What's New?
 - Sitemap - Calendar
Trade Agreements - FTAA Process - Trade Issues 

espa�ol - fran�ais - portugu�s
Search

World Trade Organization

WT/DS54/R
WT/DS55/R
WT/DS59/R
WT/DS64/R


2 July 1998
(98-2505)
Original: English

Indonesia - Certain Measures Affecting the Automovile Industry

Report of the Panel

(Continued)


D. General response by Indonesia to claims Under Article III of GATT 1994 - SCM Agreement prevails

5.128 Indonesia makes a general response to all of the claims raised by the complainants, including those under Article III, by arguing that the Agreement on Subsidies and Countervailing Measures ("SCM Agreement") is the lex specialis, and prevails, for review of the 1993 and 1996 subsidy programmes, which Indonesia, as a developing country, is permitted to maintain. In addition, Indonesia responds specifically to the claims under Article III:4 regarding the tariff measures, by arguing that these are border measures and voluntary measures and thus not governed by Article III. (See Section V.F.1.) Indonesia also responds specifically to all of the claims (including those under Article III) made with respect to the June 1996 measures by arguing that those measures have expired. (See Section X.A.) The following are Indonesia's general responses to the Article III claims raised.

1. The SCM Agreement is the lex specialis for review of the 1993 and 1996 subsidy programmes, which Indonesia, as a developing country, is permitted to maintain

5.129 The provisions of the SCM Agreement prevail over those of the General Agreement in the instant dispute because they are more specific to subsidies. Sinclair149 describes lex specialis as "the concept that a specific norm of conventional international law may prevail over a more general norm".150 Lex specialis is "widely supported in doctrine"151 and extends back to Grotius.152 "Among agreements that are equal in respect to the qualities mentioned, that should be given preference which is more specific and approaches more nearly to the subject in hand: for special provisions are ordinarily more effective than those that are general".153 Furthermore, GATT panels have recognized lex specialis. For example, the Panel in EEC - Restrictions on Imports of Dessert Applies - Complaint by Chile examined the restrictive measures at issue in the context of Article XIII instead of Article I because, if found, Article XIII was lex specialis.154

5.130 The 1993 and 1996 subsidy programmes are out of the scope of the provisions of the General Agreement. Generalia specialbus, which is related to lex specialis, "does not merely involve that general provisions do not derogate from specific ones, but also, or perhaps as an alternative method of statement, that a matter governed by a specific provision, dealing with it as such, is thereby taken out of the scope of a general provision dealing with the category of subject to which that matter belongs, and which therefore might otherwise govern it as part of that category".155

5.131 Because the SCM Agreement addresses subsidies in a manner far more specific than the General Agreement, it is lex specialis for this dispute.

5.132 Complainants seek to mask their inability to prove that the two Indonesian programmes still in effect (the 1993 incentive programme and the February 1996 national car programme) are causing adverse effects to their interests. They unsuccessfully attempt to do so by asserting that the programmes are inconsistent with Article III of the GATT 1994 (as well as Article I of GATT 1994 and Article 2 and the Illustrative List of the TRIMs Agreement.)156 Their attempts fail. Both programmes are subsidy measures and so the SCM Agreement (as well as GATT Article XVI) is the lex specialis. Unlike many other WTO agreements, the SCM Agreement provides substantial special and differential treatment for developing countries like Indonesia. The 1993 and February 1996 subsidy programmes fully conform to Indonesia's obligations, as a developing country, under the SCM Agreement. The Panel, therefore, should dismiss all three complaints.

(a) The 1993 incentive programme grants an exemption from or reductions in import duties and the luxury tax available to all companies in the automotive industry

5.133 In June 1993, the Government recognized that its existing policy of seeking to have manufacturers and assemblers of automobiles and automotive components, subcomponents and parts produce their products in Indonesia was unsuccessful. The Government therefore created a new policy, the 1993 Incentive Programme. Under the programme, manufacturers and assemblers are free to source wherever they wish (in Indonesia or abroad). The Government, however, grants exemptions from or reductions in import duties and the luxury tax for companies that choose to source specified percentages of their parts and components in Indonesia.

