the assembly operation had been of EEC origin while in other cases the percentage of the value of all parts used accounted for by parts originating in the EEC had been less than 40 per cent. In any event, the distinction between parts originating in the EEC and parts originating in third countries other than Japan had not played any rôle in investigations under Article 13:10.

3.46 Japan considered that the undertakings accepted by the EEC in the context of proceedings under Article 13:10 of Council Regulation (EEC) No. 2423/88 violated Articles I and III of the General Agreement. Such undertakings were an integral part of the application of Article 13:10 and compliance with such undertakings was legally enforceable. All proceedings under Article 13:10 initiated so far had been concluded by undertakings or, where initially duties had been imposed, those duties had subsequently been replaced by undertakings. The contents of such undertakings was suggested by the EEC itself. Undertakings under Article 13:10 were enforceable because companies which offered undertakings assumed that duties would be imposed under Article 13:10 if such undertakings were not respected. Given that the terms of reference of the Panel referred explicitly to the 'application' of Article 13:10 and that undertakings constituted an integral part of the application of this provision, it was appropriate for the Panel to examine the undertakings accepted by the EEC in the context of proceedings under Article 13:10.

3.47 Japan argued that the requirements imposed by the EEC regarding the contents of undertakings under Article 13:10 were inconsistent with the General Agreement for the following reasons. Firstly, the requirement to undertake to increase the value of parts or materials used in the assembly operation of non-Japanese origin was inconsistent with Article I:1 of the General Agreement because it resulted in a treatment of parts imported from Japan which was less favourable than the treatment of parts imported from third countries. Secondly, this requirement also violated Article III:4 of the General Agreement because it resulted in a less favourable treatment of imported parts than of domestically produced parts. Thirdly, the requirement to increase the value of parts or materials of EEC origin was inconsistent with Articles III:4 and 5 of the General Agreement in that a specific proportion of the parts used was required to be purchased from domestic suppliers in the EEC.

3.48 Japan provided the Panel with a copy of a standard format which it claimed was used by the EEC Commission for the presentation of undertakings by companies involved in investigations under Article 13:10, and presented a specific example of such an undertaking. It also provided information on two specific cases in which offers of undertakings had initially been refused by the EEC Commission. From letters written by the EEC Commission to the companies in question it was evident that the Commission's initial refusal to accept these offers had been based on the fact that the offers did not provide for a commitment to use a proportion of parts of EEC origin deemed satisfactory by the Commission. It was significant that when revised offers of undertakings from these companies had eventually been accepted, these undertakings had contained a commitment to procure more than 40 per cent of parts used in the assembly operation from EEC sources. In general, for an undertaking to be accepted by the EEC Commission, companies involved in investigations under Article 13:10 were required (i) to maintain the level of non-Japanese parts used in the assembly operation at more than 40 per cent; (ii) to increase the proportion of parts used of EEC origin; (iii) to reach within a certain period of time the proportion of parts originating in countries other than Japan and the proportion of parts originating in the EEC if these proportions had fallen upon the start of the production of a new model, and (iv) to provide the Commission on a regular basis with relevant information. The requirements for the acceptance of undertakings were thus stricter than the conditions of application of duties under Article 13:10. These requirements led to discrimination not only against Japan but against any third country, in particular as a result of the condition that there be an increase of the proportion of parts procured from EEC sources. Japan considered that the conditions for the acceptance of undertakings under Article 13:10 amounted, in effect, to a local content requirement.

3.49 The EEC doubted that the issues raised by Japan regarding the acceptance of undertakings in investigations under Article 13:10 of Council Regulation (EEC) No. 2423/88 fell within the terms of reference of the Panel. Under the rules of the General Agreement and the Anti-Dumping Code acceptance of undertakings was not mandatory but left to the discretion of individual contracting parties. The EEC was practically the only contracting party which frequently accepted undertakings in the context of anti-dumping investigations. The practice of the EEC in this respect went beyond what was prescribed by the General Agreement and the Anti-Dumping code. Undertakings might be suggested by the EEC to exporters. However, if undertakings were formally offered by an exporter or by a company carrying out an assembly operation in the EEC, this was a unilateral decision of the party in question. In all investigations under Article 13:10 in which offers of undertakings had been made the companies concerned had been large multinational firms assisted by well experienced lawyers. Even if one assumed arguendo that these firms had, in fact, offered undertakings which went beyond what was necessary to eliminate the circumvention of anti-dumping duties, this would not mean that a "requirement" within the meaning of Article III had been imposed on these companies. In this connection Japan had referred to the Report of the Panel in the dispute between the United States and Canada regarding the Canadian Foreign Investment Review Act which had taken the view that certain undertakings might fall within the meaning of the term "requirement" in Article III:4 of the General Agreement in view of the fact that these undertakings were legally enforceable. However, under Article 13:10 duties could not be imposed on the ground that a party engaged in assembly operations who had made an undertaking did not procure a certain percentage of the parts used in such operations from EEC sources.

