3.86 The EEC considered that the measures provided for in Article 13:10 of Council Regulation (EEC) No. 2423/88 were clearly "necessary" within the meaning of Article XX(d) of the General Agreement because there was no reasonable alternative available under other provisions of the General Agreement. In this connection the EEC made the following observations on possible approaches based on Article VI to the problem of circumvention of anti-dumping duties. One way to deal with the problem of circumvention might have been to carry out anti-dumping investigations of imported components. This might be a conceivable solution in case of a product containing a small number of parts, e.g. ball bearings. However, for the great majority of products likely to be affected by anti-circumvention investigations such an approach would be both unrealistic and impractical in view of the large number of components. For example, there were approximately 1,000 individual components of a photocopier. Anti-dumping investigations of such a number of parts would impose a great burden on the parties to such investigations. In addition, if duties were to be imposed on major components, this would not necessarily facilitate matters, since in most instances these components were in the form of sub-assemblies and could easily be broken down into some or all of their constituent parts and exported in that form. Any anti-dumping duty imposed on major components could thus easily be avoided.

3.87 The EEC considered that there were two additional reasons why the conduct of anti-dumping investigations of components was not an appropriate method of dealing with problems of circumvention of duties on finished products. Firstly, if an investigation of components resulted in affirmative findings of dumping and injury caused thereby, duties would be imposed on all parts imported from the country concerned and not merely on those parts destined for use in assembly operations resulting in the circumvention of anti-dumping duties on the finished product. Such a result would go beyond what was necessary to prevent circumvention because the duties on the imported parts would affect companies in the EEC carrying out assembly operations which had no relationship with the exporters whose products were subject to anti-dumping duties as well as independent purchasers of spare parts and manufacturers or assemblers of products different from the product subject to anti-dumping duties but in the production of which some parts were used which were identical to the parts used in the production of the finished product subject to anti-dumping duties. Secondly, the calculation of a dumping margin for a finished product was inevitably based on figures different from those which were relevant in an investigation of parts on such a product. The cause of the dumping of the finished product was not necessarily the dumping of its constituent parts. Accordingly, a finding of dumping (and injury) with respect to the finished product did not automatically imply that its parts were also dumped. On the contrary, it was quite conceivable that, if the finished product was dumped, the imported parts were not being dumped or causing injury to domestic producers, if any, of such parts. Whether or not the individual parts were dumped and causing injury to a variety of parts manufacturers was unrelated to the question of whether circumvention of anti-dumping duties on a finished product occurred as a result of the assembly of that product from imported components.

3.88 The EEC pointed out in this context that, in addition to the possibility of carrying out anti-dumping investigations of components imported for further assembly, another possible approach to take action under Article VI of the General Agreement against circumvention of anti-dumping duties which it had considered was to regard the imported components as being "like" the finished products subject to definitive anti-dumping duties. This, however, would have entailed an extension of the interpretation of the term "like product" which had been opposed for many years in GATT.

3.89 The EEC further pointed out that it had also considered whether Article VI allowed for specific measures to prevent circumvention of anti-dumping duties. It had come to the conclusion that, while Article VI entitled contracting parties to take protective measures where it was established that dumping had caused injury to a domestic industry, the issue of non-compliance with regulations imposing anti-dumping duties was a separate issue arising after measures under Article VI had been taken and from behaviour which was not explicitly addressed in Article VI.

3.90 The EEC considered that the measures provided for in Article 13:10 of Council Regulation (EEC) No. 2423/88 were not disproportionate and were the least trade restrictive. They applied only in the most restrictive circumstances, i.e. only to products assembled by or on behalf of an exporter subject to anti-dumping duties and left unaffected the imports of parts from countries other than the country of export of the finished product subject to a definitive anti-dumping duty and the imports of parts for purposes other than assembly by a related party. In this context, Japan appeared to argue that a distinction should be made between parts sourced from independent suppliers in Japan and parts supplied by the exporters of the finished products subject to anti-dumping duties. This argument was irrelevant for the following reasons. Firstly, producers or exporters in Japan of finished products did not normally manufacture component parts but purchased such parts from independent suppliers or sub-contractors for use in assembly operations both in Japan and in the EEC. This was a typical feature of production processes of certain products in Japan and elsewhere. Secondly, the question of in-house or out-house sourcing of components was irrelevant in normal anti-dumping investigations and there was no reason why it should be considered relevant in the context of anti-circumvention investigations. Finally, if one made the distinction suggested by Japan, the independent suppliers of parts in Japan could directly supply parts to parties carrying out assembly operations in the EEC and related to the exporters of the finished product, thereby circumventing the anti-circumvention legislation. For these reasons, the relationship between the supplier of the parts and the party carrying out the assembly process was irrelevant in determining whether assembly of a finished product in the EEC constituted circumvention of anti-dumping duties. Only the relationship between the party carrying out the assembly process and the exporter of the finished product subject to anti-dumping duties was relevant.

