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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) The proper interpretation of Article III:8(b) of the GATT 1994 supports the view that Article III does not override the SCM Agreement

5.161 In Canada-Certain Measures Concerning Periodicals, WT/DS31/AB/R (30 June 1997), the Appellate Body discussed and ruled upon Article III:8(b). The facts of the dispute show that Canada did not argue that its funded postal rates programme was a subsidy under the criteria of Articles 1 and 2 of the Subsidies Agreement and, therefore, was subject to the disciplines and remedies of only that Agreement. Rather, Canada argued simply that its practice was excused (i.e., not subject to any discipline or remedies) by virtue of Article III:8(b) of the General Agreement.

5.162 The United States disagreed, arguing that the transfer of funds from one government entity to another did not fulfil the condition of Article III:8(b) regarding "the payment of subsidies exclusively to domestic producers." The Panel sided with Canada. The finding of the Panel with which the Appellate Body disagreed and which it reversed was:

Thus, we do not find that Canada Post retains any economic benefits from the "funded" rate scheme it applies to certain Canadian periodicals. The payment of the subsidy is made "exclusively" to Canadian publishers that qualify for the scheme. Since Article III:8(b) explicitly recognizes that subsidies exclusively paid to domestic producers are not subject to the national treatment rules of Article III, including those under Article III:4, we find that Canada's "funded" rate scheme on periodicals can be justified under this provision.174

5.163 In analysing the Appellate Body's discussion, one must consider the following facts. The Appellate Body was ruling on whether the government paid a subsidy exclusively to domestic producers and it was doing so in a dispute in which both parties focused solely on the General Agreement. The Appellate Body was not asked to decide and it did not address the question presented in this dispute, which is whether a subsidy permissible under the SCM Agreement (except to the extent it is proven to cause adverse trade effects) can still be proscribed as a violation of the national treatment principle of Article III of the General Agreement.

5.164 With this in mind, let us analyze the text, drafting history, context, and object and purpose of Article III:8(b). The Chairman of the Working Party that examined the provision that became Article III:8(b) explained the purpose of and need for the provision as follows:

This provision had been added to the Geneva draft [of the ITO Charter] because it was felt that if subsidies were paid on domestic and not on imported products it might be construed that Members were not applying the "national treatment" rule.175

At the Havana Conference, the Report of the Sub-Committee that examined Article 18 of the draft ITO Charter (the predecessor of Article III of the General Agreement) stated:

This sub-paragraph [Article III:8(b)] was redrafted in order to make it clear that nothing in Article 18 could be construed to sanction the exemption of domestic products from internal taxes imposed on like imported products or the remission of such taxes. At the same time the Sub-Committee recorded its view that nothing in this sub-paragraph or elsewhere in Article 18 would override the provisions of Section C of Chapter IV [on Subsidies.]176

Previous GATT panel reports addressing Article III:8(b) have focused on the first portion of this quotation from the Havana Reports. However, neither they nor the Appellate Body in Canada-Periodicals focused on or analyzed the portion emphasized above.

5.165 The panel report most relevant to this dispute is United States-Measures Affecting Alcoholic and Malt Beverages (19 June 1992), BISD 39S/206.177 There, the panel, as quoted by the Appellate Body in Canada-Periodicals, stated:

Article III:8(b) limits therefore the permissible producer subsidies to "payments" after taxes have been collected or payments otherwise consistent with Article III. This separation of tax rules, e.g. on tax exemptions or reductions, and subsidy rules makes sense economically and politically. Even if the proceeds from non-discriminatory product taxes may be used for subsequent subsidies, the domestic producer like his foreign competitors must pay the product taxes due. The separation of tax and subsidy rules contributes to greater transparency. It also may render abuses of tax policies for protectionist purposes more difficult, as in the case where producer aids require additional legislative or governmental decisions in which the different interests involved can be balanced.178

The full import of this statement is clear from the following finding of the United States-Measures Affecting Alcoholic and Malt Beverages Panel:

