OAS

22 March 1990

EEC - REGULATION ON IMPORTS OF PARTS AND COMPONENTS

Report by the Panel adopted on 16 May 1990*

(L/6657 - 37S/132)

I. INTRODUCTION

1.1 In a communication dated 29 July 1988 and circulated in document L/6381 Japan requested bilateral consultations with the EEC under Article XXIII:1 of the General Agreement on Tariffs and Trade (hereinafter referred to as "the General Agreement") regarding Council Regulation (EEC) No. 1761/81 of 22 June 1987 and measures taken by the EEC under this Regulation with respect to certain products produced or assembled in the EEC by companies related to Japanese companies. In a communication dated 6 October 1988 and circulated in document L/6410 Japan informed the CONTRACTING PARTIES that consultations on this matter had taken place between Japan and the EEC on 16 September 1988 but that these consultations had not led to a mutually satisfactory resolution. Japan, therefore, requested the Council to establish a panel to examine this matter under Article XXIII of the General Agreement.

1.2 At its meeting on 19 and 20 October 1988 the Council agreed to establish a panel in the dispute referred to the CONTRACTING PARTIES by Japan in document L/6410 and authorized the Chairman of the Council to draw up the terms of reference of this Panel and to designate its Chairman and members in consultation with the parties to the dispute (C/M/226). At the same meeting, the delegations of Australia, Canada, Hong Kong, Korea, Mexico, Thailand, Singapore and the United States reserved their right to make a submission to the Panel.

1.3 In document C/165, dated 9 May 1989, the Chairman of the Council informed the CONTRACTING PARTIES of the terms of reference of the Panel:

"To examine, in the light of the relevant provisions of the General Agreement, the matter referred to the CONTRACTING PARTIES by Japan in document L/6410 and to make such findings as will assist the CONTRACTING PARTIES in making the recommendations or in giving the rulings provided for in Article XXIII:2 of the General Agreement."

These terms of reference were accompanied by the following understanding between the parties to the dispute:

"It is the understanding of the parties to the dispute that the standard terms of reference do not preclude any party from arguing before the Panel that Article VI of the GATT should be interpreted in light of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (BISD 265/171), nor do they preclude other parties from arguing differently."

In the same document the Chairman of the Council informed the CONTRACTING PARTIES that the composition of the Panel was as follows:

    Chairman: Mr. Joseph A. Greenwald

    Members:

      Mr. Timothy Groser

      Mr. Christopher Thomas

1.4 The Panel met with the parties to the dispute on 27 and 28 July and on 19 and 20 October 1989. The Panel received written submissions from the following interested contracting parties: Australia, Canada, Hong Kong, Korea, Singapore and the United States. The Panel heard the delegations of Australia, Hong Kong and Korea at its meeting in July 1989 and it heard the delegation of Canada at its meeting in October 1989. The Panel submitted its Report to the parties to the dispute on 2 March 1990.

II. Factual aspects

2.1 The matter referred to the CONTRACTING PARTIES by Japan in document L/6410 concerned Council Regulation (EEC) No. 1761/87 of 22 June 1987 and its application. This Regulation amended Council Regulation (EEC) No. 2176/84 on protection against dumped or subsidized imports from countries not members of the European Economic Community. This amendment consisted of the addition of a new paragraph 10 to Article 13 of this Regulation. On 11 July 1988 the EEC Council adopted Regulation (EEC) No. 2423/88 which replaced Council Regulation (EEC) No. 2176/84, as amended. The provisions of Council Regulation (EEC) No. 1761/87 were incorporated into Regulation (EEC) No. 2423/88 in Article 13:10.

2.2 The preamble of Council Regulation (EEC) No. 1761/87 contained a number of considerations explaining the background and objective of the amendment. Thus, the third recital of the preamble indicated that:

"... experience gained from the implementation of Regulation (EEC) No. 2176/84 has shown that assembly in the Community of products whose importation in a finished state is subject to anti-dumping duty may give rise to certain difficulties".

According to the fourth recital, assembly or production in the EEC of such products was in particular considered likely to lead to circumvention of the anti-dumping duty where (i) the assembly or production was carried out by a party related or associated to any of the manufacturers whose exports of the like product were subject to an anti-dumping duty and (ii) the value of the parts or materials used in the assembly or production operation and originating in the country of origin of the product subject to an anti-dumping duty exceeded the value of all other parts or materials used. The preamble further stated that:

"... in order to prevent circumvention, it is necessary to provide for the collection of an anti-dumping duty on products thus assembled or produced".

2.3 Article 13:10 of Council Regulation (EEC) No. 2423/88 provides that certain measures may be taken if the following conditions are met:

- "assembly or production is carried out by a party which is related or associated to any of the manufacturers whose exports of the like product are subject to a definitive anti-dumping duty;

- the assembly or production operation was started or substantially increased after the opening of the anti-dumping investigation;

- the value of parts or materials used in the assembly or production operation and originating in the country of exportation of the product subject to the anti-dumping duty exceeds the value of all parts or materials used by at least 50 per cent.