3.50 Regarding the cases in which investigations under Article 13:10 of Council Regulation (EEC) No. 2423/88 had resulted in the acceptance of undertakings, the EEC pointed out that the companies concerned had been those found to have practised highly injurious dumping and to have circumvented the anti-dumping duties which had been the result of their unfair trading practices. In view of this some consideration had been given in the first anti-circumvention investigations (four out of thirty-five) to the question of how sourcing could be moved from Japan not only to third countries but also to the EEC. This had been done in order to avoid difficulties in establishing which parts were in reality of non-Japanese origin; the EEC had never intended to exclude imports of parts which genuinely originated in third countries. It might be that a consequence of this early approach had been that certain Japanese companies had undertaken to maintain a specific level of EEC content in their sourcing of parts. However, no offer of an undertaking had ever been refused solely on the ground that the offer did not provide for sufficient local sourcing. Following these initial cases, the EEC had changed its approach somewhat in order to avoid any ambiguity regarding its policy with respect to undertakings and in some cases where doubts had persisted the original undertakings had been amended. If in subsequent cases Japanese companies had undertaken to maintain certain levels of EEC content this had been done because of normal commercial considerations as could be seen from the fact that the content of each undertaking varied from company to company. It depended entirely on the individual company concerned whether EEC content was specifically provided for or not in an undertaking, and the percentage of parts procured in the EEC was not a factor in considering whether undertakings offered were satisfactory.

3.51 The EEC pointed out that in approximately 50 per cent of the undertakings which had been accepted in proceedings under Article 13:10 of Council Regulation (EEC) No. 2423/88 no reference to a specific level of parts of EEC origin existed. As regards the other cases, the companies in question had not been under any constraints regarding the contents of the undertaking. What mattered was only that at least 40 per cent of the value of parts used in the assembly process was of non-Japanese origin. If parties carrying out assembly operations in the EEC who had given undertakings wished to change the composition of the parts ratio an amendment was possible.

3.52 The EEC provided to the Panel a copy of a note addressed by the EEC in April 1989 to the Japanese authorities in which the EEC had explained that the attainment of a certain level of local content was not a criterion taken into consideration in investigations under Article 13:10. The text of this note made clear the concerns of the EEC regarding a possible misinterpretation by Japanese companies of the criteria for the acceptance of undertakings and indicated that what was required was that at least 40 per cent of the value of parts used in the assembly process in the EEC was accounted for by parts originating in any country inside or outside the EEC, except the country of export of the finished product subject to anti-dumping duties.

3.53 Japan considered that Article 13:10 of Council Regulation (EEC) No. 2423/88 and the measures taken under this provision lacked transparency and thereby violated Article X:1 and X:3 of the General Agreement, in particular in respect of the criteria for the acceptance of offers of undertakings and the methodology for determining the origin of parts used in assembly operations within the EEC. The EEC had not made public the criteria used in the consideration of offers of undertakings in proceedings under Article 13:10. While the conditions under which duties could be imposed were defined in the text of Article 13:10, the only available information regarding the conditions under which the EEC would consider undertakings acceptable consisted of letters and oral explanations by the EEC officials to companies involved in proceedings under this Article. From this information it could be concluded that the conditions for the acceptance of undertakings were stricter than the conditions for the imposition of duties.

3.54 Japan pointed out that the issue of the determination of the origin of parts or materials used in assembly operations in the EEC had led to difficulties, in particular in cases where parts were used which were manufactured in the EEC or in third countries other than Japan and which contained sub-components imported from Japan. It was only after an investigation under Article 13:10 was started that companies engaged in assembly operations within the EEC were in a position to ascertain how the EEC Commission would determine the origin of the parts used in these operations. Problems had also arisen because of the fact that in some cases the EEC had denied the validity of certificates of origin which had been issued in its Member States for the parts used by companies in assembly operations. The determination of the origin of the parts entailed a heavy administrative burden on the companies concerned which were required to provide detailed information on the origin of parts procured from suppliers, information which was often difficult to obtain. Furthermore, in determining the value of parts of Japanese origin, the EEC had used the free-into-factory price of parts used in assembly plants in the EEC, which meant that customs duties paid on parts imported from Japan were included in the value of these parts. Finally, in practice there existed the possibility of changes in the criteria to determine origin. For example, the method used to determine origin in the investigation of electronic typewriters differed from the method used to determine origin in the photocopiers case, even though Article X:3 of the General Agreement required that such rules be administered in a uniform and reasonable manner. Furthermore, on 3 February 1989 the EEC Commission had adopted Regulation (EEC) No. 288/89 on the determination of the origin of integrated circuits. Under the rules set forth in this Regulation many semi-conductors produced in the EEC by companies related to Japanese companies were treated as being of Japanese origin whereas under the previously applicable rules such semi-conductors had been treated as being of EEC origin. This had led to problems for certain Japanese producers in the EEC of electronic typewriters and plain paper photocopiers who had given undertakings on the assumption that such semi-conductors would be treated as being of EEC origin.