The words "payment of subsidies" refer only to direct subsidies involving a payment, not to other subsidies such as tax credits or tax reductions.179

5.166 One must note, however, that United States Alcoholic Beverages was decided prior to the completion of the Uruguay Round negotiations and, therefore, under the then-existing GATT regime. The Tokyo Round Subsidies Code did not contain an all-encompassing definition of subsidies. Its membership was limited to those Contracting Parties who chose to adhere and the relationship of the Code to the GATT was not expressed and was subject to differing views. Further, because the GATT and the Code were separate legal instruments, provisions of one could not be raised and analyzed by a panel in a dispute involving the other.

5.167 All of that changed with the entry into force of the WTO Agreements. Article 1 of the SCM Agreement identifies four types of subsidies: (i) direct transfer of funds; (ii) forgoing of revenue otherwise due; (iii) provision of goods or services at non-market prices; and (iv) payment to a funding mechanism directed by a private body. Only the first type is a "direct subsidy." All Members of the WTO adhere to both the General Agreement and the SCM Agreement and both agreements are integral parts of the Agreement Establishing the World Trade Organization (see Article II.2 thereof). Finally, dispute settlement panels are mandated to address the relevant provisions of all WTO agreements cited by the parties to a dispute. (Article 7.2 of the Dispute Settlement Understanding.)

5.168 Under these circumstances, general rules of treaty interpretation require rethinking the scope of Article III:8(b). Under the WTO, "the payment of subsidies" language in Article III.8(b) must refer to all subsidies identified in Article 1 of the SCM Agreement, not merely to the subset of "direct" subsidies. This interpretation, and only this interpretation, avoids rendering the SCM Agreement meaningless. Under this interpretation, any and all subsidies provided exclusively to domestic producers are not governed by the national treatment principle of Article III of the General Agreement (which by definition they could not meet). Rather, subsidies that fall within the scope of Articles 1 and 2 of the SCM Agreement and that are actionable under Articles 5 and 6, are subject only to the disciplines of Article 7 of the SCM Agreement and, even then, only if they cause adverse effects to the interests of other Members.

(e) In a conflict between the SCM Agreement and Article III of the GATT 1994, the SCM Agreement Prevails

5.169 The "General interpretative note to Annex 1A" of the Agreement Establishing the World Trade Organization states:

In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A to the Agreement Establishing the World Trade Organization (referred to in the agreements in Annex 1A as the "WTO Agreement"), the provision of the other agreement shall prevail to the extent of the conflict.

The Report of the Panel in European Communities-Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/USA (22 May 1997), defines "conflict" as follows:

As a preliminary issue, it is necessary to define the notion of "conflict" laid down in the General Interpretative Note. In light of the wording, the context, the object and the purpose of this Note, we consider that it is designed to deal with (i) clashes between obligations contained in GATT 1994 and obligations contained in agreements listed in Annex 1A, where those obligations are mutually exclusive in the sense that a Member cannot comply with both obligations at the same time, and (ii) the situation where a rule in one agreement prohibits what a rule in another agreement explicitly permits .

However, we are of the view that the concept of "conflict" as embodied in the General Interpretative Note does not relate to situations where rules contained in one of the Agreements listed in Annex 1A provide for different or complementary obligations in addition to those contained in GATT 1994. In such a case, the obligations arising from the former and GATT 1994 can both be complied with at the same time without the need to renounce explicit rights or authorizations. In this latter case, there is no reason to assume that a Member is not capable of, or not required to meet the obligations of both GATT 1994 and the relevant Annex 1A Agreement. (Emphasis added; footnote omitted.)

5.170 If the Panel were to conclude that it cannot reconcile the coverage and disciplines of the SCM Agreement and Article III of the General Agreement (either by reason of general rules of treaty interpretation or through interpretation of Article III:8(b)), then a "conflict" would exist between the Subsidies Agreement and Article III of the General Agreement. By virtue of the General Interpretative Note, the provisions of the Subsidies Agreement would prevail.