In applying this provision, account shall be taken of the circumstances of each case and, inter alia, of the variable costs incurred in the assembly or production operation and of the research and development carried out and the technology applied within the Community".

If the above-mentioned conditions are met, Article 13:10(a) provides that:

"Definitive anti-dumping duties may be imposed, by way of derogation from the second sentence of paragraph 4(a), on products that are introduced into the commerce of the Community after having been assembled or produced in the Community ..."

2.4 Article 13:10(c) governs the determination of the rate of the duty which, under Article 13:10(a), may be imposed on products assembled or produced in the EEC:

"The rate of the anti-dumping duty shall be that applicable to the manufacturer in the country of origin of the like product subject to an anti-dumping duty to which the party in the Community carrying out the assembly or production is related or associated. The amount of duty collected shall be proportional to that resulting from the application of the rate of the anti-dumping duty applicable to the exporter of the complete product on the c.i.f. value of the parts or materials imported; it shall not exceed that required to prevent circumvention of the anti-dumping duty."

2.5 The last sub-paragraph of Article 13:10(a) provides that, if duties are applied under this provision on products produced or assembled in the EEC,

"...the Council shall, at the same time, decide that parts or materials suitable for use in the assembly or production of such products and originating in the country of exportation of the product subject to the anti-dumping duty can only be considered to be in free circulation insofar as they will not be used in an assembly or production operation as specified in the first sub-paragraph."

2.6 Regarding the procedure for the "introduction into the commerce" of the EEC of the products subject to duties under Article 13:10(a), Article 13:10(b) provides that:

"Products thus assembled or produced shall be declared to the competent authorities before leaving the assembly or production plant for their introduction into the commerce of the Community. For the purposes of levying an anti-dumping duty, this declaration shall be considered to be equivalent to the declaration referred to in Article 2 of Directive 79/695/EEC."

2.7 Finally, Article 13:10(d) provides that:

"The provisions of this Regulation concerning investigation, procedure and undertakings apply to all questions arising under this paragraph."

2.8 During the period June 1987-October 1988 the EEC opened investigations under Article 13:10 with respect to the assembly or production in the EEC of five products: electronic typewriters, electronic weighing scales, hydraulic excavators, plain paper photocopiers and ball bearings. Information on these investigations is given in Annex I. Investigations under Article 13:10 were opened in December 1988 with respect to serial impact dot matrix printers and in July 1989 with respect to video cassette recorders.

III. MAIN ARGUMENTS

General

3.1 Japan considered that Article 13:10 of Council Regulation (EEC) No. 2423/88 and the measures taken by the EEC pursuant to this provision (imposition of duties on products assembled or produced in the EEC and acceptance of undertakings) were inconsistent with Article VI and violated Articles I, II, III and X of the General Agreement. Article 13:10 and the measures taken thereunder could not be justified under Article XX(d) of the General Agreement. Consequently, the enactment of this provision of the EEC anti-dumping Regulation and the application of measures pursuant to this provision constituted a prima facie nullification and impairment of benefits accruing to Japan under the General Agreement. Japan requested the Panel to recommend to the Council that it request the EEC to withdraw Article 13:10 of the Council Regulation (EEC) No. 2324/88 and to revoke the measures taken under this provision.

3.2 The EEC considered that duties applied pursuant to Article 13:10 of Council Regulation (EEC) No. 2423/88 were not inconsistent with Article III of the General Agreement because such duties were not internal charges within the meaning of Article III. These duties were also not inconsistent with Article X of the General Agreement because the provisions under which they were applied were fully transparent. Insofar as duties imposed under Article 13:10 were inconsistent with Articles I, II and VI of the General Agreement, such inconsistency was justifiable under Article XX(d).

Terms of Reference of the Panel

3.3 Japan was of the view that the Panel should give due consideration to the provisions of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade ("the Anti-Dumping Code") which laid down rules for the interpretation and implementation of Article VI of the General Agreement and to which both Japan and the EEC were Parties. Japan explained the necessity to take into consideration the provisions of the Anti-Dumping Code by pointing out that the EEC had notified the provisions now appearing in Article 13:10 of Council Regulation (EEC) No. 2423/88 to the Committee on Anti-Dumping Practices as an amendment to its anti-dumping legislation.

3.4 The EEC agreed that Article VI of the General Agreement had to be interpreted in light of the provisions of the Anti-Dumping Code. As one of the participants in the negotiations which had led to the conclusion of the first Anti-Dumping Code in 1967 and to its revision in 1979, the EEC attached great importance to the observance of provisions of the Code by all Parties to the Code. However, the question before the Panel was whether the provisions of Article 13:10 of Council Regulation (EEC) No. 2423/88 and the measures taken pursuant to these provisions could be justified under Article XX(d) of the General Agreement. The question of circumvention of anti-dumping duties through assembly operations in an importing country had never been envisaged when the Anti-Dumping Code was drafted and was, consequently, not addressed in the Code.