3.91 Regarding the third aspect of the requirement in Article XX(d) that measures taken under this provision be "necessary" to secure compliance with laws and regulations, i.e. that such measures should involve the least possible degree of inconsistency with other provisions of the General Agreement, the EEC considered that this condition was satisfied in the case of measures applied under Article 13:10 of Council Regulation (EEC) No. 2423/88.

3.92 With respect to the requirement of Article XX of the General Agreement that measures taken under this Article should not entail arbitrary or unjustifiable discrimination, the EEC argued that, since the discrimination involved in the measures taken under Article 13:10 of Council Regulation (EEC) No. 2423/88 was proportionate to the discrimination caused by normal anti-dumping duties, there was no arbitrary or unjustifiable discrimination within the meaning of Article XX. Regarding the requirement that measures under Article XX should not entail a disguised restriction on international trade, the EEC argued that it was neither the intention nor the result of the provisions of Article 13:10 to restrict import of parts from any source. What was intended was the prevention of circumvention of the payment of anti-dumping duties by companies switching from the export of finished products subject to anti-dumping duties to the assembly within the EEC of the same product, with a preponderance of parts imported from the country of export of the finished product, by or on behalf of the exporter concerned.

3.93 Regarding the interpretation by the EEC of the term "compliance" in Article XX(d), Japan made the following observations. It disagreed with the views of the EEC on the two-fold purpose of Article VI of the General Agreement. The only objective of anti-dumping measures under this Article was "to offset or prevent dumping". There was no general principle in the General Agreement permitting contracting parties to take effective action against "unfair trading practices". Action was allowed under the General Agreement only in specific circumstances defined in the relevant provisions of the General Agreement. The General Agreement would be endangered if contracting parties were allowed to take "effective action" against unilaterally determined "unfair trading practices". There was no principle in the General Agreement condoning unilateral retributive action in the field of tariff or non-tariff measures. Under the General Agreement any grievance should be addressed in accordance with Article II:5 (for tariff concessions) or Articles XXII and XXIII which contained procedures to redress any violation of the rights of any contracting party.

3.94 Regarding the term "circumvention" as used by the EEC, Japan argued that this concept did not refer to the existence of dumping and injury caused by such dumping and could therefore not be seen as "non-compliance" with anti-dumping duties, the purpose of which was to off-set or prevent dumping. Non-compliance with anti-dumping duties could occur when imports of products which were found to be dumped and causing injury were substantially continued without payment of anti-dumping duties. Thus, the concept of "non-compliance" within the meaning of Article XX(d) and the concept of "circumvention" used by the EEC had to be distinguished clearly.

3.95 Regarding the concept of "actionable circumvention", Japan considered that the criteria mentioned by the EEC to define this concept did not make it possible to determine whether dumping took place. Furthermore, in the application of Article 13:10 of Council Regulation (EEC) No. 2423/88, the EEC had ignored these criteria. While the EEC had argued that "actionable circumvention" was characterized by the fact that assembly operations constituted merely a shallow reflection of exporters' activities in practice, the EEC had taken measures under Article 13:10 with respect to normal investments in the EEC which involved production processes almost identical to those of Japanese exporters. In some cases investments in the EEC had involved production processes which were even more complex than those in Japan. Such investments were certainly not "shallow reflections" of the exporters' activities.

3.96 Japan also pointed out that, while the EEC had argued that the United States had come to essentially the same conclusion as the EEC regarding the need for measures against circumvention of anti-dumping duties, in fact the term "circumvention" was used by the United States in a different sense. The United States had taken the view that circumvention of anti-dumping duties could occur when exporters shifted assembly operations of minimal or no commercial significance to the country of importation. The EEC, however, considered that circumvention of anti-dumping duties could take place even if the production process at the assembly plant in the importing country was identical to the production process of the like product in the importing country. There were also important differences between the provisions on circumvention of anti-dumping duties in the anti-dumping legislation of the United States and Article 13:10 of Council Regulation (EEC) No. 2423/88. The legislation of the United States provided for the possibility to apply duties on imported parts and components while the EEC applied anti-circumvention duties on the products assembled or produced in the EEC. In addition, in determining whether assembly of a product in the United States constituted circumvention of anti-dumping duties, the United States considered value added as one of the criteria. This criterion played no rôle in investigations under Article 13:10 of Council Regulation (EEC) No. 2423/88.

