5.188 Indonesia's interpretation that subsidies that meet the criteria of Articles 1 and 2 of the SCM Agreement are governed solely by the SCM Agreement is the only reasonable interpretation of the relationship between subsidies and Article III that would not render crucial provisions of the SCM Agreement meaningless. Moreover, contrary to Complainants' assertions, Indonesia's interpretation does not render Article III useless, but confines Article III to its appropriate sphere.

(1) A "conflict" exists - Article III of the General Agreement and the SCM Agreement are mutually exclusive and cannot be applied simultaneously; the obligations of the SCM Agreement are not additional, supplementary or complementary to Article III of the GATT 1994

5.189 According to the Panel in European Communities-Regime for the Importation, Sale and Distribution of Bananas, a "conflict" exists when:

5.190 A "conflict" does not exist when rules in an Annex 1A Agreement provide for different or complementary obligations in addition to those in GATT 1994 because the Annex 1A and GATT 1994 obligations "can both be complied with at the same time without the need to renounce explicit rights or authorizations."¹⁸³

5.191 Contrary to the assertions of the European Communities and Japan (See Sections V.E.1 and 2), Indonesia's GATT 1994 and SCM Agreement obligations are mutually exclusive because they cannot "both be complied with at the same time without the need to renounce [the] explicit right[] or authorization[]" to maintain the subsidies at issue absent serious prejudice to a like product. Furthermore, Article III would "prohibit" what the SCM Agreement "permits". The SCM Agreement specifically does not prohibit developing countries from granting a subsidy involving differential internal tax treatment on products. On the other hand, Article III:2 of GATT 1994 prohibits such differential tax treatment on products. Thus, a conflict clearly exists in the instant case.¹⁸⁴

5.192 In Bananas III, the Panel specifically addressed the type of conflict which exists in the instant case in an example dealing with the relationship between Article XI and the Agreement on Textiles and Clothing (ATC):

5.193 Contrary to Japan's assertion (See Section V.E.1(3)(c)), the relationship between Article III and the SCM Agreement is analogous to the relationship between Article XI and the ATC - a conflict exists regardless of whether Indonesia "could theoretically comply with" both Article III and the SCM Agreement "simply by refraining from invoking the right" to maintain the subsidies at issue absent serious prejudice to a like product. This is because the SCM Agreement "authorizes rather than mandates" maintenance of such subsidies. Finding that a conflict does not exist "would render" the provisions of the SCM Agreement regarding actionable subsidies "meaningless."

5.194 Furthermore, such a finding would "run counter to the object and purpose" of the SCM Agreement. Special and differential treatment of developing country Members is one of the objects and purposes of the Subsidies Agreement as evidenced by Article 27, which details that treatment, and by the language of Article 27.1 ("Members recognize that subsidies may play an important role in economic development programmes of developing country Members.").

5.195 The Panel in Bananas III recognized that "many agreements listed in Annex 1A ¼ were negotiated with the intent to create rights and obligations which in parts differ substantially from those of the GATT 1994." Indonesia's right to maintain the subsidies at issue absent serious prejudice to a like product is precisely this type of right. It "differ[s] substantially from those of the GATT 1994" and it is part of the compromise negotiated between the developed and the developing countries.

5.196 The DSU prohibits the diminishment of Indonesia's right to maintain the subsidies at issue absent serious prejudice to a like product. "Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements." (DSU Article 3.2.) Furthermore, the DSU not only prohibits the nullification or impairment of Indonesia's benefits, it prohibits the impedance of an objective of the Subsidies Agreement expressed in Article 27.1 ("Members recognize that subsidies may play an important role in economic development programmes of developing country Members".). "All solutions to matters formally raised under the consultation and dispute settlement provisions of the covered agreements ¼ shall not nullify or impair benefits accruing to any Member under those agreements, nor impede the attainment of any objective of those agreements" (DSU Article 3.5).