General observations by the parties to the dispute

3.5 Japan noted that since the early 1980s there had been a sharp increase in the number of anti-dumping investigations opened by the EEC of imports from Japan. In applying its anti-dumping legislation, the EEC had developed new methodologies which, when applied to the structures and trading patterns of Japanese companies, created artificial dumping margins. Japan reserved its rights to raise these and other aspects of the anti-dumping Regulation of the EEC before the appropriate GATT bodies.

3.6 Japan pointed out that since 1980 there had been a steady increase of Japanese direct investments in manufacturing operations in the EEC and in other countries. The increased direct investment in the EEC had been caused by a number of factors such as the necessity to locate production facilities closer to the markets where the production was sold, the appreciation of the yen, the wish to avoid trade restrictive measures such as those resulting from the arbitrary findings of dumping by the EEC authorities and the apprehension concerning the effects of the completion of the EEC's internal market. Direct Japanese investment in the EEC had in general been welcomed by host countries in the EEC because it had created local employment and led to increased local value added. This investment had also been the result of efforts by Japan and the EEC to promote industrial co-operation.

3.7 Japan made the following observations on the provisions in Article 13:10 of Council Regulation (EEC) No. 2423/88. The text of this Article was brief and much was left to the interpretation of the provisions in this Article on a case-by-case basis. The "related or associated party" criterion in Article 13:10(a) meant that EEC producers were not subject to this provision even if they were engaged in assembly operations and used parts of Japanese origin. Thus, this Article discriminated against affiliates of Japanese companies. The criterion of a "substantial increase" of assembly operations following the opening of an anti-dumping investigation implied that "circumvention" could be found even where the investment in the EEC had been made prior to the opening of the original anti-dumping investigation. The third criterion in Article 13:10(a), relating to the value of parts used in the assembly process and originating in the country of export of the finished product in comparison with the value of all parts used, had turned out to be the most important factor in investigations under this Article.

3.8 Regarding the last sub-paragraph of Article 13:10(a), Japan considered that the effect of this provision was that imported parts, which would otherwise be in free circulation after having been customs cleared, were denied free circulation in the EEC and were considered to be introduced into the commerce of the EEC at the time when the assembled product left the factory in the EEC. Thus, these parts were treated as if the assembly plant were located in a free-trade zone. In reality, however, none of the factories subject to investigation under Article 13:10 had been located in free-trade zones and in all cases imported parts and components had been delivered to these factories after payment of normal customs duties. The procedure laid down in Article 13:10(b) for the collection of duties on products assembled or produced in the EEC was a completely new procedure which imposed serious administrative burdens on the companies involved. In this context, Article 13:10 used the concept of "introduced into the commerce" of the EEC in a different sense from the meaning of this concept in Article VI of the General Agreement. Article VI referred to situations where products were "introduced into the commerce of another country", while Article 13:10 concerned the introduction into the commerce of the EEC of products manufactured in the EEC.

3.9 Regarding the provisions of Article 13:10(c) of Council Regulation (EEC) No. 2423/88 on the calculation of the rate of the duties on products assembled in the EEC, Japan considered that the formula used to calculate this rate discriminated against parts or materials imported from the country of export of the finished product subject to anti-dumping duties. Although the rate of these duties was determined on the basis of the anti-dumping duty applicable to exports of individual exporters, the duties were imposed not only on parts exported by those exporters but on all imported parts or materials from the country in question. Furthermore, Article 13:10 did not provide for the possibility of a decrease of the amount of duties to be paid in cases where a decrease occurred in the proportion of parts imported from the country of export of the finished product subject to anti-dumping duties.

3.10 With respect to the procedural provisions in Article 13:10, Japan pointed out that there was no reference to the contents and procedure for the acceptance of undertakings. Hence, there was no transparency. Moreover, this Article did not provide for the possibility of refunds and administrative reviews in cases where dumping margins had changed.

3.11 Japan pointed to the following specific aspects of the investigations carried out so far under Article 13:10 of Council Regulation (EEC) No. 2423/88. The investigations had been opened upon receipt of petitions from industries producing finished products rather than from industries producing parts of such finished products. As shown by the questionnaire used by the EEC Commission in investigations under Article 13:10, such investigations focused not on whether dumping and injury occurred, but on the proportion of the value of parts used in the assembly process and originating in the country of export of the finished product subject to anti-dumping duties. In four of the six proceedings initiated so far, the investigation periods had included periods preceding the adoption of Council Regulation (EEC) No. 1761/87. The EEC Commission had established weighted averages of the proportions of the value of imported parts and materials originating in Japan. As a result, duties could be imposed even where towards the end of the investigation period the value of parts used in the assembly process and originating in Japan represented less than 60 per cent of the total value of all parts used.

