5.101 Finally, there is the government-directed $690 million loan to TPN. This loan conferred an advantage on TPN because of (1) the concessional terms of the loan; and (2) in the absence of this intervention by Indonesia, TPN would not have been able to obtain such a loan due to its own financial situation, the financial situation of its partner, Kia Motors, and the overall clamp down on lending by the Indonesian Government. In addition, the evidence is overwhelming that Indonesia ordered the consortium of government-owned banks and private banks to provide the loan because of TPN's status as a participant in the production of a national motor vehicle". TPN's status, in turn, was contingent upon satisfaction of the local content requirements for a national motor vehicle set forth in Decree No. 31/1996.

5.102 The most recent component of the National Motor Vehicle programme was introduced on 11 August 1997, when a consortium of four government-owned banks and twelve private banks decided to disburse US$650 million in ten-year loans to TPN to carry out the national car project.¹⁰⁵ Although the twelve private banks have not been identified in full, the four government-owned banks reportedly are Bank Dagang Nagara (BDN), Bank Expor Impor, Bank Rakyat Indonesia, and Bank Tabungan Negara.¹⁰⁶ BDN previously had disbursed a US$40 million bridging loan to TPN, bringing the total loan amount to US$690 million. The loans reportedly will carry an annual interest rate of 3 per cent over the 3-6 month deposit rate, a maturity of 10 years, and a grace period of 3 years.¹⁰⁷ The four government-owned banks would provide one-half of the $650 million loan.¹⁰⁸

5.103 The circumstances surrounding this loan indicate that the loan was provided at the express direction of the Government of Indonesia, and that but for the Government's involvement, TPN never would have obtained the loan.

5.104 On 21 April 1997, nine economics ministers were instructed by the President to coordinate efforts to implement the car programme.¹⁰⁹ This group was given a mandate to ensure that the Kia Timor venture has a local content of 60 per cent by 1999.¹¹⁰ The President's directive apparently resulted, among other things, in a directive from the Minister of National Development Planning that "All government bodies and state-owned companies should purchase the Timor when they need new sedans".¹¹¹

5.105 In May, the Coordinating Minister for Economy and Finance announced that Indonesia had "ordered" 13 banks to lend US$1.3 billion to TPN.¹¹² The private banks hesitated to do so, but were eventually persuaded to do so.¹¹³ Even after being persuaded, the private banks would agree to provide no more than one-half of the financing.

5.106 In addition, the decision to grant the $690 million loan package came at a time when Indonesia, due to the depreciation of the rupiah and overly aggressive lending by banks, was clamping down on credit and cancelling large projects, thereby making the loan to TPN all the more extraordinary.¹¹⁴ Indeed, the President of Indonesia, in his state of the nation address, announced "that all projects that were not a national priority would be shelved given the 'new realities' facing the country".¹¹⁵ As a result, according to the Coordinating Minister for Economy and Finance, the Government took stock of projects according to their scale of priority. Obviously, high priority programmes will not be axed".¹¹⁶ However, when asked by reporters whether the Timor car project would be rescheduled, the Coordinating Minister responded that the term 'national' classifies it as a high priority project .¹¹⁷ This followed an earlier statement by the Coordinating Minister that "Everyone must support the [national car] programme".¹¹⁸

5.107 Likewise, the Minister of Industry and Trade was reported as declaring that, because the Timor car project was a national project, it would not be rescheduled despite the rupiah plunge that prompted the rescheduling of other major projects.¹¹⁹ This followed earlier statements by Government officials stressing the critical importance of the Kia Timor project:

5.108 Banking sources indicated that Bank Indonesia, the central bank, would provide subsidized liquidity credit of up to 70 per cent of the funds needed for the car project.¹²³ In summarizing the decision to grant the $690 million loan package, one economist characterized the loans as special credit which 'seemed to be endorsed by the central bank'. ¹²⁴ However, an editorial in The Jakarta Post best captured the situation:¹²⁵

