4.23 Korea considered that the Panel should examine the nature of the measures applied by the EEC under Article 13:10 of Council Regulation (EEC) No. 2423/88 to determine whether or not these measures were anti-dumping measures. If the Panel came to the conclusion that the measures in question were anti-dumping measures, it should examine whether these measures were consistent with Article VI of the General Agreement and the Anti-Dumping Code. In this respect Korea pointed in particular to two practices which it considered as incompatible with Article VI and the Anti-Dumping Code: firstly, the imposition of anti-dumping duties on finished products assembled in the EEC without any investigation of the existence of dumping and injury and, secondly, the imposition on exporters of certain conditions regarding assembly operations in the EEC in the context of price undertakings accepted in anti-dumping investigations.

4.24 Korea was of the view that, if the Panel would not regard the measures provided for in Article 13:10 as anti-dumping measures, it should examine whether these measures were a new form of protectionism designed to increase the use of parts originating in the EEC and to support inefficient domestic industries in the EEC and which resulted in a distortion of trade in parts and components. In this respect the following points merited careful consideration: firstly, the imposition of requirements to use a certain proportion of parts of EEC origin only on those producers in the EEC who were related to foreign companies; secondly, the method used by the EEC to calculate the actual proportion of imported parts used in the assembly operation, in particular in case of sub-assemblies purchased in the EEC; thirdly, the market distorting effect of the requirement to use a certain proportion of parts of EEC origin in cases where such parts were produced inefficiently by quasi-monopolistic producers.

4.25 Singapore considered that Article 13:10 of Council Regulation (EEC) No. 2423/88 was inconsistent with Articles VI, I and III of the General Agreement and with the Anti-Dumping Code and did not meet the requirements of Article XX(d) of the General Agreement.

4.26 Singapore argued that the first question to be addressed in the examination of the duties provided for in Article 13:10 was whether these duties should be considered as internal or as border measures. The General Agreement made an important distinction between these two types of measures. In general, the criteria under the General Agreement to determine whether a measure was an internal or a border measure was the place of collection of a duty. The Panel Report on the dispute concerning Belgian family allowances had considered the fact that the charges disputed in that case were imposed at the time when the purchase price was paid rather than at the time of importation and had concluded from this that these charges were internal measures within the meaning of Article III of the General Agreement. However, in the case of duties applied pursuant to Article 13:10 of Council Regulation (EEC) No. 2423/88, the fact that the duties were imposed as an explicit extension of a border measure (an anti-dumping duty) for which there was no domestic equivalent argued in favour of treating such duties as border measures. Furthermore, Article 13:10 was an integral part of the EEC anti-dumping legislation which provided for the application of anti-dumping duties. The EEC itself had also characterized the measures provided for in Article 13:10 as anti-dumping measures. Consequently, these measures had to be taken in conformity with Article VI of the General Agreement and with the provisions of the Anti-Dumping Code. Article VI of the General Agreement and the Anti-Dumping Code permitted departures from basic obligations under the General Agreement in exceptional circumstances and therefore had to be interpreted narrowly.

4.27 Singapore considered that Article 13:10 of Council Regulation (EEC) No. 2423/88 was inconsistent with Article VI of the General Agreement and with the Anti-Dumping Code because, firstly these rules required that anti-dumping duties be calculated and imposed on products in respect of their condition at the time of importation and, secondly, these rules required that anti-dumping duties be imposed only as a result of investigations to determine the existence of dumping and consequent injury in which interested parties were given adequate opportunities to defend their interests.

4.28 Singapore pointed out that Article VI:1 of the General Agreement referred to the imposition of anti-dumping duties at the point of importation. This provision stated that:

Other provisions in the General Agreement and in the Anti-Dumping Code on the imposition of anti-dumping duties supported the view that the relevant point in time was the moment when products were imported. Thus, Article 8:2 of the Anti-Dumping Code provided that:

Articles 2:1 and 2:5 of the Anti-Dumping Code on the definition of "export price" indicated that the export price was the price at the point of importation of a product. Article 2:1 referred to "... the export price of the product exported from one country to another", and Article 2:5 provided that:

It was evident that the purpose of this provision in Article 2:5 was to arrive at an actual or notional price "at which the product is exported from one country to another". Finally, Article VI:6(a) of the General Agreement provided that:

Thus, the General Agreement and the Anti-Dumping Code required that anti-dumping duties be calculated and imposed on products in respect of their condition at the time of importation and that anti-dumping duties be applied at the border. Article 13:10 of Council Regulation (EEC) No. 2423/88 was inconsistent with these requirements in that it allowed for the imposition of anti-dumping duties on products" introduced into the commerce of the Community after having been assembled or produced in the Community". Products produced or assembled in the EEC were not "imports" from a source found to be causing injury.