3.12 Japan noted that according to the explanation given by the EEC, the purpose of Article 13:10 of Council Regulation (EEC) No. 2423/88 was to prevent an exporter whose products were subject to anti-dumping duties when exported to the EEC, from "circumventing" or "evading" those duties by establishing an assembly plant within the EEC. However, this explanation was not sufficient because the term "circumvention" had not been defined by the EEC. The provisions of Article 13:10 deviated from the normal framework for anti-dumping measures in that under these provisions regulatory measures could be taken with respect to foreign investment in the EEC and imports into the EEC of parts or components without any regard to whether or not there was dumping. That the objective of Article 13:10 was fundamentally different from the objective of normal anti-dumping measures was illustrated by the provision in the second sub-paragraph of Article 13:10(a) that, in considering the possible application of duties on products assembled within the EEC, account had to be taken, inter alia, of the variable costs incurred in the assembly operation, the research and development carried out and the technology applied within the EEC. Such factors were irrelevant to the question of whether dumping took place and indicated that this Article was being used for industrial policy purposes.

3.13 Japan also argued in this connection that Article 13:10 entailed discrimination between foreign-capitalized companies and domestic-capitalized companies whereas normal anti-dumping measures provided equal competitive conditions for domestic and foreign companies. Discrimination between producers of finished products in the EEC resulted from this provision because under Article 13:10 complainants were free to use imported parts while the defendants were not. Moreover, in practice Article 13:10 served as an instrument to promote industries producing parts in the EEC. Although parts industries in Japan were well developed and internationally competitive, their exports to the EEC were restricted as a result of the measures taken under Article 13:10. This applied in particular in cases where proceedings under Article 13:10 led to the acceptance of undertakings which provided for an increase of the percentage of parts procured locally. Furthermore, manufacturers in the EEC related to Japanese companies often needed to transfer technology to local manufacturers of parts supplied by these manufacturers and this also helped to promote parts industries in the EEC.

3.14 Japan considered that the measures imposed under Article 13:10 of Council Regulation (EEC) No. 2423/88 imposed a very great burden on the companies subject to such measures. Firstly, the amount of the duties which had been imposed so far had been considerable. Secondly, a company which wanted to avoid being subjected to an anti-circumvention duty or which wanted its offer of an undertaking to be accepted had to purchase at least 40 per cent of the value of all parts used in the production or assembly process from non-Japanese sources and had to increase the proportion of parts purchased from EEC sources. Thus, such a company would increase the proportion of parts procured locally even where this was not consistent with economic considerations. Given that the industries in the EEC producing mechanical and electronic parts were not as well developed as in Japan, such a company was faced with increased costs for the purchase of locally produced parts. It also had to transfer technology to local parts suppliers or run the risk of a deterioration of the quality of parts used in its production process and it had to cope with delay in the delivery of the locally procured parts. Thirdly, the investigation process under Article 13:10 also imposed a burden on the companies investigated, especially as to the information which had to be provided regarding the origin of parts and components used in the production process in the EEC.

3.15 Japan also considered that Article 13:10 of Council Regulation (EEC) No. 2423/88 entailed restrictions on trade in parts and components imported from Japan. The imposition of duties under this provision had substantially the same effect as in the case where such duties were imposed directly on the imports of parts and components. Furthermore, a decrease of parts imported from Japan would occur as a result of efforts of companies engaged in assembly operations in the EEC to increase the proportion of parts originating in other countries. In Japan parts and components were generally produced by companies which were not producing the finished products. These companies had not been subject to the investigations in the EEC resulting in the imposition of definitive anti-dumping duties on imports of finished products or to subsequent investigations under Article 13:10. Nevertheless, measures taken under Article 13:10 resulted in a restriction on exports of parts and components of these companies without there being any opportunity for these companies to defend themselves. In this respect Japan pointed out that under Article 13:10 parts manufactured by companies other than those whose exports of finished products were subject to definitive anti-dumping duties were treated unfavourably in the calculation of whether the value of parts or materials used in the assembly process and originating in the country of export of the finished product subject to definitive anti-dumping duties exceeded the value of all other parts or materials by more than 50 per cent and in the determination of the amount of duties to be imposed.

3.16 Japan was of the view that there was a lack of transparency in the implementation of Article 13:10 which resulted from the fact that the EEC had not promulgated specific rules on important aspects of this provision such as the methodology for determining the country of origin of the parts or materials used in the assembly process and the contents and procedures for the acceptance of undertakings. The lack of clarity regarding the rules to determine the origin of parts or materials would lead Japanese companies engaged in production operations in the EEC to purchase at least 45 to 50 per cent of their parts from non-Japanese suppliers in order to ensure that they would attain the 40 per cent threshold. Furthermore, direct investment in the EEC concerning products not yet subject to anti-dumping duties when imported could be found to constitute "circumvention" when, following anti-dumping investigations on the imported finished products, the local production in the EEC was increased. This created an incentive for companies to increase the proportion of parts procured locally even before an anti-dumping duty investigation had been initiated. Thus, the uncertainty at the time when the investment was made regarding possible future measures under Article 13:10 effectively required such companies to raise the level of local content of their production operations.