3.55 The EEC was of the view that the arguments of Japan regarding the inconsistency of Article 13:10 of Council Regulation (EEC) No. 2423/88 and measures taken under this provision with Article X of the General Agreement were unfounded. Article 13:10 provided for precise rules which were relatively easily understood and applied. In addition, it provided for full procedural rights for interested parties involved in investigations. Regarding the question of the determination of origin raised by Japan, the EEC pointed out that the EEC rules of origin had been laid down in Council Regulation (EEC) No. 802/68 and in implementing Regulations. Stable and foreseeable provisions regarding criteria to determine the origin of goods were important for international trade and for this reason an International Convention on the Simplification and Harmonization of Customs Procedures had been concluded in 1973 in Kyoto. It was noteworthy that, while the EEC and many of its trading partners had accepted a framework of rules of origin laid down in this Convention and had undertaken to apply this framework, Japan had never accepted the framework established by this Convention even though it had in the proceedings before this Panel and on other recent occasions argued in favour of more precise internationally agreed rules of origin.

3.56 Japan argued that Article 13:10 of Council Regulation (EEC) No. 2423/88 and the measures taken under this provision, which it considered were inconsistent with Articles I, II, III, VI and X of the General Agreement, could not be justified under Article XX(d). Article XX was applicable where a contracting party applied measures inconsistent with other provisions of the General Agreement. It was, therefore, necessary to first establish how Article 13:10 and its application violated other provisions of the General Agreement before one could examine Article XX(d) as a possible legal basis of these measures. Past GATT practice indicated that the responsibility to demonstrate that the conditions of application of Article XX(d) were met rested with the contracting party which invoked this provision. It was, consequently, the responsibility of the EEC to explain what in this case were the "laws or regulation ... not inconsistent with the provisions of this Agreement" and how Article 13:10 and the measures applied thereunder could be justified as being "necessary to secure compliance" with such "laws or regulations".

3.57 Japan argued that anti-dumping measures taken under Article VI of the General Agreement were derogations from fundamental obligations laid down in Articles I and II of the General Agreement. As such, the rules in Article VI on the application of anti-dumping measures needed to be interpreted narrowly. Under Article VI anti-dumping measures could be taken only under precisely defined circumstances. Further rules on the implementation of Article VI had been laid down in the Anti-Dumping Code. The rules in Article VI and in the Anti-Dumping Code would be undermined if contracting parties resorted to Article XX(d) to justify unilateral departures from these rules under the pretext that action was necessary to prevent "circumvention" of anti-dumping measures. Given that Article VI provided for a limited exception to general obligations under the General Agreement, measures taken under Article XX(d) for the alleged purpose of prevention of "circumvention" of anti-dumping measures had to be examined carefully in order to determine whether an exception going beyond what was permitted under Article VI was necessary.

3.58 Japan considered that the General Agreement permitted trade restrictive measures only in exceptional circumstances. The mere existence of economic injury was not a sufficient ground under the General Agreement to impose trade restrictive measures. On the contrary, the General Agreement prohibited such measures except in certain specific cases. If an exporter shifted his commercial operations from operations in respect of which trade restrictive measures were provided for (e.g. the export of products at dumped prices) to other operations such as direct investment in a foreign country, for which the General Agreement did not provide for the possibility to take trade restrictive measures, the mere fact that the local production by the exporter in the foreign country might have a negative effect on domestic producers in that country could not be a justification to extend the application of restrictive measures taken with respect to the dumped exports to the local production in the importing country because such local production and the importation of parts for use in local production did not constitute dumping.

