5.78 The European Communities claims that the following measures (See Section III.B) applied by Indonesia are inconsistent with Article III:4 of GATT 1994 because they favour the "use" by Indonesian car manufacturers of domestic parts and components over "like" imported parts and components:

5.79 The following are the European Communities's arguments in support of these claims:

5.80 Article III:4 of GATT provides in pertinent part that:

5.81 In order to rule on this claim, the Panel is required by the wording of Article III:4 to make the following determinations:

• first, whether the measures at issue are "laws, regulations or requirements";
• second, whether they "affect the internal use" of parts and components for the assembly of motor vehicles;
• third, whether imported parts and components are "like" domestic parts and components; and
• fourth, whether the measures afford "less favourable treatment" to imported parts and components.

5.82 The measures at issue are contained in generally applicable Presidential Instructions, Government Regulations and Decrees of the Minister of Finance and of the Minister of Industry and Trade. Therefore, they are "laws or regulations" within the meaning of Article III:4.

5.83 The measures are "voluntary" in the sense that car manufacturers are not under a legal obligation to use local parts and components and that failure to comply with the local content targets set by the measures only entails the loss of the tax and tariff benefits linked thereto. This, however, does not have the consequence of placing the measures outside the purview of Article III:4.

5.84 Previous Panels have made clear that III:4 does not apply only to "mandatory" measures. Where compliance with a certain measure is necessary in order to secure an advantage or benefit, such measure may also be covered by Article III:4. As noted by the Panel Report on EEC - Regulation on Imports of Parts and Components:

5.85 The "advantage" in question may consist of a benefit granted in respect of an import measure, such as for instance a tariff exemption. Thus, in EC - Regime for the Importation, Sale and Distribution of Bananas the Panel found that a requirement to purchase domestic bananas in order to obtain the right to import bananas at a lower duty rate under a tariff rate quota was a requirement affecting the internal purchase of a product within the meaning of Article III:4.⁹⁹

(b) The measures "affect the internal use" of parts and components for the assembly of motor vehicles

5.86 For a measure to "affect" the use of parts and components for motor vehicles, it does not have to regulate directly those products. It only has to affect the conditions of competition between domestic and imported parts and components. In the words of the Panel Report on Italian Discrimination Against Imported Agricultural Machinery:

5.87 The measures in dispute "affect" the internal use of automotive parts and components because they "modify adversely the conditions of competition"' between domestic and imported parts and components by giving to the Indonesian car manufacturers tax and tariff incentives for using local parts and components instead of imported like parts and components.¹⁰¹

(c) Imported parts and components and domestic parts and components are "like" products

5.88 The mere fact of being manufactured in Indonesia does not of itself confer upon Indonesian made parts and components any specific characteristics, properties, nature or quality which makes them "unlike" parts and components made in the Community.

(d) The measures at issue give "less favourable treatment" to imported parts and components

5.89 The measures at issue afford "less favourable treatment" to imported parts and components because the use of those parts does not entitle Indonesian car manufacturers to the same tax and tariff benefits as the use of like domestic parts. As a result, whenever both Community made parts and components and Indonesian made parts and components can be obtained on the same conditions, the Indonesian car manufacturers will give preference to the purchase or internal production of Indonesian made parts and components over the importation of Community made ones.

(e) Local content requirements have already been found contrary to Article III:4 of GATT

5.90 Local content requirements similar to the ones under consideration have already been found to be inconsistent with Article III:4 of GATT by previous Panels.

5.91 In the 1984 case concerning Canada's Foreign Investment Review Act ("FIRA"), the Panel found that the undertakings given to the Canadian Government by certain foreign investors to, inter alia, purchase goods of Canadian origin in specified amounts or proportions afforded "less favourable treatment" to like imported products and were therefore contrary to Article III:4.¹⁰²

5.92 Local content requirements have also been found contrary to Article III:4 by the 1990 Panel Report on EC - Regulation on Imports of Parts and Components. In that case, the Panel concluded that, by making the suspension of anti-circumvention proceedings initiated in accordance with the Community's anti-dumping regulations against the subsidiaries of Japanese companies established in Community territory conditional upon the investigated companies giving an undertaking to limit the use of Japanese parts and materials, without imposing similar limitations on the use of like domestic products, the latter were given more favourable treatment in violation of Article III:4.¹⁰³

(f) The TRIMs Agreement confirms that the measures are incompatible with Article III:4 of the GATT

5.93 The TRIMs Agreement has confirmed beyond doubt that local content requirements such as the ones under consideration are inconsistent with Article III:4 of GATT. Indeed, the Illustrative List of TRIMs annexed to that Agreement reads in relevant parts as follows:

5.94 The measures in dispute fall squarely within point 1 (a) of the Illustrative List and are therefore contrary to GATT Article III:4.