3.17 The EEC provided the following explanation of the background of the adoption of the amendment now appearing in Article 13:10 of Council Regulation (EEC) No. 2423/88. In the mid-1980s the EEC had imposed anti-dumping duties on imports of certain products of Japanese origin. A common characteristic of these products was that they were technically sophisticated and produced and distributed by well-known Japanese multinational companies with large financial resources at their disposal. Following the imposition of these duties, the domestic industries concerned in the EEC had complained that the duties were ineffective because, despite the application of these duties, domestic producers were still compelled to compete with prices of the dumped products in the EEC which remained stationary or which in some cases even declined. Producers in the EEC had explained this situation by pointing to the fact that the cost of assembling the products in question by a "screwdriver" process was relatively low in relation to the value of these products; as a result, the exporters in question had chosen to export the parts of the finished products to the EEC or to third countries for subsequent assembly. These assembled products were then introduced into the commerce of the EEC, thereby circumventing the duties imposed on the finished products when imported directly from Japan. These views had been advanced in particular with respect to three products the imports of which had been subject to anti-dumping duties for some time (hydraulic excavators, electronic weighing scales and electronic typewriters) and with respect to plain paper photocopiers which had been the subject of an investigation opened in August 1985 and on which definitive anti-dumping duties had been imposed in February 1987. The EEC authorities had been aware of similar allegations by domestic producers in other countries, notably in Canada and the United States.

3.18 The EEC further noted that a Report of the Committee on External Economic Relations of the European Parliament, adopted on 3 July 1986, had recommended inter alia that anti-dumping duties be imposed on the component parts of finished products found to have been dumped in order to prevent circumvention of duties on imports of such products through the establishment of assembly facilities within the EEC. In light of the views expressed by domestic producers and the European Parliament, the EEC Commission had examined the allegation that the anti-dumping measures applied by the EEC were being circumvented by producers who had started assembly operations in the EEC. This examination confirmed that there had been a considerable decline of imports of the finished products in question following the imposition of definitive anti-dumping duties. This decline of imports of the finished products had coincided with a dramatic increase of the imports of components of these products destined for assembly in the EEC by subsidiaries of the exporters of the products subject to anti-dumping duties. This increase of imports of components had been all the more striking because in most cases such components had not previously been imported into the EEC. In addition, the EEC authorities had found an increase, for most exporters from zero, in the volume of these finished products assembled in the EEC from the imported components. At the same time, press reports had suggested the likelihood of further increases of assembly operations in the EEC and of imports of relevant components. In some instances these reports had indicated that the main reason for the establishment of assembly plants in the EEC was to avoid the payment of anti-dumping duties. Finally, it had been found in the course of the examination by the EEC authorities that, contrary to what had been expected, no perceptible increase had occurred of the price of the finished products introduced into the commerce of the EEC and that, in certain instances, prices had been even lower than those established in the anti-dumping duty investigations which had led to the imposition of the anti-dumping duties. It had thus become evident that exporters who had been found to have dumped and thereby caused injury to domestic industries in the EEC were able to continue to sell the products in question in the EEC without taking account of the anti-dumping duties by merely transferring a limited part of the assembly process to the EEC.

3.19 The EEC provided the Panel with statistics on the value of plain paper photocopiers and electronic typewriters imported directly from Japan and the volume of these products assembled in the EEC by companies related to Japanese producers. These data, covering the period 1981-1988, showed that in these cases, as in a number of other cases, direct imports of the finished products from Japan had declined dramatically following the imposition of anti-dumping duties and that imports had been replaced progressively by sales of identical products assembled in the EEC and containing a preponderance of parts imported from Japan. The obvious result of the increase of this type of assembly operations had been the erosion of the payment of anti-dumping duties and, thus, of the guarantee which such payment provided concerning the costs and prices of the products concerned.

3.20 The EEC argued that the imposition of anti-dumping duties guaranteed a cost increase for the importer which was intended to eliminate the injurious effect of the dumping. Without this guarantee, an exporter could vary prices in the Community at will. Thus, the continued effectiveness of this guarantee was essential for the EEC to prevent the recurrence of injurious dumping. Circumvention of the payment of the duty would nullify this guarantee. It was thus the maintenance of this guarantee which was of primary concern to the EEC and which had led to the adoption of anti-circumvention measures by the EEC. The need for such action had also been felt by some of the main trading partners of the EEC, and in particular by the United States. The EEC had, however, recognized that any action to deal with this problem of circumvention would have to be subject to specific constraints. Thus, it had been considered to be of paramount importance that any measures taken to deal with this problem should be in conformity with the obligations of the EEC under the General Agreement and that, consequently, such measures should be confined to those strictly necessary to deal with the circumvention of the anti-dumping duties. The EEC had also taken into consideration the need to avoid acting in an arbitrary manner and the need to provide interested parties, in particular exporters and parties carrying out assembly operations in the EEC, an opportunity to refute any allegations of circumvention made against them. Furthermore, the EEC had considered it desirable to ensure, as far as possible, that any measures taken should be the least disruptive of trade and that such measures should not impede genuine inward investment in the EEC. Finally, it had been considered necessary to ensure that measures could be applied without undue delay in order to remedy as quickly as possible the injury caused by the dumped imports. In light of these considerations, the EEC Commission had examined various conceivable courses of action. This examination had led to the conclusion that within the framework of the General Agreement Article VI and Article XX(d) constituted the only relevant provisions regarding the application of measures against circumvention of anti-dumping duties through importation of components and subsequent assembly in the EEC. After considering possible ways of dealing with the problem of circumvention of anti-dumping duties under Article VI of the General Agreement*, the EEC had come to the conclusion that the only appropriate legal basis under the General Agreement on which it could base measures against circumvention was Article XX(d).