4.29 Singapore considered that Article 13:10 of Council regulation (EEC) No. 2423/88 was also inconsistent with Articles VI:2 and VI:6(a) of the General Agreement and Articles 2, 3, 5 and 6 of the Anti-Dumping Code which required that the existence of dumping and injury be determined through formal investigations before anti-dumping duties could be imposed. Under Article 13:10 of the EEC Regulation duties could be imposed based solely on the origin of the parts used. N° investigation was carried out to determine whether imported parts were being dumped and causing injury to the domestic industry producing a "like product". There was no indication of how an exporter could obtain a refund in case of changes in the margins of dumping of the imported parts.

4.30 Singapore argued that, if the Panel would decide that the duties levied by the EEC were internal charges, rather than anti-dumping duties, these internal charges were being imposed contrary to Article III of the General Agreement. The duties levied by the EEC were imposed on products after they have been assembled in the EEC, on the basis that a specified proportion of the value of the parts and materials used in the finished product was imported from a particular country by a related or associated manufacturer in the EEC. N° duty was applied on the domestic "like product" if such product contained only components produced in the EEC. In this regard the duties levied by the EEC on products assembled in the EEC were inconsistent with Article III:2 of the General Agreement. Furthermore, Article 13:10 of Council Regulation (EEC) No. 2423/88 exempted from any duties products which contained more than a certain proportion of domestically-produced components. This was contrary to Article III:4 of the General Agreement since it affected the internal sale of products and placed products containing imported components in a less advantageous position. Article 13:10 also entailed an obligation on companies to purchase a certain proportion of parts locally and in this respect it was in violation with Article III:5 of the General Agreement which prohibited local content requirements. Singapore further argued that duties under Article 13:10 were inconsistent with Article I of the General Agreement. The most-favoured-nation principle contained in Article I:1 prohibited discrimination between countries. This prohibition applied not only to import duties but also to internal measures.

4.31 Regarding the argument of the EEC that Article 13:10 of Council Regulation (EEC) No. 2423/88 was justified under Article XX(d) of the General Agreement, Singapore made the following observations. As a provision permitting exceptions to obligations under the General Agreement, Article XX should be interpreted narrowly. Measures which were otherwise inconsistent with the General Agreement could be taken under Article XX(d) only if (i) the "laws or regulations" with which compliance was being secured were "not inconsistent" with the General Agreement, (ii) the measures taken were "necessary to secure compliance" with such "laws or regulations", and (iii) 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." A contracting party invoking an exception to the General Agreement had to prove that it met all the necessary conditions. It was, therefore, incumbent upon the EEC to demonstrate that duties under Article 13:10 of Council Regulation (EEC) No. 2423/88 met each of the conditions of Article XX(d).

4.32 Singapore argued that the "laws or regulations" with which the duties levied by the EEC on products assembled in the EEC were intended to secure compliance were contained in Council Regulation (EEC) No. 2423/88. Since Article 13:10 of this Regulation was inconsistent with the General Agreement and with the Anti-Dumping Code, the measures taken by the EEC could not be considered to fall within the scope of the exception permitted by Article XX(d). Regarding the second condition of application of Article XX(d), Singapore argued that it followed from the term "necessary" in Article XX(d) that the EEC was required, if possible, to follow a procedure which involved no derogation from rules of the General Agreement or which limited such a derogation to a minimum. The EEC had not established that the measures taken under Article 13:10 of its anti-dumping Regulation were necessary to prevent circumvention of its anti-dumping legislation. The preamble of Council Regulation (EEC) No. 1761/87 had merely stated that:

The preamble had concluded that:

The EEC had claimed that if at least 60 per cent of the value of parts and components used in assembly operation were imported from a particular country of which the exports of a finished product had been found to be dumped, dumping of the parts and components could be presumed without further investigation or evidence and anti-dumping duties were levied on that basis on the assembled product. However, existing rules of the General Agreement could be used to deal with problems of dumping of parts and components. There was no reason why one could not determine the export price and normal value of parts. The EEC could have used its existing anti-dumping legislation to prevent dumping of imported parts. The EEC, however, had chosen to depart from the existing international anti-dumping rules and had not attempted to properly establish that components were in fact being dumped. Even if the EEC were to argue that the assessment and collection of anti-dumping duties on imported components presented practical difficulties which justified a departure from the ordinary rules, it still remained to be shown that the means chosen by the EEC involved the least degree of inconsistency with the General Agreement. The onus lay on the EEC to prove why a derogation from the normal anti-dumping provisions had been necessary. In the view of Singapore, Article 13:10 of Council Regulation (EEC) No. 2423/88 could not be considered "necessary" within the meaning of Article XX(d) of the General Agreement.