3.59 Japan further argued that, while the EEC had used the terms "circumvention" and "evasion" to justify the amendment to its anti-dumping Regulation, these terms appeared nowhere in the General Agreement or in the Anti-Dumping Code. These terms had negative connotations and suggested a deceptive behaviour. It was necessary to clarify whether these terms referred to specific situations in respect of which the General Agreement allowed for the application of trade restrictive measures or whether they simply referred to actions which were considered undesirable by EEC industries. The EEC had explained the term "circumvention" by pointing out that in a number of instances exporters whose exports of finished products to the EEC were subject to anti-dumping duties had established "screwdriver" assembly facilities in the EEC and that in such operations only a limited part of the assembly process had been transferred to the EEC. This allegation was unfounded. Data on the nature of the operations of Japanese producers in the EEC of electronic typewriters, plain paper photocopiers and dot matrix printers showed that the production process carried out by these producers in the EEC was substantially identical to the production process of these products in Japan and that the value added in the EEC by these producers was substantial. It was, therefore, not correct to characterize these operations as "screwdriver" assembly operations.

3.60 With respect to the argument of the EEC that anti-circumvention measures had been necessary because domestic industries in the EEC had continued to suffer injury even after the imposition of definitive anti-dumping duties, Japan also argued that the EEC had not provided sufficient factual evidence of injury caused by what the EEC perceived as "circumvention". Reference had been made by the EEC to increases in local production and decreases in the volume of exports of finished products by certain Japanese companies as evidence of "circumvention" and to prices of products assembled in the EEC as evidence of injury to domestic producers; these two elements, however, were not sufficient to determine the existence of a real problem of "circumvention" or of injury to domestic industries caused by such "circumvention". The EEC assumed a direct causal relationship between the initiation of an anti-dumping duty investigation on finished products and the increase in the volume of such products assembled in the EEC. However, there were other factors explaining the expansion of such assembly operations, such as the sharp rise of the Japanese yen, policies of EEC member States to encourage foreign direct investment and the accelerating pace of the internationalization of corporate activities.

3.61 Japan further pointed out that, while the EEC had argued that there had been no perceptible increase of the prices of finished products assembled in the EEC and that in certain cases these prices had even been lower than the prices established in the investigations which had led to the application of definitive anti-dumping duties, Article 13:10 did not provide for any examination of prices at which products assembled in the EEC were sold. The EEC had also not provided any factual evidence in support of this allegation and in one case a Japanese company engaged in assembly operations in the EEC had increased the prices at which it sold finished products in the EEC. Furthermore, in order to show the existence of injury to domestic industries as a result of the alleged circumvention, it was necessary to consider not only prices; other economic indicators also needed to be taken into account. The EEC had, however, not provided any factual evidence that injury to its domestic industries could be established on the basis of such other economic factors.

3.62 Japan considered that, if one assumed arguendo that there were situations in which exporters wished to avoid the effects of anti-dumping duties on finished products by exporting parts of such products at dumped prices for local assembly in the importing country, contracting parties were obliged to first try to deal with such situations by applying measures which were in conformity with Article VI of the General Agreement. The EEC had argued that the conduct of anti-dumping investigations on imported parts would not be an appropriate way of dealing with problems of "circumvention" of anti-dumping duties through assembly operations in view of the large number of such parts which would have to be investigated. This argument was, however, not sufficient to demonstrate that adequate measures against such "circumvention" could not be taken under Article VI. If assembly operations were really limited to the type of "screwdriver" assembly described by the EEC, the number of sub-assemblies imported for final assembly was necessarily small. For example, in the case of electronic typewriters the final assembly involved four to seven sub-assemblies; anti-dumping investigations could be carried out with respect to each of these sub-assemblies. Furthermore, in case of alleged "circumvention" of anti-dumping duties through "screwdriver" assembly operations, only those parts supplied by exporters whose exports of finished products were subject to definitive anti-dumping duties to related companies carrying out the assembly operation needed to be investigated which meant that the number of transactions which had to be investigated was limited. The invocation of Article XX(d) to justify measures to prevent "circumvention" of anti-dumping measures presupposed that such measures could not be taken under Article VI of the General Agreement. The EEC had not demonstrated that normal anti-dumping investigations under Article VI could not adequately deal with this problem.

3.63 Japan considered that measures necessary to secure compliance with anti-dumping laws or regulations could be based on Article XX(d) where such measures could not be taken under Article VI of the General Agreement. For measures to be justifiable under Article XX(d) the following conditions had to be met. Firstly, the "laws or regulations" with which compliance was sought had to be "not inconsistent" with the General Agreement. Secondly, the measures in respect of which Article XX(d) was invoked had to be "necessary to secure compliance with those "laws or regulations". Thirdly, measures taken under Article XX(d) were subject to the requirement that they were not applied "in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade ...".