3.97 On the view of the EEC that measures under Article 13:10 were not disproportionate and applied only under restrictive conditions, Japan argued that the question of the proportionality of these measures had to be examined in light of the objective of anti-dumping measures, i.e. "to offset or prevent dumping". Since the measures under Article 13:10 were not related to this objective, there was no basis for the view that these measures were not disproportionate. The concept of "least degree of inconsistency" with provisions of the General Agreement, which had been referred to by the EEC, had been used by the Panel established in the dispute between the EEC and the United States regarding section 337 of the United States Tariff Act of 1930. The Report of this Panel stated that:

The EEC, however, had argued that as long as the anti-circumvention measures were proportionate to the discrimination caused by the normal anti-dumping duties which they were intended to enforce, such measures were "necessary" within the meaning of Article XX(d). This interpretation of the concept of "least degree of inconsistency" with provisions of the General Agreement was inconsistent with the Panel Report on section 337 of the United States Tariff Act of 1930.

3.98 With respect to the argument of the EEC that to treat finished products and components as "like products" for the purpose of investigations under Article VI of the General Agreement, would entail an extension of the concept of "like product", Japan pointed out that under Article 13:10 of Council Regulation (EEC) No. 2423/88 duties were in effect imposed on imported parts used in the production of finished products without there being any investigation of whether such imported parts were being dumped. Thus, measures under Article 13:10 in effect involved a treatment of finished products and components as "like products" and entailed an extension of the definition of the term "like product".

3.99 In response to the view of Japan that the problem of circumvention addressed in Article 13:10 of Council Regulation (EEC) No. 2423/88 did not constitute "non-compliance" within the meaning of Article XX(d) of the General Agreement, the EEC argued that in contesting the second objective of Article VI Japan ignored the very purpose of this Article, i.e. the creation of a guarantee to contracting parties that they could take effective action against unfair trading practices. If this guarantee were undermined, the delicate balance of rights and obligations underlying the General Agreement would be seriously put into danger. Japan had argued in this context that where this balance was endangered it was not for contracting parties to take unilateral action, but that the alternative and proper recourse was to invoke Articles XXII and XXIII of the General Agreement. However, these Articles were applicable only to disputes between contracting parties and did not apply to unfair trading practices of individual exporters or to non-compliance with measures imposed in response to such unfair practices. This issue of non-compliance could only be dealt with within the framework of Article XX(d) which specifically dealt with such behaviour. If circumvention of legitimate commercial policy measures was not considered to fall within the scope of Article XX(d), contracting parties would be defenceless in the face of unfair trading practices and could not rely on Article VI for effective action while at the same time they would be obliged to adhere to other obligations under the General Agreement.

3.100 Regarding the observations made by Japan on the criteria used by the EEC to define the concept of "actionable circumvention", the EEC considered that the criteria which it had adopted were in line with economic reality. It was evident that a product for which the research, development and design had taken place in an exporting country and which was assembled in the EEC by the same exporting company with a preponderance of the same parts was to all intents and purposes the same product as the product subject to anti-dumping duties upon importation into the EEC. It was misleading to suggest that in such cases there were no differences between the assembly operations on the EEC and the production processes in Japan. What was produced in Japan was not only the result of an assembly operation using parts sourced in Japan but of research, development, design and technological innovation which were carried out only in Japan. In the instances in which the EEC had concluded that circumvention of anti-dumping duties had occurred, only the assembly operation had been transferred to the EEC. It was therefore undeniable that the objective of such assembly operations in the EEC was to recreate a product identical to that which had previously been exported to the EEC. However, the use in the assembly operation of a preponderant proportion of parts originating in the country of export of the finished product subject to anti-dumping duties was only one of the criteria to determine whether actionable circumvention occurred.

4.1 Australia considered that the duties provided for in Article 13:10 of Council Regulation (EEC) No. 2423/88 were not in fact anti-dumping duties as had been claimed by the EEC. The manner in which these charges were imposed and the point at which they were imposed made it clear that they were internal charges within the meaning of Article III. The Report of the Panel in the dispute concerning Belgian Family Allowances had clarified the criteria to distinguish between internal charges and charges on imports as such. In the case before the Panel, the internal charges were imposed on the finished product when it entered the commerce of the EEC. However, these charges were only imposed on the basis that a specified proportion of the value of the parts and materials used in the finished product were imported from a particular country by a particular manufacturer or assembler in the EEC. No charges were levied on the imported components at the point of importation. Therefore, the charges being levied in this case clearly met the criteria for internal charges within the meaning of Article III:2 as defined in the Belgian Family Allowances Report, i.e. the charges were not imposed on the parts and materials at the time of importation and were not imposed on all such imports but only on those imports in particular specified end uses.