5.171 The SCM Agreement permits Indonesia, as a developing country, to subsidize the luxury tax rate unless those subsidies are proven to cause adverse trade effects. Article III of the GATT 1994, on the other hand, would proscribe these subsidies on the ground that they denied national treatment under the terms of Article III:2. Adverse trade effects would not need to be proven. In other words, the SCM Agreement explicitly permits what Article III of the GATT 1994 would prohibit. Indonesia's obligations under the two provisions would be mutually exclusive. One simply could not apply the general prohibition of Article III:2 and, at the same time, provide Indonesia its explicit rights under the SCM Agreement regarding the proof of adverse effects. This falls squarely within the definition of "conflict" in the General Interpretative Note. Hence, the provisions of the SCM Agreement (an "Annex 1A Agreement") would prevail over Article III of the General Agreement.

5.172 Article III:4 of GATT 1994 also conflicts with the SCM Agreement insofar as it prohibits measures which the SCM Agreement does not prohibit. Take, for example, a law that provides assistance to an industry in a disadvantaged region (meeting the requirements Article 8.2(b) of the SCM Agreement) or other "greenlight" subsidies. This subsidy is permitted by the SCM Agreement, but would violate Article III:4, if it applied. A similar conflict arises in the instant case, where the SCM Agreement, as Indonesia has demonstrated, permits the measures which complainants argue violate Article III:4. Also, even if complainants were correct, a conflict would exist and only the SCM Agreement would apply.

(f) The SCM Agreement defines subsidies and sets out all of the rights and obligations pertaining to them

5.173 Articles 1 through 9 of the SCM Agreement comprehensively set out the definitions of, disciplines on and remedies for subsidies. The SCM Agreement covers all subsidies. If a subsidy is one of the two types of subsidies identified in Article 3, it is a prohibited subsidy. If a subsidy is one of the four types of subsidies identified in Article 8, it is a non-actionable subsidy. If a subsidy is specific within the meaning of Article 2, but neither prohibited under Article 3 nor non-actionable under Article 8, it falls into the residual category of actionable subsidies.

5.174 Also, the Subsidies Agreement covers all remedies for subsidies, with Article 27 providing special and differential treatment of developing country Members. If a subsidy is a prohibited subsidy, a complainant must prove the existence of a prohibited subsidy and the remedy is that the Member "withdraw the subsidy without delay" (Article 4.7). If a subsidy is an actionable subsidy, including an otherwise prohibited subsidy granted or maintained by a developing country, a complainant must prove the existence of a subsidy within the meaning of Articles 1 and 2 and adverse effects to the complainant's interests through the use of that subsidy (Article 5). The remedy is that the Member "shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy." (Article 7.8). Procedures and remedies for certain non-actionable subsidies are set forth at Article 9.

(g) The definition of "subsidy" in the SCM Agreement is all-encompassing, contrary to the United States assertion

5.175 To support its argument that the definition of subsidy in the SCM Agreement is not all-encompassing, the United States cites Article 1.1 of the SCM Agreement as stating that the definition is "[f]or the purpose of this Agreement".

5.176 First, the United States' attempt to use this language to confine the definition ignores the fact that all WTO agreements are part of a unitary whole. The SCM Agreement is part of the family of WTO agreements. Article II:2 of the Agreement Establishing the World Trade Organization states that "[t]he agreements and associated legal instruments included in Annexes 1, 2 and 3 ¼ are integral parts of this Agreement, binding on all Members." Prior to the entry into force of the WTO Agreements, no international legal definition of subsidy existed. There was no all-encompassing structure of definitions, disciplines and remedies, and the Subsidies Code applied to only a small number of GATT Contracting Parties. With the entry into force of the WTO agreements, the SCM Agreement's definition of subsidy became the sole definition of subsidy for the family of WTO agreements.

5.177 Second, the United States fails to (and cannot) provide an alternative definition of subsidy. Finally, the measures at issue clearly fall within the definition of "subsidy" set out at Articles 1.1(a)(1)(ii) and 2 of the SCM Agreement. (See Sections V.D.1 and VIII.A.1 and 2).