3.64 Regarding the term "laws or regulations" in Article XX(d), Japan considered that in this case these "laws or regulations" presumably were the relevant parts of Council Regulation (EEC) No. 2423/88 and the individual Regulations imposing definitive anti-dumping duties on the finished products in respect of which the EEC had applied Article 13:10 of Council Regulation (EEC) No. 2423/88. Japan doubted that this general anti-dumping Regulation of the EEC and the Regulations imposing definitive anti-dumping duties in specific cases could be considered to be "not inconsistent with the provisions of this Agreement" in view of the fact that the methodology applied by the EEC in its anti-dumping investigations led to artificial margins of dumping.

3.65 Japan was of the view that, even if one assumed that the EEC anti-dumping Regulation and the individual Regulations imposing definitive anti-dumping duties were "laws or regulations ... not inconsistent with the provisions of this Agreement", Article 13:10 of Council Regulation (EEC) No. 2423/88 and the measures based on that provision could not be regarded as "measures necessary to secure compliance" with those Regulations. "Compliance" with those Regulations would mean that anti-dumping duties levied were properly paid. It was, however, clear that Article 13:10 did not purport to ensure that anti-dumping duties would be paid properly. Rather, this Article provided for the imposition of duties on locally assembled finished products or imported parts of finished products on which anti-dumping duties could not normally be imposed under the provisions of Council Regulation (EEC) No. 2423/88. Thus, Article 13:10 and the measures based on this Article were irrelevant to the question of the "compliance" with Council Regulation (EEC) No. 2423/88 or with the individual Regulations imposing definitive anti-dumping duties in specific cases.

3.66 Japan argued in this context that the objective of anti-dumping measures, as defined in Article VI:2 of the General Agreement, was "to offset or prevent dumping" by means of the imposition of an anti-dumping duty (or acceptance of a price undertaking) on imported products found to have been dumped and causing or threatening material injury to a domestic industry. It was important to consider how Article 13:10 of Council Regulation (EEC) No. 2423/88 related to this objective. Under this Article duties could be imposed on products assembled in the EEC on the basis of criteria which were entirely unrelated to the issue of whether dumping was being offset or prevented and whether compliance with anti-dumping duties was being secured.

3.67 Japan further argued in this connection that in order to show that measures under Article 13:10 were "necessary to secure compliance" with Regulations imposing anti-dumping duties, the EEC had to demonstrate that the situation which had necessitated the imposition of the original definitive anti-dumping duties continued to exist. Thus, there had to be evidence of a continuation of dumping and injury caused by such dumping. Of particular importance in this context was the existence of a causal relationship between any margins of dumping established with respect to imported parts and any alleged injury to the domestic industry producing finished products. In the absence of dumping of the imported parts, there could be no justification for the imposition of anti-dumping duties. In this respect Japan disagreed with the view of the EEC that "circumvention" of anti-dumping duties by assembly could occur without the parts imported for use in the assembly being dumped. Furthermore, if there was no injury to the domestic industry producing the finished products, or if no causal relationship existed between such injury and the import of dumped parts there would also be no justification for the imposition of anti-dumping duties. If one examined the measures taken by the EEC in light of these considerations it was clear that, since the application of Article 13:10 of Council Regulation (EEC) No. 2423/88 did not involve investigations of whether dumping and injury existed, these measures could not be regarded as "necessary to secure compliance" with Council Regulation (EEC) No. 2423/88 or with individual Regulations imposing definitive anti-dumping duties in specific cases.

3.68 Japan considered that Article XX(d) allowed only for limited and conditional exceptions to other provisions of the General Agreement and did not permit departures from basic requirements of those provisions. In cases where Article XX(d) was involved to justify measures allegedly necessary to secure compliance with anti-dumping duties, contracting parties were still obliged to respect the three basic requirements of Article VI and to determine the existence of dumping, injury to a domestic industry and a causal relationship between the dumping and injury. If Article XX(d) were interpreted to permit departures form these fundamental obligations laid down in Article VI, the result would be that the stringent conditions imposed by this Article and intended to prevent a protectionist abuse of anti-dumping measures would be rendered meaningless. In this light, one could envisage a situation where Article XX(d) might have permitted, for instance, a procedural departure which would not render the other Articles of the General Agreement meaningless. Such procedural departures could include dispensing with the requirement for a full-fledged investigation to determine the existence of dumping and injury, but total disregard for their determination would seem to go beyond what might be permissible under Article XX(d).

3.69 Japan considered that the measures taken by the EEC under Article 13:10 of Council Regulation (EEC) No. 2423/88 involved discrimination within the meaning of Article I:1 of the General Agreement against parts imported from Japan. This discrimination was a form of "arbitrary or unjustifiable discrimination" proscribed by the opening paragraph of Article XX. Furthermore, given the conditions for the acceptance of undertakings in proceedings under Article 13:10 and the lack of transparency surrounding the implementation of this provision, it could be concluded that that measures under Article 13:10 constituted "a disguised restriction on international trade", and as such were inconsistent with the opening paragraph of Article XX of the General Agreement.