5.134 Decree of the Minister of Industry No. 114/M/SK/6/1993 (9 June 1993) granted incentives in the form of exemption from or reduction in import duties to automotive component producers and assemblers that purchase Indonesian parts and components.157 Since 21 January 1997, pursuant to Decree of the Minister of Finance No. 36/KMK.01/1997, the import duty on major components has ranged from 65 per cent for producers and assemblers who source less than 20 per cent of their parts and components domestically to 0 per cent for those who source more than 60 per cent domestically.158 For subcomponents and parts, the duty ranges from 25 per cent for those who source less than 20 per cent domestically to 0 per cent for those who source more than 40 per cent domestically.

5.135 At present, pursuant to Decree of the Minister of Finance No. 272/KMK.04/1995 (28 June 1995), the luxury tax rate is 20 per cent for domestically produced sedans of 1600cc or less and domestic content of more than 60 per cent; it is 35 per cent for other sedans.159

(b) The February 1996 National Car Programme grants import duties and luxury tax exemptions to producers of a National Car

5.136 Instruction of the President No. 2/1996 (19 February 1996) establishes the national car programme and directs the Minister of Finance to grant exemption from import duties regarding imported parts and components and from payment of luxury tax to companies designated as producers of a national car.160 The exemption from import duties currently is implemented by Article 4 of Decree of the Minister of Finance No. 36/KMK.01/1997 (21 January 1997) and the exemption from the luxury tax is implemented by Government Regulation No. 36/1996 (4 June 1996).161

5.137 Decision of the State Minister for the Mobilization of Investment Funds No. 02/SK/1996 (5 March 1996) designated Timor Putra Nasional (TPN) to produce a national car.162 Under Decree of the Minister of Industry and Trade No. 31/MPP/SK/2/1996 (19 February 1996), TPN's receipt of the import duty and luxury tax exemptions is conditioned on, among other things, the sourcing of at least 20 per cent of the national car's parts and components domestically at the end of the first year, at least 40 per cent at the end of the second year and at least 60 per cent at the end of the third year. The programme effectively terminates in the third year.163

(c) The Government's grant of exemptions and reductions in import duties and the luxury tax to certain manufacturers and assemblers of automobiles and automotive parts is a subsidy

5.138 Articles 1 and 2 of the Subsidies Agreement define specific subsidy. They provide in relevant part that "a subsidy shall be deemed to exist if ... there is a financial contribution by a government" where:

  • "government revenue that is otherwise due is foregone or not collected" (Article 1.1(a)(l)(ii)); and
  • a benefit is thereby conferred that is "specific to an enterprise or industry or group of enterprises or industries" (Article 2.1).

5.139 Under the 1993 incentive programme, the Government forgoes or does not collect revenue that is otherwise due by granting an exemption from or reduction in the rate of import duties on automotive parts and components. Thus, there is the requisite financial contribution by the Government. As will be discussed in the next subsection, the subsidy falls under the provisions of Article 3 of the Subsidies Agreement. Thus, by virtue of Article 2.3 of that Agreement, there is the requisite specificity.164

5.140 The same is true with regard to the February 1996 national car programme. It exempts companies designated by the Government as producers of a national car from the payment of either import duties on automotive parts and components or the luxury tax. The Government, therefore, forgoes or does not collect revenue otherwise due from specific enterprises.

5.141 Because both programmes indisputably provide subsidies, the SCM Agreement is the lex specialis and the WTO conformity of the programmes must be assessed pursuant to the provisions of only this Agreement.

