Knocked-Down Auto Part Kits: Complete Vehicles or Just Parts?

Automobile manufacturing is a highly globalized industry.  One technique to reduce customs duties commonly used by automobile manufacturers has been to manufacture high-technology automotive parts in developed countries with reliable infrastructure and a skilled workforce, then to ship complete kits of parts to developing countries for assembly into completed vehicles.  These shipments take the form of completely knocked down (CKD) kits, containing all auto parts, and semi-knocked down (SKD) kits, containing all high-technology parts.  Exporting such kits to developing countries for assembly maximizes efficiency by utilizing the resources and skills found mainly in developed countries for technologically complex parts and low-cost semi-skilled labor in developing countries for routine assembly tasks. 

The CKD and SKD kits have irked some developing countries that desire not only the benefits of increased semi-skilled employment but also skilled employment and technology transfer.  As a result, some developing countries, such as China and India, have attempted to restrict or penalize CKD and SKD kit importations using indigenization requirements or by imposing a surcharge on importations of such kits, effectively treating them as imports of complete vehicles.  However, these attempts have been impeded by the WTO Appellate Body determination that imposing discriminatory domestic manufacturing requirements violates GATT Article III:2.

On September 15, 2022, Thailand’s highest court delivered its opinion over a dispute between Thai Customs and a local subsidiary of the world’s biggest automaker, Toyota Motor Corp. of Japan, which owns 86.4% of the voting power in Toyota Motor Thailand (TMT).  TMT had imported CKDs into Thailand between 2010 and 2012, claiming that the CKDs were automobile parts entitled to preferential treatment under the Japan-Thailand bilateral trade agreement, namely the Japan-Thailand Economic Partnership Agreement (JTEPA), concluded in 2007.  The JTEPA is intended to progressively liberalize tariffs between Japan and Thailand on over 90% of their bilateral trade.

The relevant article of JTEPA provides:

Article 33 – Unassembled or Disassembled Goods
Where a good satisfies the requirements of the relevant provisions of Articles 28 through 31 [rules of origin] and is imported into a Party from the other Party in a disassembled form but is classified as an assembled good pursuant to Rule 2(a) of the General Rules for the Interpretation of the Harmonized System, such a good shall be considered as an originating good of the other Party.

The dispute arose when Thai Customs sought allegedly unpaid customs duties from TMT on 11.6 billion Thai baht (US$ 309 million) of CKDs imported from Japan between 2010 to 2012 for the automaker’s hybrid Prius.  At the time of the imports, Thailand levied 80% customs duties on passenger vehicles.   If the auto-related imports were determined to be parts and accessories “imported for use in assembling of motor vehicles” by manufacturers in Thailand, they would be eligible for reduced customs duties of 50% ad valorem.  TMT claimed that the Thai government initially approved the customs benefits for the imports in 2010, but the Thai government internally changed its interpretation in 2012.  Although TMT prevailed in claiming the reduced customs duties before the trial court, the Thai appellate court reversed, and the Supreme Court of Thailand affirmed, provoking what may become a trade dispute between Japan and Thailand.

The events are complicated by the fact that TMT’s minor shareholder is Thailand’s second largest company, Siam Cement Public Company (SCG), which holds a 10% stake.  The largest shareholder of SCG, in turn, is Maha Vajiralongkorn, the King of Thailand.  King Vajiralongkorn owns 33.6% of SCG.

Extraterritorial Investigation Under the U.S. FCPA

This controversial decision was issued amidst scandals involving the nation’s former and current top judges, which have been investigated by regulatory bodies in both Thailand and the United States pursuant to the U.S. Foreign Corrupt Practices Act (FCPA).  Toyota has disclosed the ongoing investigation by U.S. regulators to its shareholders in its annual reports filed with the SEC since 2021.  It stated that “[i]n April 2020, Toyota reported possible anti-bribery violations related to a Thai subsidiary to the SEC and the DOJ.” 

Toyota is subject to the FCPA as an issuer of securities listed on the New York Stock Exchange for the conduct of its non-U.S. subsidiary.  The FCPA includes anti-bribery provisions, which prohibit making “an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value,” to any person for purposes of “influencing any act or decision of . . . foreign official, political party, party official, or candidate in his or its official capacity.”

According to the internal investigation conducted by Toyota as first reported by Law360 on March 29, 2021, TMT contracted a local law firm to help establish a backchannel to Thailand’s supreme court judge via former high-ranking judges, and that TMT paid $18 million on the $27 million contract, leaving the remaining $9 million on a contingency basis if the company won the appeal regarding the customs duties on the CKD parts.  Thailand’s supreme court established a four-member panel to investigate the alleged corruption, but former judges and the law firm named in the article filed criminal complaints against Law360 and the writer.  The regulatory investigations by both nations are ongoing.