4.2 Australia considered that, as internal charges within the meaning of Article III of the General Agreement, the duties provided for in Article 13:10 of Council Regulation (EEC) No. 2423/88 were clearly contrary to the provisions of Article III:2. Such duties were imposed only on finished products which contained a particular proportion of imported components. No equivalent charge was applied on the like domestic product, i.e., the same finished product containing only components produced within the EEC or the components themselves when they were produced in the EEC. The manner in which these charges were applied was also discriminatory between import sources and therefore contrary to Article I:1 of the General Agreement. Where the producer or assembler in the EEC was related to or associated with, for example, a Japanese company, against the products of which there had been an anti-dumping finding, charges would be applied to products containing at least the specified proportion of components imported from any company in Japan. The same charges were not imposed, however, if the imported components used in the same product were obtained from any source other than Japan.

4.3 Regarding the view of the EEC that Article 13:10 of Council Regulation (EEC) No. 2423/88 was consistent with Article XX(d) of the General Agreement, Australia considered that the essential question was whether the measures provided for in Article 13:10 could be considered "necessary" within the meaning of Article XX(d). As indicated by the Report of the Panel in the dispute concerning the Canadian Foreign Investment Review Act, the onus was on the contracting party invoking Article XX(d) to demonstrate that measures were necessary within the meaning of this provision. The EEC had made no attempt to establish that the measures provided for in the amendment to its anti-dumping legislation were in fact necessary to avoid circumvention of its anti-dumping legislation. The EEC had claimed that, if at least 60 per cent of the value of parts and components were imported from a particular source (against which dumping of a finished product had been proved), dumping of the components could be taken as given without further investigation or proof and the charges were levied on that basis. The EEC already had in place anti-dumping legislation which could have been used to prevent dumping of components where such dumping could be established. However, it had chosen not to use the existing provisions of its legislation to attempt to properly establish that components were in fact being dumped. On that basis the measures provided for in the amendment to the EEC anti-dumping legislation could not be considered "necessary" within the meaning of Article XX of the General Agreement. In the recent Panel Report on section 337 of the United States Tariff Act of 1930 the EEC had argued that:

In the present case, the amendments adopted by the EEC had clearly been written to differentiate between products assembled or manufactured within the EEC and containing certain imported components and those containing only domestic components in similar situations. The enforcement measure was only applicable to the product containing the imported components and not to that containing only components from domestic sources. In its Report, this Panel had concluded that contracting parties were not allowed to:

It was worth noting that the EEC had been strongly in favour of the adoption of this Report and presumably therefore accepted the reasoning underlying the Panel's conclusions. Yet in this present case the EEC had taken a directly contrary position and claimed that the amendments to its anti-dumping legislation, which were clearly inconsistent with Articles I and III:2 of the General Agreement, were necessary for the enforcement of its legitimate anti-dumping provisions.

4.4 Australia further argued that, if the Panel would decide that the charges levied under Article 13:10 of Council Regulation (EEC) No. 2423/88 could be considered anti-dumping duties rather than internal charges, these anti-dumping duties were nevertheless still being imposed contrary to the provisions of Article VI of the General Agreement and the Anti-Dumping Code. Article VI and the Anti-Dumping Code both required that certain facts be established before anti-dumping duties could be imposed. In this case the provisions of Article 13:10 of Council Regulation (EEC) No. 2423/88 did not require it to be established that imported components were being sold at less than their normal value in the exporting country nor that they were causing or threatening material injury to an established domestic industry. Article 1 of the Anti-Dumping Code provided that:

The amendments to the EEC anti-dumping legislation did not require investigations of whether dumping of the "like product" occurred. Such investigations were necessary for the measures to be in accordance with the provisions of Article 2 of the Anti-Dumping Code.

4.5 Canada pointed out that the question of circumvention of anti-dumping duties had attracted increasing attention and sparked considerable debate among contracting parties in recent years. On the one hand, certain importing countries were concerned that anti-dumping measures were being rendered impotent through the circumvention activities of exporting sources. On the other hand there was considerable concern about the unilateral implementation of anti-circumvention measures and the lack of internationally agreed rules. Canada was fully aware of the potential for circumvention of anti-dumping measures and it was, consequently, sympathetic to the valid concerns governments might have regarding the circumvention of anti-dumping measures. As Canada understood it, Japan was not contesting the right to maintain anti-circumvention regulations but was questioning the measures taken by the EEC in light of the provisions of the General Agreement. Canada was concerned that measures adopted for anti-circumvention purposes would not, in their own right, lead to trade or investment distortions. The terms of reference of the Panel called for an examination of the matter raised by Japan in light of the relevant provisions of the General Agreement. The fact that there were no internationally agreed rules about circumvention presented a challenge to the Panel. Canada wished to avoid a situation in which the GATT Council, in taking a decision to adopt the findings and conclusions of this Panel, would thereby foreclose the necessity for contracting parties to develop agreed rules relating to the issue of the circumvention of anti-dumping findings.