3.21 The EEC considered that the practice of application of Article 13:10 demonstrated that measures had been taken under this provision only when the existence of circumvention was indisputable. In the cases investigated so far the value of parts or materials used in the assembly operations in the EEC and originating in the country of export of the finished product had invariably accounted for more than 70 per cent and in most cases more than 80 per cent of the total value of the parts or materials used in these operations. Where duties had initially been applied to products assembled in the EEC, undertakings had been offered by the companies concerned which had been accepted by the EEC Commission. As of July 1989 no extended anti-dumping duty was being collected on products assembled in the EEC.

3.22 The EEC explained that the imposition of duties under Article 13:10(a) required a derogation from the second sentence of Article 13:4(a) because Directive 79/623/EEC required that normal customs duties (including anti-dumping duties) be paid when goods were "released for free circulation" in the EEC, which normally occurred when goods were imported into the EEC. Under Article 13:10, however, the payment of duties imposed to prevent circumvention of anti-dumping duties took place when products were "introduced into the commerce" of the EEC. Since this inevitably occurred at a stage different from importation, a derogation from the second sentence of Article 13:4(a) was necessary.

3.23 Regarding the meaning of the expression "introduced into the commerce of the Community" in Article 13:10(a) and the difference between this concept and the concept of "release for free circulation in the Community" in Article 2:1 of Council Regulation (EEC) No. 2423/88, the EEC pointed out that "release for free circulation in the Community" was a term used in the EEC customs legislation in order to realize a principle laid down in Article 10 of the EEC Treaty. Under this principle, goods imported from third countries were to be considered to be on an equal footing with goods originating in the EEC ("in free circulation") if import formalities had been complied with and any customs duties which were payable had been levied. When goods were assembled in the EEC under circumstances which indicated that anti-dumping duties had been circumvented, goods could, as a matter of fact, be considered to have been released without all customs duties payable, including anti-dumping duties, having been levied. This situation called for redress and, therefore, the levying of anti-dumping duties was considered to be postponed until the moment where the assembled goods were "introduced into the commerce of the Community". The concept of postponement of the collection of the customs duties payable was emphasized by the legal fiction that the imported parts and materials in question could only be considered to be in free circulation insofar as they would not be used in an assembly or production operation as specified in the first sub-paragraph of Article 13:10(a).

3.24 In response to a question by the Panel, the EEC confirmed that Article 13:10 was applicable only when a definitive anti-dumping duty was in force and did not apply to cases in which imports were subject to price undertakings.

3.25 Regarding the last sub-paragraph of Article 13:10(a), the EEC explained that in practice the EEC authorities first conducted an investigation to determine whether the circumstances necessary for the imposition of duties under Article 13:10 existed. If this investigation led to the conclusion that parts or materials had been used in the assembly or production in the EEC of a product under circumstances which constituted circumvention, the EEC Council, when establishing that an anti- circumvention duty should be imposed, would at the same time decide that parts or materials suitable for use in the assembly or production of the product concerned and originating in the country of exportation of the product subject to the original anti-dumping duty could only be considered to be in free circulation insofar as they would not be used in an assembly or production operation which fulfilled the criteria for circumvention. Thus, effectively a legal fiction was created. This procedure ensured that only the parts or materials used in the assembly process and imported from the country in question would be affected by the anti-circumvention duty, while all other imported parts or materials would be in free circulation in the EEC once they had been customs-cleared and the normal customs duties had been paid. This procedure had been devised because goods in free circulation should normally not be subject to import duties of any kind. Consequently, the parts in question could not be deemed to be in free circulation in the EEC until introduced into the commerce of the EEC as part of the assembled product subject to the anti-circumvention duty. The procedure foreseen in the last sub-paragraph of Article 13:10(a) applied only to parts or materials imported after the EEC Council had imposed duties on products assembled or produced in the EEC.

3.26 Regarding Article 13:10(b), the EEC explained that the "declaration" referred to in that paragraph was made on the same entry form or document (Single Administrative Document) as used for the customs clearance of imported products. With respect to the second sentence of this paragraph, the EEC explained that under Article 2 of Directive 79/695/EEC the obligation to pay customs duties was created by the declaration referred to therein. Since duties imposed under Article 13:10(a) had to be collected in the same manner as normal customs duties, it had been necessary to provide that the declaration made when goods were introduced into the commerce of the EEC after having been assembled in the EEC was the equivalent of the declaration provided for in Directive 79/695/EEC regarding the importation and release for free circulation of products in the EEC.