(d) Article 27.3 of the SCM Agreement permits Indonesia, as a developing country, to maintain the subsidies granted under the 1993 and February 1996 programmes

5.142 Entitlement to the subsidies granted under both the 1993 and February 1996 programmes and the level of the subsidy granted to each recipient depends upon the percentage of locally sourced parts and components in a particular car model or automotive component. Therefore, these subsidies technically fall within the scope of Article 3.1(b) as "subsidies contingent (whether solely or as one of several other conditions) upon the use of domestic over imported goods".

5.143 Indonesia is a developing country. Accordingly, Indonesia is within the ambit of Article 27.3 of the Subsidies Agreement, which provides that "[t]he prohibition of paragraph 1(b) of Article 3 shall not apply to developing country Members for a period of five years ... from the date of entry into force of the WTO Agreement [i.e., until 1 January 2000]." Instead, the provisions of Articles 5 to 7 regarding "actionable subsidies" apply. (See Section VIII.B.2(c)). No Complainant has, as required by Article 6, demonstrated by positive evidence that the Indonesian auto subsidies result in "serious prejudice" to its interests. (See Section VII.B). Therefore, the Panel should: (1) rule that the subsidies provided by Indonesia under the 1993 and February 1996 programmes are consistent with Indonesia's obligations under the Subsidies Agreement; and (2) because the Subsidies Agreement is the lex specialis, dismiss all three complaints.

(e) Introduction of the February 1996 subsidy programme was not inconsistent with Indonesia's obligations under the SCM Agreement

5.144 Indonesia further asserts that Indonesia's introduction of the February 1996 programme was consistent with its obligations under Articles 27.3 and 28.2 of the Subsidies Agreement. These arguments are set forth in detail in Section VIII.C, which covers the claim raised by the United States under Article 28 of the SCM Agreement, and Indonesia's responses to this claim.

2. Indonesia's luxury tax subsidies to the automotive industry are governed by the disciplines of the SCM Agreement and not by Article III of the GATT 1994

5.145 This is the first dispute involving the relationship between the WTO Agreement on Subsidies and Countervailing Measures and Article III of the General Agreement.165 Prior to the entry into force of the WTO Agreements, no international legal definition of subsidy existed. There was no all-encompassing structure of remedies applicable to subsidies. Subsidy disciplines applied only to a small number of GATT Contracting Parties and there was no over-arching WTO agreement governing the relationship of the substantive agreements. Thus, there was no basis for claiming that the Tokyo Round Subsidies Code was lex specialis in instances such as those presented in this dispute. This all changed with the entry into force of the WTO. Subsidies are governed by and subject to the disciplines of the Subsidies Agreement, not Article III of the General Agreement.

(a) Both the 1993 incentive programme and the February 1996 National Car Programme subsidize certain automobile producers by granting reduced luxury tax

5.146 The luxury tax rate for sedans (passenger vehicles) is 35 per cent.166 Decree No. 272 implements the 1993 Incentive Programme. Article 2(1) sets a subsidized luxury tax rate of 20 per cent for domestically produced sedans with an engine capacity of less than 1600cc and with local content of greater than 60 per cent. Also, the Government forgoes collection of 15 per cent of the generally applied 35 per cent luxury tax rate with respect to those enterprises producing automobiles meeting these criteria. Therefore, the measure is a specific subsidy within the meaning of Articles 1.1(a)(l)(ii) and 2 of the Subsidies Agreement.

5.147 With respect to producers of a national car, Instruction of the President No. 2/1996 (19 February 1996)167 and its implementing regulations and decrees declare that the 35 per cent luxury tax is "borne by the Government." Thus, the February 1996 programme also provides a subsidy within the meaning of Article 1.1(a)(1)(ii) of the Subsidies Agreement that is specific within the meaning of Article 2.168

(b) Subsidies are governed by and subject to the disciplines of the SCM Agreement