5.197 The United States wrongly criticizes the Panel in Bananas III and Indonesia for not fully supporting the proposition that a conflict exists if obligations are not mutually exclusive. (See Section V.E.3). First, as discussed above, the obligations are mutually exclusive. Furthermore, the negotiating history of the SCM Agreement supports the view that a conflict exists where a "right" granted by one Agreement is "precluded" by a provision in another Agreement. Annex 1A Agreements, including the SCM Agreement, were "negotiated with the intent to create rights and obligations which in parts differ substantially from those of the GATT 1994."¹⁸⁶ The opposite view, as discussed above, "would render whole Articles or sections of Agreements covered by the WTO meaningless and run counter to the object and purpose of many agreements listed in Annex 1A."¹⁸⁷

(2) Paragraph 8(b) of Article III of the GATT 1994 is inapposite, except clarifying that Article III applies to discriminatory internal taxes on like products

5.198 Article III applies to discriminatory internal taxes on like products. The import duty subsidies are border measures, not internal measures, and therefore are outside the scope of Article III. (See Section V.F.1). The luxury tax subsidy is provided exclusively to producers or assemblers of automobiles and therefore is allowed under Article III:8(b) and is in accordance with Italian Discrimination Against Imported Agricultural Machinery.¹⁸⁸ The European Communities's and Japan's arguments regarding the interpretation of Article III:8(b) in United States-Measures Affecting Alcoholic and Malt Beverages¹⁸⁹ and Canada-Certain Measures Concerning Periodicals¹⁹⁰ are addressed in Section V.D.2. Moreover, even if the Panel finds that the luxury tax subsidy is not allowed under Article III:8(b), there is still no like product in the instant case. In quoting the report of the Sub-Committee of the Havana Conference, the European Communities itself recognizes that there must be a like product. Article III:8(b) was redrafted "in order to make it clear that nothing in Article [III] could be construed to sanction the exemption of domestic products from internal taxes imposed on like imported products or the remission of such taxes."¹⁹¹

(m) Complainants' assertion that the SCM Agreement cannot be lex specialis because, if it were, generally available and Article 8 subsidies would not be constrained, is incorrect

5.199 The example made by the United States (See Section V.E.3(a)(2)) involves differential internal taxation subject to Article III and is irrelevant to the instant case. The import duty subsidies are not internal measures (See Section V.F.1.), the luxury tax subsidy is allowed under Article III:8(b) and there are no like products involved in the instant case.

(n) Even if the United States example were relevant, the point the United States seeks to advance is incorrect as a matter of law-the SCM Agreement addresses generally available and other Article 8 subsidies

5.200 Articles 1 through 9 of the SCM Agreement are comprehensive and explicit in setting out the definitions of, disciplines on and remedies for subsidies. The absence of an SCM Agreement remedy for non-specific subsidies, such as the one described by the United States, does not indicate that the SCM Agreement fails to provide an all-encompassing structure of remedies. Instead, this absence is part of that all-encompassing structure of remedies. The detail and explicitness of the remedy provisions of the SCM Agreement indicate that this result was intended by the drafters. In particular, the remedy provisions of Article 9 clearly do not apply to non-specific subsidies (Article 8.1(a)), only to other non-actionable subsidies (Article 8.1(b)). In any event, the United States example is irrelevant in the instant case because the measures at issue are actionable subsidies.

(o) Japan's and the United States' claims that Indonesia's measures violate Article III:2, second sentence are incorrect

5.201 Japan's and the United States' claims that Indonesia's measures violate Article III:2, second sentence are incorrect. The SCM Agreement is lex specialis and, in the alternative, insofar as a conflict exists, controls the resolution of this dispute, including claims under Article III:2.

(p) Japan's view that Indonesia's argument renders the General Interpretive Note meaningless is incorrect

5.202 Japan argues that "Indonesia's 'lex specialis' theory would render the General Interpretative Note completely unnecessary and would severely weaken the GATT's fundamental obligations". (See Section V.E.1). Japan has mischaracterized Indonesia's position.

5.203 Indonesia's lex specialis argument does not "render the General Interpretative Note completely unnecessary." Rather, Indonesia's argument is supported by the General Interpretative Note. Because a "conflict" exists, the General Interpretative Note mandates that the provisions of the Subsidies Agreement "prevail to the extent of the conflict." Nor do any of Indonesia's arguments "severely weaken the GATT's fundamental obligations." As discussed above, Indonesia's interpretation that subsidies that meet the criteria of Articles 1 and 2 of the SCM Agreement are solely governed by the SCM Agreement is the only reasonable interpretation of the relationship between subsidies and Article III that would not render the SCM Agreement meaningless. This interpretation does not "severely weaken" Article III, but confines Article III to its appropriate sphere.