4.6 Canada considered that, given the limited number of proceedings opened by the EEC under its anti-circumvention legislation, an appropriate course of action for the Panel would be to examine each case in which the EEC had applied its legislation to determine if the obligations for the use of Article XX(d) had been met. In doing so, the Panel would not be obliged to come to a conclusion about the EEC anti-circumvention legislation per se and could limit itself to the application of this legislation in specific circumstances. A precedent for such an approach could be found in the Panel Report on the dispute between Canada and the United States on Automotive Spring Assemblies. This dispute had involved, inter alia, Article XX(d). The Panel had considered whether the conclusions it had drawn from an examination of the specific automotive spring assemblies case could be generalized regarding the use of section 337 of the United States Tariff Act of 1930 in cases of patent infringement. The Panel had decided that the conclusion that Article XX(d) applied and that section 337 was an appropriate vehicle to enforce United States patent law would, in principle, apply to many cases of alleged patent infringement. The Panel had noted, however, that the substance of patent infringement cases could vary considerably and had not excluded the strong possibility that there might be cases where its conclusion would not apply. Canada considered it appropriate for the Panel to draw conclusions regarding whether or not the EEC was justified in invoking Article XX(d) to defend its anti- circumvention measures in specific cases. This would avoid the necessity of reaching a conclusion on the EEC anti-circumvention legislation in and of itself. Multilateral negotiations were necessary to establish the appropriate framework against which the EEC anti-circumvention legislation could be measured.

4.7 Canada considered that the debate regarding circumvention focused to a large extent on the definition of what constituted circumvention and on the definition of measures appropriate to deal with circumvention. Regarding the definition of circumvention, Canada was of the view that circumvention only occurred where the importation of parts and components of dumped goods was such that this undermined an existing injurious dumping finding on the final product. This required, firstly, evidence that the dumping of the assembled product was being shifted to the importation of parts and components which were being exported at dumped prices. Secondly, the importation of the parts or components must also contribute to the injurious effects of the dumping of the assembled "like product". In other words, circumvention existed only if a clear causality could be shown between the imposition of anti-dumping duties and the subsequent increased importation of dumped parts and components for the assembled product, and the continued injury to the domestic producers of the assembled "like product". In such cases, there might be justification for the extension of anti-dumping duties to the dumped parts and components originating in the subject country. Article 13:10 of Council Regulation (EEC) No. 2423/88 established criteria used by the EEC to determine whether circumvention was occurring and whether measures had to be taken to prevent this circumvention. Because the EEC had invoked Article XX(d), it was incumbent on the EEC to provide evidence that each of the cases where anti-dumping duties had been extended did indeed involve actual circumvention and not merely a presumption of circumvention on the ground that the criteria of Article 13:10 had been met. In other words, the EEC should show that the criteria defined in its legislation were necessary to prove that circumvention was occurring.

4.8 Regarding the question of measures to deal with circumvention of anti-dumping duties, Canada argued that Article VI of the General Agreement and the Anti-Dumping Code set out rights and obligations with respect to the circumstances and conditions under which anti-dumping duties could be applied. In normal circumstances where the import of allegedly dumped parts and components was causing or threatening to cause injury to domestic producers of parts, a measure consistent with the General Agreement was available by means of a separate anti-dumping investigation into parts as prescribed under Article VI and the Anti-Dumping Code. This, however, might not adequately deal with situations where the injury caused by imported parts was being felt by domestic producers of end products, rather than by domestic producers of parts. In such cases the need for and scope of anti-circumvention measures had to be assessed carefully as anti-dumping practices were already an exception to the basic principles of the General Agreement of national treatment and most-favoured-nation treatment and contracting parties had recognized that anti-dumping practices should be narrowly construed so as not to constitute an unjustifiable impediment to international trade. Canada did not rule out, however, the possibility of situations involving circumvention of anti-dumping findings not covered by existing rules. In addition, the problem of circumvention of such anti-dumping findings could generally be considered to fall within the meaning of the concept of the enforcement of rules relating to customs and governments had the right to ensure that their laws and regulations were being enforced. Consequently, Canada did not, in principle, preclude the invocation of Article XX(d) in cases where it was necessary for a government to prevent circumvention of an anti-dumping finding consistent with Article VI of the General Agreement.