5.148 Articles 3 through 9 of the SCM Agreement set out the disciplines applicable to different types of subsidies and the remedies applicable to each type. All subsidies fall into one of three categories -prohibited, actionable or non-actionable. Two types of subsidies are prohibited by virtue of Article 3.1 -subsidies contingent upon export performance and subsidies contingent upon the use of domestic over imported goods. Four types of subsidies are non-actionable: subsidies which are "not specific within the meaning of Article 2" (Article 8.1(a)); assistance for certain research activities (Article 8.2(a)); assistance to disadvantaged regions (Article 8.2(b)); and assistance to promote adaptation to new environmental requirements (Article 8.2(c)). All subsidies which are neither prohibited under Article 3 nor non-actionable under Article 8 are actionable and are governed by Articles 5 through 7 of the SCM Agreement. Thus, all subsidies are covered. If they are one of the two subsidies identified in Article 3 they are prohibited. If they are one of the four identified in Articles 8, they are non-actionable. If they are specific subsidies within the meaning of Articles 1 and 2 but are not among the subsidies identified in Articles 3 or 8, then they fall into the residual category of actionable subsidies.

5.149 The SCM Agreement also sets out in detail the remedies applicable to the three categories of subsidies. For developed country WTO Members, the remedy applicable to the two types of subsidies identified in Article 3.1 is the mandate to "withdraw the subsidy without delay" (Article 4.7). The only prerequisite for such a mandate is the proven existence of a prohibited subsidy. The complaining party is not required to plead or prove any adverse effects. For all WTO Members, subsidies that meet the criteria of Article 8 are, as the term indicates, non-actionable. They are generally permissible and are not subject to remedial action.

5.150 For the residual category of actionable subsidies, including those not prohibited for developing countries by virtue of Article 27, a complaining party must establish both the existence of a subsidy within the meaning of Articles 1 and 2 and adverse effects to its interests through the use of that subsidy (Article 5). Where both the subsidy and the adverse effects are established, the remedy is that the developing country Member "shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy" (Article 7.8). In other words, the remedy is to eliminate the harm to the trade interests of the complaining Member. The subsidizing country can choose to do so by eliminating the measure, but it is not required to do so. Its only obligation then is to eliminate the adverse effects.

5.151 By virtue of the special and differential treatment provided by Article 27, the prohibitions of Article 3.1 do not apply to developing country WTO Members (Articles 27.2 and 27.3). Accordingly, the Article 7 remedy provisions applicable to actionable subsidies apply instead of the remedial provisions of Article 4 (Article 27.7). The effect is that, as here (because Indonesia is a developing country), Complainants must plead and prove not only the existence of one of the two types of subsidies identified in Article 3.1169, but also that the subsidy alleged has caused adverse effects to their interests (Article 5).

5.152 In sum, the remedy where both the subsidy and the adverse effects are proven is the remedy applicable to actionable subsidies - the adverse effects of the subsidy shall be removed. The subsidizing developing country can choose to do so by eliminating the measure but it also has the option of maintaining the measure and taking action to eliminate the adverse effects.

(c) General rules of treaty interpretation preclude finding that a subsidy permissible under the SCM Agreement is proscribed by Article III of the GATT 1994

5.153 Under general rules of treaty interpretation, one must give meaning and effect to all terms of a treaty. As properly recognized by the WTO Appellate Body: "An interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility".170 Therefore, Article III:2 of the General Agreement cannot control this dispute because, if it did, the entire SCM Agreement would be reduced to inutility.