(h) Article VI:5 of the GATT 1994 Is Irrelevant and Serves to Limit a Complainant's Unilateral Remedy

5.178 The United States cites GATT Article VI:5 to support its argument that the SCM Agreement was not intended to be the exclusive remedy against measures that can be characterized as subsidies. (See Section V.E.3) However, Article VI:5 is irrelevant to this case. It has nothing to do with whether a subsidy can be granted by the host country (i.e., whether the obligations of Article III of the General Agreement apply as well as those of the SCM Agreement) or, for that matter, with subsidies at all. Rather, it prevents the authorities of an importing country from double counting when imposing duties under domestic anti-dumping or countervailing duty laws.180

(i) The United States' interpretation of Article 32.1, footnote 56, of the SCM Agreement is flawed

5.179 The United States cites footnote 56 of Article 32 of the SCM Agreement as indicating that the drafters did not intend for the Agreement to be the exclusive remedy against measures within the Agreement's definition of subsidy (See Section V.E.3), and thus there is no "conflict" between the SCM Agreement and the General Agreement. This interpretation is incorrect. Article 32.1 and footnote 56 were taken verbatim from the Tokyo Round Subsidies Code, in which they appear as Article 19.1 and footnote 38. A companion article and footnote appear in the Tokyo Round Anti-Dumping Code. Only the reference to "dumping", as opposed to "subsidy", differs.181 Thus, it is clear that the drafters of the Tokyo Round Codes considered that these articles and their footnotes applied to actions by authorities of importing countries under domestic countervailing duty or anti-dumping laws. In this context "other relevant provisions" of the General Agreement refers to other permissible actions by importing authorities, such as safeguard actions under Article XIX of the General Agreement, which are "appropriate" when the conditions for application of that remedy are satisfied.

5.180 There are two additional reasons why the United States' argument is flawed. First, the United States' argument ignores the significance of the words "relevant" and "where appropriate" in footnote 56:

This paragraph is not intended to preclude action under other relevant provisions of GATT 1994, where appropriate. (Emphasis added.)

The United States ignores the very text it seeks to interpret. Other GATT provisions are not "relevant" and, moreover, action under other GATT provisions is not "appropriate" and therefore is precluded, because the measures at issue are clearly covered by the SCM Agreement, which also provides remedies for them.

5.181 Second, Article 32.1 itself states:

No specific action against a subsidy of another Member can be taken except in accordance with the provisions of GATT 1994, as interpreted by this Agreement. (Emphasis added; footnote omitted.)

The words "as interpreted by this Agreement" confirm the supremacy of the SCM Agreement in defining and providing remedies for subsidies.

(j) Indonesia's right, as a developing country, to maintain domestic-content subsidies Is subject only to Indonesia's obligation not to cause serious prejudice to a like product.

5.182 Because Indonesia is a developing country Member, "[t]he prohibition of paragraph 1(b) of Article 3 shall not apply ¼ for a period of five years ¼ from the date of entry into force of the WTO Agreement [i.e., until 1 January 2000]" to its domestic-content subsidies (Article 27.3). Instead, Articles 5 through 7 apply. No Complainant has, as required by Article 6, demonstrated by positive evidence that the domestic-content subsidies result in "serious prejudice" to a like product. (See Section VIII.B.)

(k) The application to this dispute of Article III of the GATT 1994, as complainants advocate, would render the SCM Agreement meaningless

5.183 If Article III:2 were to proscribe actionable subsidies that are not proven to cause adverse effects, the provisions of the Subsidies Agreement regarding actionable subsidies would be rendered meaningless.