5.109 Indeed, newspapers reported that the Governor of Bank Indonesia (the Indonesian central bank) was opposed to state banks granting a large loan to TPN.¹²⁶ However, the Governor reportedly was forced to approve the deal following a meeting with the President.¹²⁷

5.110 Finally, all indications are that TPN was not perceived as a sound credit risk, and that the decision to grant the US$690 million loan package was based on something other than commercial considerations. Reportedly, some of the private banks involved were willing to immediately write off any credit they would give to TPN.¹²⁸ Some analysts regarded the decision as a double standard and a violation of prudent banking principles. ¹²⁹ Other analysts were more specific¹³⁰:

5.111 Moreover, the Kia Timor project was in so much trouble that the Government of Indonesia finally wound up roping in two leading domestic automakers, PT Astra International and PT Indomobil. ¹³¹ Indomobil was charged with assembling the Timor Kia Sephias, while the Government asked Astra to participate by supervising the construction of assembly facilities and the nation-wide distribution of the cars.¹³²

5.112 To make matters worse, and the decision to grant the loan package even more questionable, the decision was made in light of the fact that TPN's partner, Kia, was in extremely perilous financial condition. Kia was responsible for putting up US$400 million to build the assembly plant.¹³³ On 15 July 1997, the Kia Group was placed under control of a bankruptcy protection committee by bankers concerned about the company's debt of nearly US$11 billion.¹³⁴ On 22 July 1997, South Korean banks refused to meet the full funding requested by the Kia Group, and demanded that Kia executives surrender management control.¹³⁵ Subsequently, on 22 September 1997, the main units of the Kia Group, including Kia Motors, filed for special court protection in a last-ditch attempt to prevent South Korea's eighth-largest conglomerate from being dismantled and its management ousted by bank creditors. ¹³⁶

5.113 Finally, in October 1997, Indonesia appealed to the International Monetary Fund and the World Bank for help in the face of a 32 per cent decline in the rupiah since August 1997.¹³⁷ However, notwithstanding this crisis, and notwithstanding calls for further budget cuts, newspapers reported that [t]he government has ruled out cuts in the controversial national car programme ... . ¹³⁸

(b) The tariff and tax incentives and the government-directed $690 million loan are inconsistent with Article III:4

5.114 Article III:4 states the following:

5.115 Indonesia's tariff and tax incentives for automotive parts and subparts and the provision of the $690 million loan are openly discriminatory and are in plain contravention of Article III:4 of GATT 1994. First, they each constitute regulations or requirements that affect the sale, purchase, transportation and distribution of imported and domestic automotive parts and subparts. Second, imported automotive parts and subparts are like domestic automotive parts and subparts. Third, the tariff and tax incentives and the $690 million loan discriminate against imported automotive parts and subparts.

(1) The tariff and tax incentives and the government-directed $690 million loan are regulations or requirements that affect the internal sale, etc. of automotive parts and subparts

5.116 Indonesia's tariff and tax incentives are regulations or requirements that affect the internal sale, offering for sale, purchase, distribution or use of automotive parts and subparts in Indonesia. Manufacturers or assemblers of motor vehicles (or motor vehicle parts) pay a lower duty on imported parts (or subparts) if the finished motor vehicle (or the finished part) satisfies local content targets decreed by the Government. As such, the various Indonesian measures clearly create an incentive for manufacturers or assemblers to purchase domestic parts or subparts, as opposed to imported parts or subparts.

5.117 Moreover, while a determination of whether there has been a violation of Article III:4 does not require a separate consideration of whether a measure 'afford[s] protection to domestic production' ¹³⁹, it is worth recounting that Indonesia has made no secret of the fact that the purpose of the various measures is to protect the domestic automotive parts industry. The preamble to Decree No. 114/1993 (which establishes the local content thresholds for the 1993 programme) states that the objective of the measure is supporting and encouraging the development of the automotive industry and/or the component industry ... . Likewise, the Elucidation to Regulation No. 20/1996 (which established luxury tax incentives) states that the purpose of the regulation was to speed up the achievement [of] the national motor vehicle industry using local components ... . The Elucidation to Regulation No. 36/1996 is to the same effect. Most recently, in its notification to the SCM Committee, Indonesia stated that the objective of both the 1993 and National Motor Vehicle programmes was the increased use of domestically produced components .¹⁴⁰