4.9 Canada considered that in such circumstances it was incumbent upon the party invoking Article XX(d) to provide evidence that it met all three criteria specified in Article XX(d) in order to justify otherwise GATT inconsistent measures. These criteria were (i) that the "laws or regulations" with which compliance was being secured were "not inconsistent" with the General Agreement, (ii) that the measures in question were "necessary to secure compliance" with those laws or regulations, and (iii) that the measures 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". Canada considered that since it might not be necessary in all situations to go beyond the existing rules of the General Agreement to deal with the circumvention of anti-dumping findings, it was necessary to examine the particular cases for which the EEC was invoking Article XX(d) to determine whether the particular actions taken by the EEC to prevent circumvention were in accordance with the criteria of Article XX(d).

4.10 Regarding the first of the three above-mentioned conditions of application of Article XX(d), Canada argued that it was essential to distinguish between the adoption and enforcement of measures to secure compliance with laws and regulations and the laws or regulations with which compliance was considered necessary. The EEC was entitled to take action against injurious dumped goods; it had exercised this right, for example, in applying anti-dumping duties to electronic typewriters and electronic scales exported from Japan. Since these types of action were not the object of Japan's request for a panel, it could be assumed that the EEC anti-dumping legislation under which such measures had been taken was not being challenged by Japan in this dispute as inconsistent with the provisions of the General Agreement. The "measures" which had been taken by the EEC to secure compliance with its anti-dumping measures, and for which a Panel ruling was sought, related to the application of Council Regulation (EEC) No. 1761/87 to products assembled or produced by Japanese-related companies in the EEC using material of Japanese origin. In invoking Article XX(d), the EEC had itself acknowledged that these particular measures of exception were inconsistent with Article VI and with the provisions of the Anti-Dumping Code.

4.11 Canada considered that the recent Panel Report on section 337 of the United States Tariff Act of 1930 provided a perspective with respect to the concept of "necessity" in Article XX(d). This Panel had concluded that:

The Panel had also stated that:

Consequently, in order for a derogation from the agreed international rules on anti-dumping measures to be "necessary" within the meaning of Article XX(d), it should be limited to the minimum degree of GATT inconsistency required to deal with the circumvention of anti-dumping duties. Therefore, the application of a measure of exception designed to secure compliance with an existing anti-dumping finding needed to be carefully circumscribed to limit its use to truly genuine forms of circumvention. In this respect Canada reiterated its view that circumvention of anti-dumping duties existed only if a clear causality could be shown between the imposition of anti-dumping duties and the subsequent increased importation of dumped parts and components for the assembled product, and the continued injury to the domestic producers of the assembled "like product". It might be helpful in this regard if the Panel examined, for each case in which the EEC had applied anti-circumvention measures, the criteria employed by the EEC to determine if measures were, in fact, necessary. Among the questions which might be relevant to such an examination were those of the relevance of the relationship between the exporter of parts and the producer of the final product, the degree of increase in parts imports and the share of imported parts in the total parts inputs.

4.12 Regarding the requirement that measures under Article XX(d) should not constitute disguised restrictions on international trade, Canada pointed to the fact that the EEC anti-circumvention legislation included factors such as the amount of research and development undertaken and the nature of the technology used, which were only peripherally related to the question of circumvention. The inclusion of these factors in the legislation raised the question of whether the measures provided for in Article 13:10 of Council Regulation (EEC) No. 2423/88 constituted a disguised restriction on international trade. While the existence of higher value added production processes or research and development might help establish that a production process involved more than simple assembly questions, it remained to be determined whether the absence of such activities permitted the conclusion that circumvention of an anti-dumping finding was occurring and causing injury to the domestic producer of finished like goods. There was a risk that any unilaterally established criteria to determine the existence of circumvention could go beyond the issue of circumvention and have effects, directly or indirectly, on other areas. Any such criteria should be carefully considered and be the minimum necessary so as not to unduly impede legitimate business investment and sourcing decisions which were the basis for international trade.

4.13 Hong Kong considered that, in enacting the provisions of Article 13:10 of Council Regulation (EEC) No. 2423/88, the EEC had unilaterally departed from existing international rules without having attempted to seek to resolve the problem of circumvention of anti-dumping duties through multilateral development of the rules of the General Agreement. The EEC was bound by the General Agreement and the Anti-Dumping Code. Article 13:10 of Council Regulation (EEC) No. 2423/88 was an integral part of the EEC anti-dumping legislation and led to the imposition of anti-dumping duties. This Article was, consequently, subject to the same limitations as other anti-dumping provisions of contracting parties to the General Agreement. The EEC had not acknowledged that Article 13:10 was contrary to Article VI of the General Agreement and the provisions of the Anti-Dumping Code but had argued that Article XX(d) of the General Agreement was a sufficient legal basis for the adoption of Article 13:10, although this was not stated in the text of this Article. Referring to Article XX(d), the EEC had argued that Article 13:10 was necessary to prevent circumvention of duties imposed pursuant to its anti-dumping legislation, which was "not inconsistent" with the provisions of the General Agreement. The fact that Article 13:10 itself arguably conflicted with provisions of the General Agreement and of the Anti-Dumping Code was immaterial in the view of the EEC because Article XX provided for exceptions to obligations under the General agreement and Article 13:10 of Council Regulation (EEC) No. 2423/88 could be regarded as a measure to secure compliance with a regulation relating to customs enforcement, as provided for in Article XX(d) of the General Agreement.