5.154 Under Article III:2 no imported product shall be subject to an internal tax in excess of that applied to a like domestic product. Article 3.8 of the WTO Dispute Settlement Understanding codifies long-standing GATT practice that infringement of an obligation of the General Agreement such as that of Article III:2 is considered prima facie to constitute a case of nullification or impairment. In other words, the covered practice is proscribed and the complaining party need not plead or prove adverse trade effects.171

5.155 The Indonesian luxury tax is an internal tax. Under the 1993 Incentive Programme, passenger sedans with an engine capacity of less than 1600cc and an Indonesian content of more than 60 per cent are obliged to pay a subsidized luxury tax of only 20 per cent if they are produced in Indonesia, while the imported like product (imported passenger sedans with an engine capacity of less than 1600cc and an Indonesian content of more than 60%) are subject to the non-subsidized luxury tax rate of 35 per cent. Under the February 1996 national car programme, the Government excuses TPN from payment of the luxury tax on the 1500cc Timor S515 (which meets the applicable local content level) while imposing the non-subsidized rate of 35 per cent on imports of like products. (There is no ban on imports of small-engine-capacity sedans that would be "like" the Timor. However, Complainants have the burden of proving that there actually are such imports because, if they do not do so, they fail to prove "serious prejudice" with respect to the "actionable" subsidization by Indonesia of the luxury tax rate for certain domestic sedans.)

5.156 If Article III:2 applied, then no more would need to be established. Complainants would not have to plead or prove that they have suffered adverse trade effects by reason of the subsidized luxury tax rates. Despite the Subsidies Agreement, which permits actionable subsidies to be maintained unless they are proven to cause adverse trade effects, the measure--indeed all such actionable subsidies - would be proscribed under Article III:2 of the General Agreement merely upon a showing of discrimination due to a subsidy. Such a holding would render meaningless the provisions of the Subsidies Agreement relating to actionable subsidies.

5.157 In this dispute the issue is limited to Article III:2 and tax subsidies.1172 However the same interpretational problem would arise with respect to virtually all subsidies other than subsidized import duties and other border charges. The purpose of most subsidies is to provide financial assistance to a targeted industry or a small group of industries. By their very nature and by design, subsidies discriminate against producers of like products (both domestic and imported) that do not receive the subsidy. To the extent that a subsidy is not provided to an imported product (which is the case in virtually every subsidy ever granted), then it does not provide national treatment. Accordingly, one cannot give meaning and effect to the framework of the Subsidies Agreement requiring proof of adverse trade effects as to actionable subsidies if Article III of the General Agreement and its national treatment principle is applied.

5.158 The importance of the existence of a legal definition of subsidies and an all-encompassing structure of remedies is evident by contrasting the subsidies provisions applicable to goods with those applicable to services. In its Explanatory Note on the Scheduling of Initial Commitments in Trade in Services173 (intended to assist countries in preparing their services commitments in the Uruguay Round), the GATT Secretariat stated:

Article XVII [national treatment] applies to subsidy-type measures in the same way that it applies to all other measures. Article XV (Subsidies) merely obliges Members to "enter into negotiations with a view to developing the necessary multilateral disciplines" to counter the distortive effects caused by subsidies. Therefore, any subsidy which is a discriminatory measure within the meaning of Article XVII would have to be either scheduled as a limitation on national treatment or brought into conformity with that Article. Subsidy-type measures are also not excluded from the scope of Article II (MFN). An exclusion of such measures would require a legal definition of subsidies which is currently not provided for under the GATS.

5.159 The GATS contains no "legal definition of subsidies", and so the GATS requirements regarding national treatment (which permit scheduling a limitation on the obligation) apply. In the goods area, there is a legal definition in the SCM Agreement, thereby warranting exclusion of subsidies from application of the national treatment obligation of GATT Article III.

5.160 The only conceivable interpretation of the relationship of subsidies and Article III of the General Agreement that would not reduce the SCM Agreement to redundancy or inutility is that subsidies which meet the criteria of Articles 1 and 2 of the SCM Agreement are governed by and are subject to the disciplines of only the SCM Agreement. Actionable subsidies (including Article 3.1 subsidies which are actionable for developing countries by virtue of Article 27) require proof of adverse trade effects. That requirement cannot be subverted merely by arguing that the subsidy violates Article III of the GATT 1994 by denying national treatment.

To Continue with The proper interpretation of Article III:8(b).