4.33 Singapore further considered that Article 13:10 of Council Regulation (EEC) No. 2423/88 was discriminatory and a disguised restriction on trade because one of the conditions of application of duties under this Article was that the company in the EEC must be related to or associated with a company in a particular country which was subject to an anti-dumping measure. This implied that a company in the EEC which was not related to any company in the country subject to anti-dumping measures could source all its components from that country, while companies which were related to firms in the exporting country in question were allowed to purchase not more than 60 per cent of the parts which they used from that country.

4.34 The United States considered that the evasion or circumvention of an anti-dumping duty imposed in accordance with Article VI of the General Agreement and with the relevant provisions of the Anti-Dumping Code contravened the purpose of those provisions, undermined the effectiveness of the disciplines of the General Agreement and the Anti-Dumping Code relating to dumping and anti-dumping practices and provided an appropriate basis for further action consistent with the General Agreement to prevent injurious dumping. The interpretative history of Article VI of the General Agreement also indicated that a contracting party was entitled to safeguard the effect of a properly issued anti-dumping duty order through the establishment and administration of an anti-circumvention provision which was consistent with the General Agreement. The evolution of international production and trade had led to circumstances in which firms could and did readily circumvent the intent and effectiveness of legitimately imposed anti-dumping duties. Thus, not only were anti-circumvention measures permissible if taken in a manner which was consistent with the General Agreement, but such measures had become necessary to maintain the careful balance of rights and obligations envisioned under the General Agreement.

4.35 The United States argued that the concept of prevention of circumvention of anti-dumping measures was compatible with the letter and spirit of Articles VI and XX of the General Agreement and of the Anti-Dumping Code. Article VI of the General Agreement established the clear right of any contracting party to take action in the form of the imposition of anti-dumping duties in an amount not greater than the margin of dumping in order to counteract the effects of the dumping found to be causing injury. This right would be undermined if a firm which had been found to have dumped a product, imports of which had been found to cause material injury to a domestic industry, were able to evade those duties simply by shifting assembly operations of minimal or no commercial significance to the country of importation from the country of exportation. It was a paradigm of customs legislation that actions leading to evasion of validly imposed duties ordinarily were actionable. Thus, counteracting the circumvention of an anti-dumping duty finding was a justifiable and proper exercise of the rights of a contracting party under Article VI of the General Agreement.

4.36 The United States considered that the ability of contacting parties to protect the scope of an anti-dumping finding was strongly supported by the interpretative history of Article VI of the General Agreement. For example, with respect to the issue of "indirect dumping" (i.e., instances in which dumped goods were not shipped directly from the country of manufacture but were exported from another country) the Report of a Group of Experts on Anti-Dumping and Countervailing Duties had concluded that:

Similarly, in 1955 a Working Party which had considered the narrower question of whether, in a case of indirect dumping, the dumping margin should be determined based on the price at which goods were sold in the country of exportation or in the country of manufacture had concluded that either price could be used. The Working Party had appeared to accept as given that the only question in an instance of indirect dumping was how to calculate the dumping margin, not whether it was appropriate to assess a margin on goods shipped from the country of export. The Reports of the Group of Experts and of the Working Party affirmed the view that a contracting party was entitled, in order to effectuate its rights under Article VI of the General Agreement, to protect itself against practices which circumvented the terms of an outstanding anti-dumping finding.