4.14 Hong Kong considered that the general exceptions in Article XX of the General Agreement should be construed narrowly. As a leading commentator of the General Agreement had observed, this Article did "open the danger of excessive protectionism". A broad interpretation of Article XX(d) would allow contracting parties to the General Agreement to draw up draconian new laws under the pretext of enforcement of existing trade policy, subject only to the loosely worded limitation that the measures in question not "constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade". Anti-dumping measures were an exception to the freetrade principles of the General Agreement and the use of such measures was specifically circumscribed by the specific provisions of Article VI of the General Agreement. The general exceptions should not be interpreted in a way which would be inconsistent with specific provisions of the General Agreement.

4.15 Hong Kong argued that Article 13:10 of Council Regulation (EEC) No. 2423/88 was inconsistent with the requirement that measures under Article XX(d) of the General Agreement be not applied "in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail". That Article 13:10 was discriminatory followed from the fact that one of the criteria for application of duties under this Article was that the company carrying out assembly operations in the EEC had to be related to or associated with a company in a country subject to an anti-dumping measure. Under this test, a company which had no shareholders in the country subject to anti-dumping measures could import virtually all of its parts from that country, while companies with shareholders in that country would be allowed to purchase no more than 60 per cent of their parts from that country.

4.16 Hong Kong considered that, even if Article XX(d) would permit an exception to Article VI, the EEC rules on measures to prevent circumvention of anti-dumping duties went beyond the limitations of Article XX(d). The claim of the EEC that its anti-circumvention measures were justified under Article XX(d) because they were designed to prevent circumvention of anti-dumping duties was not supported by the wording of Article XX(d). "To secure compliance" did not have the same meaning as "to prevent circumvention". The true meaning of the exception on which the EEC had based its argument should not be distorted. Article XX(d) could not be extended to cover a situation where a measure was not as effective as intended because of the fact that companies were legitimately pursuing an alternative trading strategy, such as setting up an operation in the EEC. In spite of the absence of a multilaterally agreed definition of the term "circumvention" the EEC had unilaterally defined this term, although the concept of "circumvention" had not been defined in the text of Article 13:10. The EEC had argued that the conditions for the imposition of duties under Article 13:10 were intended to provide a definition of circumvention which was "fair, narrow, and based on objective criteria". Yet, not only was Article 13:10 far in excess of what was "necessary to secure compliance" with anti-dumping measures, it also went beyond what was necessary to prevent circumvention, in the broadest sense of the word. In determining whether Article 13:10 was necessary, it was important to note that the EEC already had customs rules and rules of origin which could adequately cope with situations of circumvention of anti-dumping duties. For example, General Rule 2(a) for the Interpretation of the Combined Nomenclature appeared to be relevant to a situation in which parts were imported in the EEC for the sole purpose of simple assembly. This rule seemed adequate and much more appropriate to deal with real cases of circumvention.

4.17 Hong Kong considered that Article 13:10 was clearly designed to achieve a broader objective than only to ensure that the EEC was not defrauded of anti-dumping duties. The requirement that at least 40 per cent of the total parts value be made up of parts originating in the EEC or in countries not subject to anti-dumping duties placed limitations on where a company could source its parts and raised the suspicion that the EEC was seeking to increase substantial investment in the EEC by inducing companies to source more parts in the EEC. The fact that assembly costs were not a main criterion under Article 13:10 meant that companies might be liable for duties even when carrying out labour intensive operations. There was no justification for presuming that "circumvention" occurred only because 60 per cent of the parts used in the assembly operation were imported from the country subject to anti-dumping duties. The EEC had failed to explain the exclusion of assembly costs as a main criterion under Article 13:10 even though the declared objective of this provision was to prevent "screwdriver" assembly operations. A company could assemble a product from literally thousands of parts, a large proportion of which could be of EEC origin, in a large and well-staffed operation, and still be subject to duties under Article 13:10.