149Sir Ian Sinclair, K.C.M.Q., Q.C., Bencher of the Middle Temple, Member of the International Law Commission, Associate member of the Institut de Droit International, Sometime Legal Advisor to H.M. Foreign and Commonwealth Office.

150Ian Sinclair, The Vienna Convention on the Law of Treaties 96 (2nd ed. 1984).

151Ian Sinclair, The Vienna Convention on the Law of Treaties 96 (2nd ed. 1984) (citing Y.B. of the Int'l L. Commission (1976-II), 120.

152Wilfred Jenks, The Conflict of Law-Making Treaties, 1953 Brit. Y.B. Int'l L. 446.

153Book II, Cap. XVI, sec. xxix (1): translation by Kelsey in Classics of International Law edition, vol. ii (1929) 428. cited in Wilfred Jenks, The Conflict of Law-Making Treaties, 1953 Brit. Y.B. Int'l L. 446.

154EEC - Restrictions on Imports of Dessert Apples - Complaint by Chile (22 June 1989), BISD 36S/93, 133, para. 12.28.

155Gerald Fitzmaurice, The Law and Procedure of the International Court of Justice 1951-4: Treaty Interpretation and Other Treaty Points, 1957 Brit. Y.B. Int'l L. 236 (second emphasis added). Sir Gerald Fitzmaurice, K.C.M.Q., Q.C., was Legal Advisor to the Foreign Office.

156As will be discussed, the third Indonesian programme subject to complaint--established by the June 1996 decrees and regulations--is no longer in effect. By its terms it expired 30 June 1997 and has not been (and will not be) renewed.

157See Indonesia Exhibit 8. The schedule of incentives granted has been amended several times since 1993.

158See Indonesia Exhibit 9.

159See Indonesia Exhibit 10.

160See Indonesia Exhibit 1.

161See Indonesia Exhibit 9 and 3, respectively.

162See Indonesia Exhibit 5.

163See Indonesia Exhibit 2.

164The United States Government officially has recognized that the 1993 programme is a subsidy programme. In its April 1997 report entitled Indonesia's Automotive Market Summary, the US Department of Commerce declared that "[t]his policy [the February 1996 national car programme] represents a net increase in the amount of subsidy paid under the system". (Emphasis added.) See Indonesia Exhibit 11.

165Canada did not argue that its "funded" postal rates for certain periodicals was a subsidy under the terms of, and subject to the disciplines of, the Subsidies Agreement. This is a crucial distinction between the instant dispute and Canada-Certain Measures Concerning Periodicals, WT/DS31/R (14 March 1997).

166See Decree of the Minister of Finance No. 272/KMK.04/1995 (28 June 1995) at Indonesia Exhibit 10.

167See Indonesia Exhibit 1.

168The United States also argues that the August 1997 loan is inconsistent with Article III:4 of the General Agreement. However, as demonstrated above, the loan is not within the Panel's Terms of Reference and so should not be examined.

169Both the 1993 and February 1996 programmes impose the type of local content eligibility requirements contemplated by Article 3.1(b). The June 1996 programme does not, but is irrelevant because it already has ended.

170United States - Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R (20 May 1996) (p.23) footnote omitted). See also Japan - Taxes on Alcoholic Beverages, WT/DS/AB/R (4 October 1996) (p. 12); DSU, Article 3.2.

171In its Uruguay Round TRIMs submission of 6 February 1989, the United States recognized that certain GATT provisions (e.g., Article I) proscribe practices, while others (e.g., Article VI) remedy adverse trade effects (MTN.GNG/NG12/W/14 at pp. 12-13). GATT Article XVI and the Subsidies Agreement, like GATT Article VI, remedy trade effects of actionable subsidies.

172The import duty subsidies relate to border measures, not to internal laws subject to Article III:4 of the General Agreement. This renders much of Complainants' argumentation irrelevant.

173MTN.GNS/W/164 (3 September 1993) at p. 6 (emphasis added).