3.27 Regarding the provisions in Article 13:10(c) concerning the calculation of the rate of the duty on products assembled in the EEC, the EEC explained that the use of the word "proportional" in this paragraph was intended to have the result that only a certain proportion of the normal anti-dumping duty applicable to finished products imported into the EEC would be collected as anti-circumvention duty. This proportion was calculated by multiplying the rate of the anti-dumping duty applicable to the exporter concerned by the proportion of the finished product assembled in the EEC represented by the parts imported from the country of export of the finished product. This methodology had the desired effect that no anti-circumvention duty would be imposed on any value added during the assembly operation of the finished product or on the value of any parts or materials imported from any country other than the country of export of the finished product subject to definitive anti-dumping duties. Regarding the requirement in Article 13:10(c) that the rate of the duty on products produced or assembled in the EEC "shall not exceed that required to prevent circumvention of the anti-dumping duty", the EEC explained that when taking decisions regarding the amount of duty required to prevent circumvention of the original definitive anti-dumping duty all relevant factors had to be taken into account; the EEC considered that such relevant factors included levels of research and development and technology applied within the EEC.

3.28 The EEC explained that the provisions of Article 13:10 of Council Regulation (EEC) No. 2423/88 applied only to assembly operations carried out within the EEC and were not applicable to the assembly of products in third countries. When finished products, subject to anti-dumping duties, were assembled in third countries and exported to the EEC, the EEC would apply its normal rules of origin applicable to imports from third countries to determine whether the finished product in question originated in the country of export of the finished product subject to anti-dumping duties.

Arguments concerning the consistency of Article 13:10 of Council Regulation (EEC) No. 2423/88 and of measures applied under this provision with the General Agreement

(i) Articles VI, I and II

3.29 Japan noted that Article 13:10(a) of Council Regulation (EEC) No. 2423/88 described the duties which could be applied pursuant to this provision as "definitive anti-dumping duties". In bilateral consultations and in discussions in the Committee on Anti-Dumping Practices the EEC had confirmed that these duties were of the same nature as anti-dumping duties. It was, therefore, necessary to first analyse the duties under Article 13:10 in light of the requirements of Article VI of the General Agreement.

3.30 Japan argued that, in view of the fact that Article VI:1 of the General Agreement defined dumping as a situation in which "products of one country are introduced into the commerce of another country" at prices less than the normal value of such products, it was clear that the duties imposed under Article 13:10 could not be considered to be consistent with Article VI:1 if one considered that these duties were imposed on finished products introduced into the commerce of the EEC after having been assembled in the EEC. Consequently, the only way in which the duties imposed under Article 13:10 could possibly be interpreted as anti-dumping duties within the meaning of Article VI was by assuming that these duties were levied on the imported parts used in the assembly of the finished products in the EEC. If one analyzed these duties as anti-dumping duties on imported parts, it was evident that these anti-dumping duties were imposed in violation of the basic requirements of Article VI of the General Agreement. Firstly, a violation of Article VI:2 and 6(a) resulted from the fact that these duties were applied in the absence of an investigation of whether the imported parts were dumped and causing injury to a domestic industry in the EEC. Secondly, the amount of the anti-dumping duty applied pursuant to Article 13:10 on imported parts was not based on any margin of dumping established with respect to such parts. Thirdly, Article 13:10 did not contain a provision for a possible refund of anti-dumping duties on imported parts. Japan further pointed out that Article 1 of the Anti-Dumping Code provided that:

"The imposition of an anti-dumping duty is a measure to be taken only under the circumstances provided for in Article VI of the General Agreement and pursuant to investigations initiated ... and conducted in accordance with the provisions of this Code."

It was, therefore, clear that anti-dumping duties were allowed exclusively under the circumstances laid down in Article VI of the General Agreement. Duties imposed under Article 13:10, if considered as duties on imported parts, were not in conformity with Article VI of the General Agreement and could, therefore, not be justified as anti-dumping duties.

3.31 Japan argued that, given that the duties imposed pursuant to Article 13:10 could not be considered to have a legal basis in Article VI of the General Agreement, it was necessary to examine whether such duties were in conformity with other provisions of the General Agreement. These duties could be characterized either as internal charges or as customs duties. Because the nature of the duties was ambiguous, it was difficult to identify exactly and definitively whether these duties were internal charges or customs duties. While there were substantial arguments in favour of regarding these duties as internal charges, Japan considered that these duties were inconsistent with the General Agreement in either case.

3.32 Japan pointed out that Article 13:10 of Council Regulation (EEC) No. 2423/88 provided for the imposition of duties on products produced or assembled in the EEC on the basis of the proportion of parts imported from Japan used in the production or assembly of such products. As such, these duties could be seen as a special type of customs duties levied on parts imported from Japan. Support for this view could be found in the fact that under Article 13:10 parts imported from Japan were denied free circulation in the EEC even after normal customs duties had been paid on imports of such parts. If one considered the duties imposed under Article 13:10 as customs duties on imported parts, these duties violated Article I:1 of the General Agreement because they were imposed only on parts imported from Japan; thus, discrimination occurred between parts originating in Japan and like products of third countries. Moreover, almost all parts originating in Japan on the importation of which duties had been levied under Article 13:10 were products for which the EEC customs tariff was bound. Thus, the imposition of duties on these parts was also inconsistent with Article II:1(b) of the General Agreement.