5.118 In the Screwdriver panel report, the panel recognized that requirements that an enterprise voluntarily accepts to gain government-provided advantages are nonetheless requirements ¹⁴¹:

5.119 Indonesian producers or assemblers of motor vehicles (or motor vehicle parts) that seek to take advantage of the tariff and tax incentives offered by the Government must satisfy the local content targets of the relevant measures. These targets are requirements - or regulations - within the meaning of Article III:4.

5.120 These tariff and tax incentives also clearly affect the sale of imported automotive parts and subparts, because they provide a clear incentive to an Indonesian manufacturer or assembler to augment its purchases of Indonesian-made parts. For example, a manufacturer or an assembler of motor vehicles can obtain a complete exemption from tariffs on imported parts and the luxury tax on finished motor vehicles if the local content of the vehicle exceeds 60 per cent. In the case of a producer of a national motor vehicle , such as Kia Timor, the target is even lower; 20 per cent local content in the first year. These incentives directly affect (and it is their stated purpose to affect) the competitive conditions under which automotive parts and subparts are sold to manufacturers and assemblers. Therefore, these incentives affect the sale of automotive parts subparts in Indonesia.¹⁴²

5.121 As for the $690 million loan to TPN, this loan is no different in kind from the special credit facilities that were condemned by the panel in Italian Agricultural Machinery. TPN received the government-directed loan because of its status as a participant in the Kia Timor joint venture to produce a national motor vehicle . Kia Timor achieved its status because of its commitment to satisfy the local content requirements of Decree No. 31/1996. As such, the loan, just as much as the tariff and tax incentives, adversely modifies the conditions of competition between domestic and imported automotive parts and subparts on the Indonesian market.

(2) Domestic and imported automotive parts and subparts are like products"

5.122 Although there obviously are hundreds, if not thousands, of individual parts that go into a finished motor vehicle, for purposes of Article III:4, imported automotive parts and subparts are like automotive parts and subparts made in Indonesia. Domestic and imported products share the same physical characteristics and commercial uses. Thus, while a clutch and a shock absorber may differ from each other, a domestic and imported clutch are like each other, just as a domestic and imported shock absorber are like each other. In Indonesia, however, the Government discriminates against the imported clutch and shock absorber by providing incentives that favour the purchase and use of their domestic counterparts.

(3) Indonesia's tariff and tax incentives and the government-directed $690 million loan to TPN provide less favourable treatment to imported automotive parts and subparts

5.123 Indonesia imposes progressively lower import duties on imported automotive parts and subparts based on the local content of the finished motor vehicle or the finished part. Similarly, Indonesia exempts sales of motor vehicles from the luxury tax if the local content of the vehicle exceeds 60 per cent. Finally, the Indonesian government directed a consortia of banks to extend special credit facilities, in the form of a $690 million loan, to TPN in order to enable the joint venture in which it is the predominant partner, Kia Timor, to produce a national motor vehicle that will satisfy local content targets. Each of these measures accords manifestly less favourable treatment to imported automotive parts and subparts in comparison to their domestically-made counterparts, and each of these measures is calculated to place imported products at a competitive disadvantage by creating an incentive for Indonesian manufacturers or assemblers of motor vehicles or motor vehicle parts to use Indonesian-made parts or subparts. Indeed, Indonesia has made no secret of the fact that the express purpose of this discriminatory treatment is to increase the use of Indonesian-made parts. Indonesia's discriminatory measures constitute precisely the type of protectionist regulatory measures that Article III:4 condemns.