3. Claims Raised by the United States

5.95 The United States claims that Indonesia's system of tariff and tax incentives and the government-directed $690 million loan to TPN (See Section III.C), all of which are contingent upon the use of domestic automotive parts, are inconsistent with Article III:4 of GATT 1994 and are not covered by Article III:8(b) of GATT 1994. The following are the United States' arguments in support of these claims:

(a) Summary of the measures

5.96 Imported automotive parts, as well as imported subparts, face discrimination once they arrive in Indonesia. Indonesia offers several incentives to purchasers and users of automotive parts and subparts that are intended to encourage the use of Indonesian-made parts and subparts. These incentives can be summarized as follows:

(1) Import duty incentives

5.97 Under Decree No. 645/1993, as amended by Decree No. 223/1995, the import duty rate on imported automotive parts and subparts decreases as the local content of the finished product (either a motor vehicle or a motor vehicle part) increases.¹⁰⁴ If the degree of local content exceeds a certain threshold (60 per cent in the case of passenger cars, 40 per cent in the case of light commercial vehicles, and 40 per cent in the case of subparts of passenger cars and light commercial vehicles), imports may enter duty-free. (See Tables 6 and 7)

5.98 In addition, under the National Motor Vehicle programme, Article 4(2) of Decree No. 645/1993, as amended by Article 1 of Decree No. 82/96, exempts "[i]mports of parts and equipment of motor vehicles for assembling purposes or manufacture of national motor vehicles which fulfil the required local contents stipulated by the Minister of Industry and Trade ... ." As set forth in Article 3(1) of Decree No. 31/1996, in order to receive national motor vehicle benefits, the local content rates shown in Table 8 must be achieved.

5.99 Finally, under Article 1 of Presidential Decree No. 42/1996, national motor vehicles produced abroad were allowed to be imported free of the 200 per cent Indonesian tariff on CBU passenger cars if such cars "fulfill[ed] the local content requirements as stipulated by the Minister of Industry and Trade"; i.e., if they satisfied the local content rates of Decree No. 31/1996 set forth in the preceding paragraph. Thus, TPN was allowed to import CBU Kia Sephia sedans from Korea without having to pay the 200 per cent tariff on finished passenger cars. TPN was allowed to do so only because, as a participant in the joint venture to assemble a "national motor vehicle", it was subject to the local content schedule set forth in Decree No. 31/1996.

(2) Tax incentives

5.100 Under Decree No. 647/1993, passenger cars and jeeps were subject to a luxury tax of only 20 per cent, provided that their local content exceeded 60 per cent. Otherwise, the luxury tax for these motor vehicles was 35 per cent. Regulation No. 20/1996 established a more complex luxury tax schedule, although the distinguishing feature of the schedule continued to be that the luxury tax rate decreased as the rate of local content increased. Finally, Regulation No. 36/1996 increased the degree of discrimination inherent in Indonesia's luxury tax structure by establishing a luxury tax rate of 0 per cent for national motor vehicles and motor vehicles with a local content greater than 60 per cent. Under Regulation No. 36/1996, the following luxury tax schedule currently exists:

Under this schedule, all passenger vehicles and light commercial vehicles (with the exception of passenger cars with a cylinder capacity greater than or equal to 1600cc) are exempt from the luxury tax provided that the local content of the vehicle exceeds 60 per cent. Thus, the incentive to use domestic, rather than imported, automotive parts is even greater. And, of course, national motor vehicles are subject to their own local content schedule, as set forth in Decree No. 31/1996.

To Continue with The government-directed $690 million loan .

⁹⁸Panel Report on European Communities - Regulation on imports of Parts and Components, adopted on 16 May 1990, 37S/132, 197, para 5.21.

This principle has been consistently followed by other Panels. Thus, the Panel Report on Italian discrimination against Imported Agricultural Machinery (adopted on 23 October 1958, BISD 7S/60, 64, para 12) found that an Italian law providing especial credit terms to farmers for the purchase of agricultural machinery conditional on the purchase by the farmers of Italian machinery was contrary to Article III:4. Similarly, the Panel Report on EEC - Payments and subsidies paid to Processors and Producers of Oilseeds and Related Animal Feed Proteins (adopted on 25 January 1990, BISD 37S/86, 124-125) concluded that the payment by the Community of subsidies to the processors of oilseeds who purchased oilseeds of Community origin was contrary to Article III:4.

⁹⁹See e.g. Panel report on EC - Regime for the Importation, Sale and Distribution of Bananas, adopted 25 September 1997, WT/DS 27/R/USA, paras. 7.179 and 7.180. On appeal, this finding has been upheld by the Appellate Body (WT/DS 27/AB/R, adopted 25 September 1997, at para 211).

¹⁰⁰Panel Report on "Italian Discrimination against Imported Agricultural Machinery", adopted on 23 October 1958, 7S/60, 64, para 12.

¹⁰¹That the purpose of the measures at issue is to increase the use of local parts and components at the expense of imported parts is not only obvious from the structure and design of the measures but has been openly acknowledged by the Indonesian authorities.

Thus, the only recital of Decree 645/93 reads as follows:

The recital of Decree 223/95 amending Decree 645/93 is even less ambiguous in this respect:

A similar statement is found in the first recital of Government Regulation 36/96:

More recently, the "policy objective" of the measures at issue has been defined in the following terms in Indonesia's notification under Article XVI:1 of GATT 1994 and Article 25 of the SCM Agreement as

¹⁰²Panel report on Canada - Administration of the Foreign Investment Review Act, adopted on 7 February 1984, BISD 30S/140, paras 5.4-5.12.

¹⁰³ Panel report on EEC - Regulation on Imports of Parts and Components, adopted on 16 May 1990, BISD 37S/132, paras 5.19-5.21.

¹⁰⁴Decree No. 223/1995 replaced the incentive schedule originally contained in Decree No. 645/1993.