3.33 The EEC argued that of the Articles of the General Agreement referred to by Japan, Articles I, II and VI related to customs duties, border taxes and equivalent levies at the border, while Article III related to internal taxes. Under the General Agreement a measure was either a duty, i.e. a charge of any kind imposed on or in connection with importation, or an internal tax. These categories were mutually exclusive and could not apply to the same measure. The same logic applied to the relationship between Articles I, II and VI on the one hand and Article III on the other.

3.34 The EEC considered that duties imposed under Article 13:10 of Council Regulation (EEC) No. 2423/88 were customs duties. In support of this view it pointed to the following facts. Firstly, the purpose of these duties was to eliminate circumvention of anti-dumping duties on imported finished products; consequently, these duties were applied "in connection with importation". Secondly, the nature of these duties was identical to the nature of the anti-dumping duties they were intended to enforce. Thirdly, duties imposed under Article 13:10 of Council Regulation (EEC) No. 2423/88 were collected by the customs authorities in EEC member States under procedures identical to the procedures for the collection of customs duties on goods imported into the EEC from third countries. Finally, duties collected under this provision formed part of the own resources of the EEC in the same way as customs duties on imports from third countries whereas taxes normally formed part of the revenue of the member States.

3.35 The EEC also argued in this connection that anti-circumvention duties were imposed not on imported parts or materials but on the finished product assembled or produced in the EEC. Such duties could only be imposed if an anti-dumping duty was in force on imports of the finished product in question; anti-circumvention duties were merely constituting an extension of such anti-dumping duties to cover the like product assembled in the EEC. The obligation to pay such extended duties was created through a customs declaration which had to be made when the product assembled in the EEC was introduced into the commerce of the EEC. That the duties applied under Article 13:10 of Council Regulation (EEC) No. 2423/88 were duties imposed "in connection with importation" was also underlined by the provision in Article 13:10 that parts or materials imported from the country of export of the finished product subject to anti-dumping duties and imported for assembly in the EEC by a related party could not be considered as being in free circulation in the EEC until the finished assembled product was introduced into the commerce of the EEC. Given that the anti- circumvention duties imposed under Article 13:10 constituted customs duties within the meaning of Article I of the General Agreement, there could be no question of any violation of Article III and the question of whether these measures involved the least possible degree of inconsistency with provisions of the General Agreement had to be evaluated by examining these measures in light of Articles I, II and VI of the General Agreement.

3.36 The EEC argued that duties applied under Article 13:10 of Council Regulation (EEC) No. 2423/88 were intended to eliminate circumvention of anti-dumping duties. Whether such duties were called anti-circumvention duties, extended anti-dumping duties or normal anti-dumping duties was merely a question of semantics. Nevertheless, the duties which were circumvented were definitive anti-dumping duties and this was the reason why any duties imposed to enforce the collection of the circumvented duties could logically also be termed definitive anti-dumping duties.

3.37 Regarding the status under Article VI of the General Agreement of measures applied under Article 13:10 of Council Regulation (EEC) No. 2423/88, the EEC argued that, while normal anti-dumping investigations had to be carried out in full conformity with Article VI, non-compliance with regulations imposing definitive anti-dumping duties following such investigations was a separate and additional issue arising after the application of Article VI and from behaviour not covered by Article VI. This issue of non-compliance was specifically dealt with by Article XX(d) of the General Agreement. Furthermore, where consistency with Article VI was possible, in particular with respect to procedural aspects of measures under Article 13:10, the EEC had ensured such consistency by providing that the provisions of Council Regulation (EEC) No. 2423/88 "concerning investigation, procedure and undertakings" applied mutatis mutandis to all questions arising under Article 13:10*.

3.38 Regarding Article I, the EEC pointed out that Article VI specifically provided for an exception to the most-favoured-nation principle of Article I. Since anti-dumping duties were limited in scope, measures taken under Article XX(d) should not have a scope which was any broader and which would result in an extension of the exception under Article VI to the most-favoured-nation concept in Article I. The restrictive nature of the provisions of Article 13:10 ensured that duties imposed under that provision would not entail such an extension. As long as the discrimination caused by the measures to prevent circumvention of anti-dumping duties was proportionate to the discrimination caused by the normal anti-dumping duties, the anti-circumvention measures did not involve any discrimination which would be unjustifiable under Article XX(d). Japan was incorrect in considering any discrimination as unjustifiable within the meaning of Article XX. If one was enforcing measures which were lawfully discriminatory, such as anti-dumping duties, one could not be denied the right to be similarly discriminatory to the extent necessary for the enforcement of such lawfully discriminatory measures.

3.39 Regarding Article II of the General Agreement, the EEC argued that anti-dumping duties imposed under Article VI were invariably additional to ordinary customs duties. Consequently, anti-circumvention measures were also additional to ordinary customs duties. As long as these anti-circumvention measures were proportionate to the normal anti-dumping duties which they were designed to enforce, there was no extension of the exception to Article II provided for by Article VI.

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