(c) Indonesia's discriminatory tariff and tax incentives and the government-directed $690 million loan do not constitute a direct subsidy to domestic producers within the meaning of Article III:8(b)

5.124 Indonesia's discriminatory tariff and tax incentives and the government-directed $690 million loan do not constitute the payment of subsidies exclusively to domestic producers within the meaning of Article III:8(b), because domestic producers of automotive parts or subparts do not receive subsidy payments. In the case of tariff incentives that favour the use of domestic automotive parts, the subsidies go to domestic producers or assemblers of motor vehicles in the form of lower (or no) import duties on imported automotive parts.¹⁴³ In the case of tariff incentives that favour the use of domestic automotive subparts, the subsidies go to domestic producers or assemblers of automotive parts in the form of lower (or no) import duties on imported subparts. In the case of tax incentives that favour the use of domestic automotive parts, the subsidies go to domestic producers or assemblers of motor vehicles in the form of an exemption from the luxury tax.¹⁴⁴ Finally, in the case of the government-directed $690 million loan, TPN received the loan in its capacity as a producer of the national motor vehicle and as user of parts.¹⁴⁵ As such, these discriminatory measures do not constitute payments exclusively to Indonesian producers of automotive parts (or subparts); rather, they modify the conditions of competition between domestic and imported products in contravention of Article III:4.

5.125 Article III:8(b) states:

5.126 A series of GATT 1947 panel reports have interpreted Article III:8(b) very narrowly to hold that the only subsidies subject to exclusion from the national treatment obligations of Article III are those subsidies that are paid exclusively to domestic producers. Thus, for example, credit facilities provided to purchasers¹⁴⁶, and not producers, and payments whose benefits could be partially retained by processors¹⁴⁷, have been found not to qualify under Article III:8(b).

5.127 Of particular relevance is the panel report in the Italian Agricultural Machinery case. In that case, the Italian Government provided special credit facilities to purchasers of Italian agricultural machinery. In finding these facilities to be in violation of Article III:4, and not excluded by Article III:8(b), the panel agreed . . . that . . . the provisions of paragraph 8(b) would not be applicable to this particular case since the credit facilities provided under the Law were granted to the purchasers of agricultural machinery and could not be considered as subsidies accorded to the producers of agricultural machinery. ¹⁴⁸ With respect to the Indonesian subsidies at issue here, these subsidies are provided to the purchasers of automotive parts (or, in some cases, subparts) and cannot be considered as subsidies accorded to the producers of automotive parts (or subparts).

To Continue with General response by Indonesia to claims Under Article III of GATT 1994.

¹⁰⁵"16 Banks to Lend $690 Million for Timor Car Project", Jakarta Post, 12 August 1997 (US Exhibit 14, pp. 161-162).

¹⁰⁶ Id.

¹⁰⁷ Id.

¹⁰⁸ Id.

¹⁰⁹ "RI to Finish Car Programme by '99", The Jakarta Post, 23 April 1997, p. 1 (US Exhibit 14, pp. 105-107).

¹¹⁰ "Timor in Trouble at WTO and at Home", Business Times (Singapore), 25 June 1997 (US Exhibit 14, pp. 143-145).

¹¹¹ "Timor Faces Rough Road at WTO; Indonesia's Government Promises to Back Vehicle Project", The Nikkei Weekly, 23 June 1997, p. 23 (US Exhibit 14, pp. 140-142).

¹¹² "Analysts Warns [sic] About Loans for Timor Car", Jakarta Post, 13 August 1997, p. 1 (US Exhibit 14, pp. 163-165).

¹¹³ "Indon Banks May Land in the ER", Business Times (Singapore), 15 August 1997, p. 7 (US Exhibit 14, pp. 166-169); see also "Indonesia Company: Suharto Clan's Business Activities", EIU Viewswire, 28 July 1997 (US Exhibit 14, pp. 154-157) ("This year the government twisted bankers' arms to procure a $690m loan to finance [TPN's] assembly plant."). Apparently, while the Government of Indonesia initiated the "national motor vehicle" programme, it lacked the money to pay for it. Therefore, the involvement of private lenders was necessary. "BRI Not Under Pressure to Support Nat'l Car Programme," ANTARA - The Indonesian National News Agency, 13 June 1997 (US Exhibit 14, pp. 136-137). Moreover, international banks had refused to lend to TPN. "Bumpy Road Ahead for Motoring Plan", South China Morning Post, 8 June 1997, p. 7 (US Exhibit 14, pp. 132-135).