3.70 The EEC considered that recourse to Article XX(d) of the General Agreement was a serious matter which should only be taken as a last resort and not as a means of escaping obligations under the General agreement with insufficient justification. Consequently, before Article XX(d) was invoked, it was necessary to ensure that no adequate measures could be taken under other provisions of the General Agreement. Furthermore, it was necessary to fully satisfy the requirements of Article XX(d). This meant, firstly, that the "laws or regulations" with which compliance was being secured had to be "not inconsistent" with the General Agreement; secondly, that the measures in respect of which Article XX(d) was invoked were "necessary to secure compliance" with those laws or regulations, and, thirdly, that the measures in question were "not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade". In the case of Article 13:10 of Council Regulation (EEC) No. 2423/88 and measures applied pursuant to this provision these conditions were fulfilled to the letter.

3.71 The EEC considered that in the case before the Panel the "laws or regulations" referred to in Article XX(d) were, firstly, EEC Regulations imposing definitive anti-dumping duties in specific cases, and, secondly, the provisions of Council Regulation (EEC) No. 2423/88 on which such Regulations were based. The "measures" referred to in Article XX(d) were Council Regulation (EEC) No. 1761/87 of 22 June 1987 (subsequently incorporated in Article 13:10 of Council Regulation (EEC) No. 2423/88) and Regulations and Decisions implementing Article 13:10 in specific cases. The above-mentioned "laws or regulations" were in full conformity with the General Agreement and thus covered by Article XX(d). Anti-dumping duties were applied under these "laws or regulations" only after it had been established after formal investigations that the products subject to investigation were being dumped and causing injury to a domestic industry. In no case was the amount of duty imposed greater than the margin of dumping established. The amount of the duty was frequently less than the margin of dumping where such lesser amount was considered sufficient to remove the injury to the domestic industry even though the application of such a lesser duty was not required under Article VI of the General Agreement. In any event, the conformity with the General Agreement of either Council Regulation (EEC) No. 2423/88 or Regulations imposing definitive anti-dumping duties in particular cases had never been formally contested in a dispute settlement procedure in the GATT. This question was, therefore, not covered by the terms of reference of the Panel.

3.72 Regarding the requirement in Article XX(d) that measures taken under this provision be "necessary to secure compliance" with "laws or regulations", the EEC considered that this requirement involved the following elements in the context of this dispute. Firstly, there had to be a problem of non-compliance with anti-dumping duties. Secondly, it had to be shown that the measures taken under Article XX(d) were necessary to deal with this problem of non-compliance which meant that it had to be shown that (1) no alternative measures could be taken which were consistent with the General Agreement, (2) the measures taken were not disproportionate, and (3) the measures involved the least possible degree of inconsistency with other provisions of the General Agreement.

3.73 The EEC considered that circumvention of anti-dumping duties on finished products through importation of parts and subsequent assembly of such parts could constitute non-compliance within the meaning of Article XX(d). The view expressed by Japan that compliance with anti-dumping duty laws or regulations was ensured merely by the payment of anti-dumping duties on imported finished products was an unreasonably restrictive interpretation of the term "compliance" in Article XX(d). In order to determine to what extent a measure had been complied with, its objective had to be understood. The objective of anti-dumping legislation and anti-dumping measures was not to generate fiscal revenue. This objective was two-fold. Firstly, to offset or prevent dumping by the imposition of an anti-dumping duty (or by acceptance of a price undertaking) on imported products found to have been dumped and causing injury. Secondly, to guarantee to the contracting parties to the General Agreement that they could rely on one of the principles underlying the concessions made to other contracting parties in the area of tariff and non-tariff measures, i.e. the right to take effective action if domestic industries were injured or threatened with injury as a result of unfair trading practices. These objectives would be clearly endangered if anti-dumping measures imposed after formal investigations carried out in conformity with Article VI were circumvented. Consequently, contracting parties must be entitled to ensure that anti-dumping measures were not being undermined by circumvention and that an important part of the GATT was not rendered ineffective. The alternative would be the destruction of the disciplines established by Article VI of the General Agreement and the collapse of the balance of rights and obligations created by the GATT.

3.74 The EEC considered that the right to take action to prevent circumvention of anti-dumping measures was clearly recognized in the footnote to Article 16:1 of the Anti-Dumping Code which permitted action in the context of anti-dumping proceedings under relevant provisions of the General Agreement other than Article VI as interpreted by the Anti-Dumping Code. In the view of the EEC, the only provision of the General Agreement which could fall in the category covered by this footnote was Article XX(d).