(q) Parts and components are not "indirectly" taxed in excess of like domestic goods

5.204 Parts and components are not "indirectly" taxed in excess of "the like domestic goods". First, there are hardly any "like" parts and components. Second, importers of these parts and components continue to pay the tax in a direct manner and in the amounts and at the rates they have been paying for years. Not receiving benefits received by another company does not at all, either directly or indirectly, increase the tax on parties that do not receive the benefit.

E. Rebuttals to Indonesia's general response to the claims raised under Article III of GATT 1994

1. Rebuttal arguments of Japan

5.205 The following are Japan's arguments rebutting Indonesia's general defence to the claims raised under Article III of GATT 1994:

5.206 Indonesia argues that GATT Article III does not apply to this dispute. That view is wrong, however.

5.207 Regarding the luxury tax exemption, while Indonesia has not made other counter-arguments, such as those it has made concerning the import duty exemption. Therefore, it is undisputed that the local content requirement, at least in connection with the luxury tax exemption, constitutes a prima facie violation of GATT Article III:4 by treating domestic parts and components more favourably than like imports and the only question is whether the application of GATT Article III:4 to the luxury tax exemption is denied by virtue of the SCM Agreement.

5.208 Indonesia argues that its measures in question are actionable subsidies under the SCM Agreement, and specifically that they are subsidies contingent on the use of domestic products that would be prohibited by SCM Article 3.1(b) but are made actionable instead by virtue of Article 27.3. There is no dispute that Indonesia's discriminatory tax policies fall within the SCM Agreement's definition of "subsidy" and they are actionable on a transitional basis under part III of the SCM Agreement. The only implication of this analysis is that, under the SCM Agreement, such subsidies are subject to the remedial provisions stipulated by Article 7, just like other subsidies including tax exemptions on domestic products actionable under the SCM Agreement, instead of Article 4, which provides the extremely expeditious procedures for prohibited subsidies. Therefore, the issue is whether the national treatment obligations of GATT Article III also apply to actionable subsidies.

5.209 Indonesia further argues that the national treatment obligations of GATT Article III do not apply to actionable subsidies, regardless of their nature, contending that such subsidies are governed solely by the SCM Agreement. In order to support that position, Indonesia mentioned four main arguments in its First Submission: the SCM Agreement is the lex specialis for "subsidies" within its definition; applying GATT Article III:2 to "subsidies" would reduce the SCM Agreement to inutility; GATT Article III and the SCM Agreement "conflict" with each other; and GATT Article III:8(b) should be "re-thought" in light of the SCM Agreement.

5.210 None of Indonesia's arguments have merit. Both GATT Article III and the SCM Agreement are applicable to the National Car Programme, there is no "conflict" between them, and GATT Article III prohibits the Indonesian measures. To accept Indonesia's argument, that is, to fail to apply GATT Article III:2 to "subsidies" would render one of the GATT's core provisions meaningless. Under Indonesia's interpretation, discriminatory imposition of internal taxes would be allowed in the name of "subsidy", but that would deprive Article III:2 of all life and purpose, because its sole function is to prohibit the discriminatory imposition of internal taxes. The following discussion demonstrates the flaws in the arguments made by Indonesia to support its incorrect theory of the relationship between GATT Article III and the SCM Agreement.

(a) Indonesia's lex specialis argument does not have any merit

5.211 Indonesia argues that "[t]his dispute involves subsidies and so is governed by the [SCM] Agreement, and not by the [GATT] or the [TRIMs Agreement]". Indonesia further argues that 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". (See Section V.D.)

(1) Indonesia's lex specialis argument is unsupported

5.212 Indonesia's lex specialis argument lacks any legal foundation. Indonesia essentially concedes this by failing in its First Submission to cite a single textual provision in support of its assertion that only the SCM Agreement applies to discriminatory tax breaks and other subsidy measures. This failure is unsurprising, of course, because there simply is no WTO rule that provides for specific agreements, such as the SCM Agreement, to apply to the complete exclusion of general WTO obligations, such as national treatment. The lack of textual support alone is enough to reject Indonesia's position¹⁹², but it is only compounded by the further absence from Indonesia's arguments of any citation to the drafting history, a Panel decision, or even a treatise in its support.