¹¹⁴ As one commentator noted of the decision to grant the $690 million loan, "The move appears to contradict government policy to clamp down on credit growth." "Jakarta Plans New 'National' Car", Financial Times (London), 7 May 1997, p. 4 (US Exhibit 14, pp. 110-111).

¹¹⁵ "Timor Car Project Not to Be Rescheduled in Face of Currency Crunch" Agence France Presse, 20 August 1997 (US Exhibit 14, pp. 170-171); see also "Timor Car Project Won't Be Rescheduled", Jakarta Post, 21 August 1997 (US Exhibit 14, pp. 172-173), in which it was reported that:

President Soeharto, in his National Day Address last Saturday, called on the business community to select projects for implementation carefully in view of the currency upheaval currently confronting the economy. Soeharto said the government and business should review their investment projects to ascertain which should be given top priority and which should be postponed.

See also, "Indonesia: Jakarta Pledges to Cut Big Projects", Financial Times (USA) (17 September 1997) (US Exhibit 15, pp. 3-4).

¹¹⁶ "Ministers Review Projects Rescheduling", Business Daily, 8 Sepember 1997 (US Exhibit 14, pp. 174-175).

¹¹⁷ Id.

¹¹⁸ "13 Banks Ordered to Finance Timor Car Project", The Jakarta Post, 7 May 1997, p. 12 (US Exhibit 14, pp. 112-114).

¹¹⁹ "National Car Programme Not Affected by Currency Crisis", ANTARA - The Indonesian National News Agency, 10 September 1997 (US Exhibit 14, pp. 176-178).

¹²⁰ "RI to Finish Car Program by '99", The Jakarta Post, 23 April 1997, p. 1 (US Exhibit 14, pp. 105-107).

¹²¹ "Government Agencies Urged to Buy Timor Nat'l Car", ANTARA - The Indonesian National News Agency, 5 June 1997 (US Exhibit 14, pp. 129-131).

¹²² "Govt Offices to Be Obliged to Buy Timor Car", The Jakarta Post, 4 June 1997, p. 1 (US Exhibit 14, pp. 126-128).

¹²³ "13 Banks Ordered to Finance Timor Car Project" The Jakarta Post, 7 May 1997, p. 12 (US Exhibit 14, pp. 112-114).

¹²⁴ "Analysts Warn About Loans for Timor Car" Jakarta Post. 13 August 1997 (US Exhibit 14, pp. 163-165).

¹²⁵ Quoted in "Indonesia 'National' Car Stalls" International Herald Tribune, 27 May 1997, p. 17 (US Exhibit 14, pp. 123-125).

¹²⁶ "Indonesian National Car Marker to Get Loans from State Banks", Agence France Presse, 29 April 1997 (US Exhibit 14, pp. 108-109); see also "Minister Says Indonesia to Slash Credit to National Car", Agence France Presse, 14 May 1997 (US Exhibit 14, pp. 119-120); "Indonesia Preparing Team to Defend Nat'l Car Policy at WTO", ANTARA - The Indonesian National News Agency, 9 May 1997 (US Exhibit 14, pp. 115-118); and "Jakarta Plans New 'National' Car", Financial Times (London), 7 May 1997, p. 4 (US Exhibit 14, pp. 110-111).

¹²⁷ Id. See also "13 Banks Ordered to Finance Timor Car Project", The Jakarta Post, 7 May 1997, p.12 (US Exhibit 14, pp. 112-114).

¹²⁸ "13 Banks Ordered to Finance Timor Car Project", The Jakarta Post, 7 May 1997, p. 12 (US Exhibit 14, pp. 112-114).

¹²⁹ "Indonesia Tries to Head Off Bank Crisis" The Nikkei Weekly, 4August 1997, p. 20 (US Exhibit 14, pp. 158-160).

¹³⁰ "Analysts Warn About Loans for Timor Car", Jakarta Post, 13 August 1997 (US Exhibit 14, pp. 163-165).