4.18 Hong Kong concluded that the fact that Article 13:10 could encompass companies which in no sense of the word intended to "circumvent" anti-dumping duties (a fortiori "not comply" with anti-dumping duties) meant that this provision was only valid if it was in conformity with provisions of the General Agreement other than Article XX(d). In view of the fact that application of Article 13:10 of Council Regulation (EEC) No. 2423/88 led to the imposition of anti-dumping measures, it followed from Article 1 of the Anti-Dumping Code that this provision was only valid if it was consistent with the provisions of the Anti-Dumping Code. However, Article 13:10, which provided for the possibility to extend anti-dumping duties to products assembled in the EEC, with the amount of duty levied being proportional to the value of imported parts included in the assembled products, was contrary to Article VI of the General Agreement and to the provisions of the Anti-Dumping Code. There was no provision under this Article for a separate investigation of whether the imported parts or the finished products assembled in the EEC were causing injury to a domestic industry producing the "like product". Therefore, unless the EEC admitted a clear breach of the basic principles of the Anti-Dumping Code, i.e., the requirements to establish dumping and consequent injury, it necessarily had to argue that anti-dumping duties were extended to a product which was "like" the product subject to the original anti-dumping duty. This type of argument implied that either the imported parts were considered "like products" in respect of the finished products, or that the finished products assembled in the EEC were considered equivalent to the finished products imported from the country subject to anti-dumping duties.

4.19 Hong Kong pointed out that in the Committee on Anti-Dumping Practices the EEC had taken the view that the relevant question under Article VI of the General Agreement was whether the imported parts were "like products" in respect of the finished product. However, parts were at a level of trade different from that of finished products and could normally be incorporated into a variety of finished products. Parts often could be used only for incorporation into finished products. Only where parts were so significant in the final product that it was substitutable with the final product could it be argued that parts and finished products were "like products".

4.20 Hong Kong further argued that, under Article 13:10 of Council Regulation (EEC) No. 2423/88 duties were imposed according to the value of parts originating in the country of export of the finished product subject to a definitive anti-dumping duty, which seemed to indicate that duties were being imposed on the parts. Nevertheless, the language of Article 13:10 and the fact that these duties were only imposed after the parts were incorporated into the finished product suggested that it was the finished product assembled in the EEC which apparently was considered by the EEC a "like product". Under Article VI of the General Agreement dumping occurred if "products from one country were introduced into the commerce of another country at less than their normal value". Article 13:10, however, provided that, if certain conditions were met, duties could be imposed on products "introduced into the commerce of the Community after having been assembled or produced in the Community". This was in violation of the basic principle of Article VI of the General Agreement that anti-dumping duties could be imposed only on imported products. It was wholly foreign to the concept of anti-dumping as regulated by the General Agreement and the Anti-Dumping Code to impose duties on products which might have the origin of the country imposing the duties. In this regard, Hong Kong also referred to Article 8:2 of the Anti-Dumping Code. Where a product was produced in the EEC, it was not "an import" from a "source" found to be causing injury. In fact, no investigation would have taken place to determine the existence of dumping and injury in relation to such products.

4.21 Hong Kong considered that where duties were imposed on products after they had been assembled in the EEC, but only on such products produced by producers related to or associated with exporters subject to anti-dumping duties, such duties amounted to discriminatory internal taxes which violated Articles I and III of the General Agreement. Furthermore, the lack of clarity regarding the nature of undertakings acceptable to the EEC in the context of investigations under Article 13:10 of Council Regulation (EEC) No. 2423/88 could well disguise the fact that companies in practice were being obliged to purchase a certain proportion of parts locally. Although the EEC had repeatedly denied that such a requirement existed, Japan had pointed out that it was the experience of Japanese firms which had been subject to investigations under Article 13:10 that such local content requirements had been imposed. Such requirements were inconsistent with Article III:5 of the General Agreement; they could in no way be seen as "necessary to secure compliance" with trade measures consistent with the General Agreement and were therefore not justifiable under Article XX(d) of the General Agreement.

4.22 Hong Kong concluded that Article 13:10 of Council Regulation (EEC) No. 2423/88 was clearly outside the provisions of the General Agreement and of the Anti-Dumping Code. This provision could not be considered to be covered by the exception of Article XX(d). The objectives of this provision were broader than only to "secure compliance" with anti-dumping duties and it could affect parties which were not circumventing anti-dumping duties. Hong Kong recognized that the problem which this provision attempted to address needed to be resolved within the framework of the General Agreement so that internationally agreed rules on this issue might be developed. However, in the absence of rules in the General Agreement dealing with this problem of circumvention, Article 13:10 of Council Regulation (EEC) No. 2423/88 had to be considered inconsistent with the provisions of the General Agreement. Hong Kong, therefore, requested the Panel to reach findings which would lead to the withdrawal of this Article.