(2) Indonesia's lex specialis argument is wrong

5.213 Indonesia's lex specialis argument is also wrong. It is inconsistent with the text of the WTO Agreements.

5.214 As mentioned, no WTO rule provides for specific agreements to apply to the complete exclusion of general WTO obligations. To the contrary, the WTO Agreements expressly provide for a different - and much narrower - rule of law. Specifically, the General Interpretative Note to Annex 1A of the Agreement Establishing the WTO (the "General Interpretative Note") provides:

5.215 The existence of the General Interpretative Note thoroughly undermines Indonesia's lex specialis argument. The General Interpretative Note explicitly specifies the consequences if a "conflict" should arise between the GATT and certain other agreements, including the SCM Agreement, and it provides for preemption only "to the extent of the conflict." But if the SCM Agreement were the lex specialis that applied to the complete exclusion of the GATT, as Indonesia argues, then no "conflict" could ever occur between the two. It is obvious that the WTO Membership, by adopting the General Interpretative Note, formally acknowledged the possibility of "conflict". Thus, the General Interpretative Note, by its very existence, disproves Indonesia's lex specialis theory.

5.216 In addition, Indonesia's theory is disproved by the existence of footnote 56 to the SCM Agreement, which specifies that the SCM Agreement does not "preclude action under other relevant provisions of GATT 1994, where appropriate." As with the General Interpretative Note, footnote 56 definitively shows that the SCM Agreement does not apply to the complete exclusion of the GATT.¹⁹³

5.217 Indonesia asserts that the SCM Agreement creates the "sole definition of subsidy for the family of WTO Agreements". However, there is no reason to ignore the plain language of Article 1.1 of the SCM Agreement, which expressly states that the definition is "for the purpose of this Agreement". One should interpret that article in good faith in accordance with the ordinary meaning to be given to its terms, as the Vienna Convention guides us to do.

5.218 Indonesia also claims its "right as a developing country to maintain domestic-content subsidies" absent serious prejudice to a like product. As mentioned already, the measures in question are not prohibited under the SCM Agreement, but made actionable on a transitional basis by virtue of SCM Article 27.3. However, this does not mean that developing countries are granted rights for exemption not only from SCM Article 3.1(b) but also from all other WTO provisions, including GATT Article III. In the context of discriminatory imposition of internal taxes, the measures in question are at the same time subject to GATT Article III.

To Continue with Indonesia's lex specialis argument has seriously damaging implications.

¹⁸²European Communities-Regime for the Importation, Sale and Distribution of Bananas (22 May 1997), WT/DS27/R/USA, 321, para. 7.159.

¹⁸³Id. at para 7.160 (emphasis added).

¹⁸⁴The European Communities and Japan also argue that the Subsidies Agreement does not explicitly authorize or permit Indonesia to apply discriminatory measures prohibited by Article III. As discussed, the measures at issue are not prohibited by Article III. The European Communities emphasizes the word "explicitly", implying that the Subsidies Agreement is not explicit enough. Yet the Subsidies Agreement is explicit enough that the EC itself admits that "Indonesia is 1/4 authorised to grant 'subsidies' under certain conditions." Those conditions are the absence of serious prejudice to a like product and they are met in the instant case.

¹⁸⁵ European Communities-Regime for the Importation, Sale and Distribution of Bananas (22 May 1997), WT/DS27/R/USA, 321, n. 403 (emphasis added).

¹⁸⁶ See European Communities-Regime for the Importation, Sale and Distribution of Bananas (22 May 1997), WT/DS27/R/USA, 321, n. 403.

¹⁸⁷ See id.

¹⁸⁸ Italian Discrimination Against Imported Agricultural Machinery (23 October 1958), BISD 7S/60.

¹⁸⁹ United States-Measures Affecting Alcoholic and Malt Beverages (19 June 1992), BISD 39S/206.

¹⁹⁰ Canada-Certain Measures Concerning Periodicals (30 June 1997), WT/DS31/AB/R.

¹⁹¹ Report 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).

¹⁹²See Vienna Convention on the Law of Treaties, art. 31; See also, United States - Standards for Reformulated and Conventional Gasoline ("US - Gasoline"), WT/DS2/AB/R, adopted on 20 May 1996, pp. 16-17.

¹⁹³Vienna Convention on the Law of Treaties, art. 26.