Let's say a country has bound a 10% tariff duty on auto parts, but a 25% duty on automobiles. To reduce the amount of duties paid, foreign companies have an incentive to export parts rather than completed automobiles. The parts can then be assembled into finished automobiles after they arrive in the country.
What if the importing country responds by declaring that imported parts which are subsequently assembled into automobiles should not be treated as parts for duty purposes, but rather should be treated as automobiles subject to the 25% tariff? The justification is that by importing auto parts that are then assembled into automobiles, the exporter is evading the 25% rate for automobile imports. Does the importing country's action violate GATT Article II, by imposing duties on auto parts above their bound rate? Does it violate GATT Article III by acting as a local content requirement, because an additional charge is imposed on automobiles that use high levels of imported parts as compared to automobiles that use mostly domestic content?
Roughly speaking, these are the issues in the China - Auto Parts case, for which the WTO panel report is likely to be circulated to the public soon (it's a little more complicated than that, of course). I'm very curious to see how the panel dealt with these issues.