4.37 The United States argued that this conclusion was also supported by the fundamental principles and policy goals underlying the authority provided in Article VI to levy anti-dumping duties on dumped and injurious imports and the authority under Article XX(d) to adopt "measures ... to secure compliance with laws or regulations, which are not inconsistent with the provisions" of the General Agreement, including measures related to customs enforcement. The basic principle of Article VI of the General Agreement was that "dumping ... is to be condemned if it causes or threatens material injury." Article VI:2 authorized contracting parties to levy anti-dumping duties in order to "offset or prevent dumping". Thus, the basic right to impose anti-dumping duties flowed from Article VI. Nevertheless, the rights under Article VI were supplemented by the provisions of Article XX(d), which authorized a contracting party to take actions necessary to enforce a customs duty. Thus, if an anti-dumping duty was otherwise permissible under Article VI, Article XX(d) gave a contracting party the right to take certain narrow supplemental actions to preserve the validity of its tariff in the face of customs fraud, or, in this case, circumvention. It was a general principle of international customs practice that substance should prevail over the form of a transaction. In certain situations assembly operations could constitute a sham to evade the payment of anti-dumping duties. This was no different from the routine problems faced every day by all contracting parties of preventing efforts to evade the collection of legitimate customs tariffs on merchandise. Contracting parties had to be permitted to make use of the flexibility afforded by Articles VI and XX to take account of the new methods of manufacture and commerce which had arisen over the last decade and which had presented new challenges to administering authorities seeking to enforce the basic precepts of the General Agreement and the Anti-Dumping Code.

4.38 The United States considered that the need for an anti-circumvention provision grew directly out of the changing nature of international commercial reality, in particular the increasing international integration of manufacturing operations and the ease of multinational sourcing of parts and location of assembly operations. At the time Article VI of the General Agreement had come into force in 1947, and even at the time of the conclusion of the Anti-Dumping Code in 1979, international trade and dumping had been considerably more straightforward and simpler phenomena than they were at present. For example, the problem of "indirect dumping" (which might include circumvention of an anti-dumping finding) was one with which contracting parties had had little or no experience in the early years of the GATT. This was not surprising in light of the fact that the commercial norm at that time was one in which a given product was manufactured in its entirety in one country and exported directly to a second country. Terms like "like product" and "domestic industry" had been much easier concepts to distinguish and evaluate. Current commercial realities were, however, very different. Production of goods had become both globalized and compartmentalized. Components of a product were often manufactured in two or more places, only to be assembled in another location and, perhaps, finally to be shipped to yet another destination. Transportation costs had fallen dramatically, tariff barriers and barriers to foreign investment had in many cases been reduced or eliminated, export markets had been opened up and economies of scale had risen. The globalization of business had been accelerated both by the push for industrial growth in countries offering lower custom costs and by advances in production technology. The result had been that it was often no longer necessary or economically efficient to start and complete production in one plant.

4.39 The United States argued that, while the above-mentioned development were in most cases a healthy and natural consequence of the economic growth and trade liberalization which had occurred over the past forty years, the globalization and compartmentalization of manufacturing operations had also presented special challenges to administering authorities charged with ensuring that the international trade rules which had helped to advance the economic progress of the last forty years continued to apply to the world which these rules had helped to create. In particular, the United States and other contracting parties had to be prepared to use the tools of the General Agreement and the Anti-Dumping Code to protect the integrity of the fundamental principles which had guided the expansion and development of the international trading system. Thus, recalling the fundamental principles underlying the purpose of Article VI and the applicable provisions of the Anti-Dumping Code was imperative at a time when an increasing number of firms had chosen to take advantage of globalized, compartmentalized methods of manufacture: some firms adopting manufacturing strategies specifically to evade payment of duties levied as a result of the application of traditional anti-dumping procedures. Thus, anti-circumvention measures, if applied consistent with the General Agreement and the Anti-Dumping Code, were an essential aspect of modern anti-dumping practices. Such measures reflected and were a direct response to the changes in methods of manufacture but, like other actions taken in response to dumping, they were applied only when it was necessary to "offset or prevent dumping". Global sourcing and flexibility of production could, within a matter of months, eviscerate an anti-dumping duty order issued on a final product. To deny contracting parties the means by which to address practices which could arise out of these new methods of manufacture would be to undermine the remedies provided by Article VI of the General Agreement and the applicable provisions of the Anti-Dumping Code. Without anti-circumvention measures, the delicate balance of rights and obligations which formed the foundation of the international trading system might be seriously undermined which would, in turn, destroy the confidence in the fairness and relevancy of the system as a whole.