3.75 The EEC considered that the interpretation of circumvention of anti-dumping duties as non-compliance was also supported by a widely recognized principle of customs and taxation laws and practices that activities leading to the circumvention of validly imposed duties or taxes were actionable. However a strict analogy between the rules governing international trade and rules of customs and taxation laws was not possible. The interpretation of customs and taxation laws necessarily had to be narrower than the interpretation of rules of the General Agreement which, as treaty rules, had to be interpreted in light of their purposes. That circumvention of anti-dumping duties could constitute non-compliance within the meaning of Article XX(d) was confirmed by the French text of Article XX(d) which referred to measures "nécessaires pour assurer l'application des lois et règlements ...". Thus, "securing compliance" with laws and regulations in reality meant securing the application of such laws and regulations. There could be no doubt that, in present day circumstances, one of the main priorities of any legislator in attempting to secure the application of laws or regulations was not only to ensure that measures provided for under such laws or regulations were implemented in the narrowest sense but also that the compliance with such measures was not undermined by circumvention.

3.76 The EEC noted that in its submission to the Panel the United States had come to essentially the same conclusion regarding the necessity of measures to prevent circumvention of anti-dumping duties. The only difference between the approach of the EEC and the approach of the United States to this problem was that the EEC considered that the right to take measures against circumvention of anti-dumping duties was specifically derived from Article XX(d), while the United States was of the view that this right was enshrined in the overall framework of Article VI, Article XX(d) and the interpretative history of these provisions. It was interesting that, whether it was Article VI, Article XX(d), general principles or all three which constituted the legal basis of measures against circumvention of anti-dumping duties, the provisions enacted by the EEC and the United States to deal with this problem were similar and concerned with exactly the same phenomenon. Accordingly, if the Panel were to adopt the approach of the United States and consider that the provisions of Article 13:10 of Council Regulation (EEC) No. 2423/88 were justified under Article VI and Article XX(d), or under any general principle of the General Agreement, the EEC would not disagree with such an approach.

3.77 The EEC further explained that, once it had been concluded that circumvention of anti-dumping duties could constitute non-compliance with such anti-dumping duties within the meaning of Article XX(d), the relevant question was how to define the circumstances under which such circumvention could be considered actionable. It had been recognized that circumvention of anti-dumping duties was not necessarily illegal and that it was necessary to distinguish between actionable circumvention and normal legitimate trading practices. The General Agreement did not expressly deal with this issue and there was no internationally agreed definition of what constituted actionable circumvention. After a careful examination of all legal and economic aspects of this question, the EEC had concluded that circumvention of anti-dumping duties could be considered actionable if the following four conditions were met: firstly, circumvention was actionable if there was non-payment of anti-dumping duties. In the case of assembly operations in the EEC involving finished products the importation of which was subject to anti-dumping duties there was a total non-payment of anti-dumping duties in each case. Secondly, there had to be a relationship between the party carrying out the assembly operation in the EEC and the exporter whose exports of finished products to the EEC were subject to definitive anti-dumping duties. Thirdly, for circumvention to be actionable, there had to be a link between the timing of the assembly operation in the EEC and anti-dumping investigations carried out by the EEC. The necessity of this link explained why Article 13:10 included a requirement that the assembly operation in the EEC must have started or substantially increased after the initiation of the original anti-dumping investigation. Absent this condition, measures against circumvention would affect parties who had been engaged in assembly operations in the EEC for a long time and who had not adapted their operations following the initiation of anti-dumping investigations.

3.78 The EEC explained that a fourth criterion to determine the existence of actionable circumvention was that there had to be a certain superficiality of the nature of the assembly operations carried out. In particular, such assembly operations had to be not more than a shallow reflection of the exporter's activities. The extent to which this was the case was best analyzed by comparing normal production and export activities with the assembly operations in question. Assembly operations merely constituted a shallow reflection of the exporting producer's activities when the exporter had simply transferred a limited part of the production process, i.e. the final assembly phase of a finished product, to the EEC, where such assembly took place mainly from parts imported from the country of export of the finished product in question and where neither research and development nor innovative technology was being transferred to the EEC. This explained why Article 13:10 of Council Regulation (EEC) No. 2423/88 provided that measures could be taken under this provision only when there was a preponderance of parts used in the assembly process in the EEC originating in the country of export of the finished product in question and that, in considering the necessity of such measures, account should be taken of the research and development and technology applied in the EEC.