¹³¹ "Astra, Indomobil Roped in to Speed Up Timor Car Project" Business Times (Singapore), 16 May 1997, p.1 (US Exhibit 14, pp. 121-122). One source described TPN's manufacturing plans as "currently in disarray". Id.

¹³² Id. Astra's decision to "help" did not come as a surprise to some observers, because Astra is 9.3 per cent owned by the Nusamba Group, an investment company controlled by three foundations controlled by the President. Id.

¹³³ "A Furious Flap Over Favoritism", Business Week, 8 July 1996, p. 14 (US Exhibit 14, pp. 92-95).

¹³⁴ "S. Korea Bankruptcy Panel Takes Control of Kia", Los Angeles Times, 16 July 1997 (US Exhibit 14, pp. 146-148); see also "South Korea: Emergency Loans Give Breathing Space to Carmaker Kia", Financial Times (London), (16 July 1997 (US Exhibit 14, pp. 149-150); and "Koreans Place Kia Motors Under Bankruptcy Shield" New York Times, 16 July 1997 (US Exhibit 14, pp. 151-153).

¹³⁵ "South Korea: Banks Refuse Full Funding of Kia Rescue", Financial Times (23 July 1997) (US Exhibit 15, pp. 1-2).

¹³⁶ "Kia: Debt-Hit Motor Group Seeks Court Protection", Financial Times (USA) (23 September 1997) (US Exhibit 15, p. 5).

¹³⁷ "Indonesia: IMF Urged to Back Rescue", Financial Times (USA) (13 October 1997) (US Exhibit 15, pp. 8-9).

¹³⁸ "Indonesia: Fund Managers Urge Government to Cut Budget Deep", Financial Times (USA) (11 October 1997) (US Exhibit 15, pp. 6-7).

¹³⁹ "European Communities - Regime for the Importation, Sale and Distribution of Bananas", Report of the Appellate Body, WT/DS27/AB/R, adopted 25 September 1997, para. 216 (emphasis in original).

¹⁴⁰G/SCM/N/16/IDN (13 January 1997), pp. 3 and 4.

¹⁴¹"EEC - Regulation on Imports of Parts and Components", L/6657, adopted on 16 May 1990, BISD 37S/132, 197, para. 5.21 (emphasis in original). See also "Canada - Administration of the Foreign Investment Review Act", L/5504, adopted on 7 February 1984, BISD 30S/140, 158, para. 5.4.

¹⁴²See "Italian Agricultural Machinery", L/833, adopted 23 October 1958, BISD 7S/60, 64, para. 12 (". . . [T]he text of paragraph 4 referred . . . to laws and regulations and requirements affecting internal sale, purchase, etc., and not to laws, regulations and requirements governing the conditions of sale or purchase. The selection of the word 'affecting' would imply, in the opinion of the Panel, that the drafters of the Article intended to cover in paragraph 4 not only the laws and regulations which directly governed the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between the domestic and imported products on the internal market." (Emphasis in original)).

¹⁴³In the case of Presidential Decree No. 42/1996, the subsidy took the form of an exemption from the 200 per cent tariff on imports of completely built-up Kia Sephia sedans.

¹⁴⁴Under Regulation No. 36/1996, there are no gradations in terms of local content rates. If local content exceeds 60 per cent, the vehicle is exempt from the luxury tax. If not, the vehicle is subject to the luxury tax based on the rate applicable to the vehicle type. In the case of a "national motor vehicle," the applicable local content rate varies by year.

¹⁴⁵At the risk of repetition, TPN received the government-directed loan due to its status as a participant in the Kia Timor joint venture to produce the "national motor vehicle." Kia Timor's status, in turn, was based on its obligation to satisfy specific local content targets under Decree No. 31/1996.

¹⁴⁶"Italian Agricultural Machinery", L/833, adopted 23 October 1958, BISD 7S/60, 64, para. 16.

¹⁴⁷"European Economic Community - Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins", L/6627, adopted on 25 January 1990, BISD 37S/86, para. 137.

¹⁴⁸ BISD 7S/60, 64, para. 14.