4.40 The United States pointed out that in light of the principles and purposes of Articles VI and XX(d) and the interpretative history of those provisions and in view of the changing commercial realities of internationally integrated manufacturing operations, the provisions in the Omnibus Trade and Competitiveness Act of 1988 on circumvention of anti-dumping duties had been drafted to ensure that any action taken would be consistent with and supported by the original finding of dumping and injury. Under these provisions three steps had been provided in applying anti-circumvention measures: (1) an inquiry to ascertain what had occurred with respect to imports since the original imposition of the anti-dumping duties; (2) an investigation to ensure that any duties finally collected on dumped parts and components were calculated in the proper amount; and (3) an opportunity to review the determination of injury. Specifically, the provision dealing with circumvention through assembly operations in the United States provided the Department of Commerce with the authority to include imported parts and components used in the completion or assembly of merchandise sold in the United States within the scope of an anti-dumping order if, after taking into account any advice of the United States International Trade Commission (USITC), the Department found that:

In addition, in determining whether to include parts or components in the order, the Department of Commerce was directed to examine three specific factors: (i) the pattern of trade; (ii) whether the foreign manufacturer of the parts and components was related to the party performing the completion or assembly in the United States; and (iii) whether imports into the United States of the parts or components had increased subsequent to the issuance of the anti-dumping duty order. These factors provided specific direction to the Department of Commerce in respect of the implementation of the language of the statute. The approach taken under the anti-circumvention provision (i.e., identification of factors for an administering authority to examine) was consistent with the General Agreement and the Anti-Dumping Code. A fundamental aspect of this provision was that the Department of Commerce was required to notify the USITC of the proposed inclusion of parts and components within the scope of an anti-dumping duty order and to take into account any written advice provided by the USITC as to whether the proposed inclusion of the parts and components taken as a whole would be inconsistent with the affirmative determination of injury on which the anti-dumping duty order was based. In drafting this provision, Congress had explicitly taken into account the provision's consistency with Article VI of the General Agreement.

4.41 The United States was of the view that, in examining the anti-circumvention provisions adopted by the EEC, the Panel should consider the essential necessity for anti-circumvention measures and approve provisions which were consistent with the General Agreement, yet fitted within the anti-dumping procedures and institutions of individual contracting parties. Not all such measures operated identically. The provisions on circumvention in the legislation of the United States were a valid exercise of the rights and obligations of the United States under the General Agreement.

5.1 The Panel noted that the issues before it arise essentially from the following facts and arguments: In June 1987, the EEC included in its anti-dumping regulation, Council Regulation No. 2176/84, a provision intended to prevent the circumvention of anti-dumping duties on finished products through the importation of parts or materials for use in the assembly or production of like finished products within the EEC. The provision was subsequently incorporated in Article 13:10 of Council Regulation No. 2423/88 adopted on 11 July 1988 which states, inter alia, that

Article 13:10(d) of the same Regulation states that the provisions of the Regulation concerning investigation, procedure and undertakings apply to all questions arising under Article 13:10. Under these provisions, the EEC made the suspension of proceedings under Article 13:10 conditional on undertakings by assemblers and producers in the EEC to limit the use of imported parts and materials. During the period between the adoption of Article 13:10 in June 1987 and the establishment of the Panel in October 1988, investigations under Article 13:10 resulted in the imposition of duties on products produced or assembled in the EEC in eight cases and in the acceptance of undertakings in seven cases. During this period there were four cases in which the acceptance of undertakings led to the revocation of the duties initially imposed. All investigations initiated and measures taken during this period under Article 13:10 involved products assembled or produced in the EEC by parties related to or associated with Japanese manufacturers whose exports of the finished like products were subject to definitive anti-dumping duties in the EEC (for further details, see Annex I).

5.2 The Panel further noted that Japan considers

- the duties imposed under Article 13:10,

- the acceptance of undertakings under Article 13:10, and

- the provisions of Article 13:10 as such,

to be inconsistent with the EEC's obligations under Articles I and II or III, and not justified by Article VI of the General Agreement. The EEC considers both the application of Article 13:10 and the Article itself to be justified by Article XX(d). Japan disagrees that Article XX(d) justifies the measures at issue. Japan further considers that the administration of Article 13:10 contravenes Article X of the General Agreement concerning the publication and administration of trade regulations, inter alia, because the EEC has failed to publish criteria for accepting undertakings and to determine the origin of parts in a uniform manner. The EEC considers that it has acted in conformity with that provision.

5.3 The Panel decided to examine successively:

The Panel further decided that it would examine each of the above issues first in the light of the provisions of the General Agreement which Japan claims to have been violated by the EEC and then, if it were to find an inconsistency with any of the provisions invoked by Japan, in the light of the exception in the General Agreement invoked by the EEC.