3.79 Regarding the last of the above-mentioned criteria to determine the existence of actionable circumvention, the EEC considered that the information provided to the Panel by Japan with respect to the nature of the assembly process in the EEC of certain products manufactured by subsidiaries of Japanese companies did not contradict the conclusion of the EEC that in these cases only assembly operations of minimal commercial significance had been transferred to the EEC. These data confirmed that as regards the products which had been investigated so far under Article 13:10 of Council (EEC) No. 2423/88 the operations carried out in the EEC had involved the simple assembly of finished products from a preponderance of parts imported from Japan; in some cases all parts used in the assembly process had been imported from Japan.

3.80 The EEC further argued that in defining what constituted actionable circumvention, it had realized that, in order to conform with the general principles of the General Agreement and the provisions of Article XX(d) as interpreted by recent GATT Panels, the criteria to determine actionable circumvention had to be restrictive, objective and transparent.

3.81 Regarding the restrictive nature of the criteria of Article 13:10 of Council Regulation (EEC) No. 2423/88, the EEC pointed out that, since only parties subject to anti-dumping duties could circumvent such duties, measures against circumvention had to be limited to assembly operations carried out by or on behalf of such parties, i.e. essentially operations by their subsidiaries in the EEC. In addition, the amount of any anti-circumvention duty had to be limited to an amount required to prevent circumvention of the anti-dumping duty, which implied that this amount had to be proportional to the value of the imported parts used in the assembly operation in the EEC.

3.82 Regarding the objective nature of the criteria to determine when assembly operations constituted actionable circumvention, the EEC argued that Article VI of the General Agreement was based on objective criteria and did not provide for an examination of intent; the same approach had to be taken when defining actionable circumvention. This explained why the EEC, in evaluating the nature of assembly operations, relied on purely objective and easily verifiable criteria, such as the value of the parts used in the assembly operation, and not on subjective notions such as value added which might be artificially fixed to realize a particular profit in the country of assembly depending on the corporate requirements of the exporting company.

3.83 The EEC considered that Article 13:10 of Council Regulation (EEC) No. 2423/88 provided for maximum transparency and predictability in an area of considerable complexity by establishing a specific parts value instead of relying on a vaguer case-by-case approach which inevitably would result in less legal certainty.

3.84 The EEC disagreed with the view of Japan that, in order to demonstrate that anti-circumvention measures were necessary to secure compliance with anti-dumping duties, it was necessary to show a continuation of dumping and consequent injury to a domestic industry. The logical implication of this argument, if applied to normal anti-dumping duties, was that dumping and injury would have to be established for each individual shipment before anti-dumping duties could be collected. However, findings of dumping and injury were based on facts established during a certain investigation period. If during this period the conditions of Article VI were met, the collection of normal anti-dumping duties was justified without there being any time limitation. In the EEC duties would in principle remain in force for a period of five years. If during this period a change of circumstances occurred, the exporter had the opportunity to demonstrate in an administrative review proceeding that dumping or injury no longer existed. The onus of proof clearly lay with the exporter in these circumstances. As long as such proof of a change of circumstances had not been provided with respect to the conditions of application of normal anti-dumping duties all measures relating to the enforcement of such anti-dumping duties within the meaning of Article XX(d), i.e. all measures "necessary to secure compliance" with such duties, were fully justified. An importer who refused to pay anti-dumping duties would expose himself to certain enforcement measures, such as the impounding of goods, selling of assets, etc. For such enforcement measures to occur it was not necessary to conduct a new investigation of dumping and injury. Mere non-payment of the duties was sufficient ground to trigger the enforcement procedures.

3.85 The EEC considered that the same reasoning applied where the measures to "secure compliance" with anti-dumping duties were anti-circumvention measures within the meaning of Article XX(d). In this case there was also no need to carry out a new investigation of dumping and injury. Non-compliance with the anti-dumping duties was sufficient ground to take anti-circumvention measures, on the condition that such measures complied with the other requirements of Article XX(d). Once it had been established that a deviation from a provision of the General Agreement was necessary because there was no reasonable alternative available, it could not be demanded that the same provision be respected in detail. The conditions of application of enforcement measures could not be identical to the conditions of application of the measures to be enforced. Thus, the conditions of application of anti-circumvention measures under Article XX(d) must be allowed to be different in nature from the conditions of application of anti-dumping measures under Article VI of the General Agreement, as long as such measures under Article XX(d) were not broader in scope than what was necessary to enforce anti-dumping duties. This was clearly the case for measures taken under Article 13:10 of Council Regulation (EEC) No. 2423/88. The duties under this Article were neither higher nor more discriminatory than the anti-dumping duties they enforced. Such duties were effectively imposed on the same company which was affected by the original anti-dumping duties and served the same function as these anti-dumping duties, namely to provide protection against unfair trade practices consisting of the introduction of products of one country into the commerce of another country without payment of the anti-dumping duty which was payable on the importation of the same product.