(1) Virtually all subsidies are intended to, and actually do, benefit only domestic products

5.184 Under the SCM Agreement, with regard to an actionable subsidy, a complainant must prove both the existence of a subsidy within the meaning of Articles 1 and 2 and adverse effects to the complainant's interests through the use of that subsidy (Article 5). In contrast, according to Article 3.8 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) as well as long-standing GATT practice, a measure infringing upon Article III:2 of the General Agreement is proscribed outright. Under Article III:2, an imported product shall not be subject to an internal tax in excess of that applied to a like domestic product. A complainant need not prove adverse effects to its interests resulting from that measure.

5.185 By definition, subsidies discriminate against 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 virtually always the case, the subsidy would violate the national treatment requirement of Article III if that obligation were applicable.

(2) Under complainants' interpretation, Indonesia's luxury tax subsidies would be condemned solely because of their discriminatory nature and the European Communities and United States would not have to show serious prejudice

5.186 The subsidy provided under the 1993 Incentive Programme benefits passenger sedans with an engine capacity of less than 1600cc and an Indonesian content of more than 60 per cent. In contrast, imported passenger sedans with an engine capacity of less than 1600cc and an Indonesian content of more than 60 per cent are subject to a non-subsidized luxury tax rate that is in excess of the subsidized rate. Under the February 1996 National Car Programme, a 1500cc Timor S515 that meets the applicable local content level is not subject to the luxury tax, whereas a similar imported car would be subject to a non-subsidized luxury tax rate in excess of the subsidized rate.

5.187 If Article III:2 were applied instead of the SCM Agreement, Indonesia's luxury tax subsidies would be condemned solely because of their inherently discriminatory nature. The European Communities and the United States would not have to meet the SCM Agreement's requirement of proving serious prejudice.

To Continue with Conversely, Indonesia's interpretation does not render Article III useless.


174WT/DS31/R (14 March 1997) (para. 5.44).

175E/CONF.2/C.3/A/W.49, p. 2.

176Report of Committees and Principal Sub-committees, United Nations Conference on Trade and Employment, held at Havana, Cuba from 21 November 1947 to 24 March 1948, ICITO I/8 (September 1948) at 66, para. 69 (emphasis added).

177Two other reports discussing Article III:8(b) are not of value in this dispute because they address whether a subsidy was indeed paid exclusively to domestic producers, a fact not at issue in this dispute. Italian Discrimination Against Imported Agricultural Machinery (23 October 1958), BISD 7S/60; and European Economic Community-Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins (25 January 1990), BISD 37S/86. The US erroneously claims that the requirement set out in Italian Machinery is not met with regard to what they term Indonesia's tariff and tax incentives for automotive parts and subparts. (See Section V.E.3(b)). As discussed in the next section of this submission, subsidized customs import duties are border measures, not internal measures, and therefore are not within the scope of Article III. The luxury tax subsidy applies to assembled automobiles and is provided exclusively to the producers or assemblers, thereby fulfilling the criterion set out in Italian Machinery. United States-Measures Affecting the Importation, Internal Sale and Use of Tobacco (12 August 1994), DS44/R, also is not relevant. There, the complaining parties sought unsuccessfully to use Article III:8(b) to argue that United States producers (but not importers) benefitted from a subsidy derived from the proceeds of an internal tax which was not within the scope of Article III:8(b) but was in violation of Article III:2.

178BISD 39S/206 (para 5.10 at p. 272)(emphasis added).

179Id. at p. 271-72, para. 5.8 (emphasis added).

180In situations in which the granting of a subsidy leads to an export price that is below "normal value" (the comparable price for the like product when destined for consumption in the home country's market), the authorities of the importing country could, absent Article VI:5, impose both anti-dumping and countervailing duties. Article VI:5 prevents this.

181The text of Article 16.1 of the Anti-Dumping Code and footnote 16 follow (with differing text, from Article 19.1 and footnote 38 of the Subsidies Code, included within brackets).

Article 16.1: "No specific action against dumping of exports from another Party [a subsidy of another signatory] can be taken except in accordance with the provisions of the General Agreement, as interpreted by this Agreement."

Footnote 16: "This is not intended to preclude action under other relevant provisions of the General Agreement, as [where] appropriate."