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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)


(7) Indonesia's interpretation would lead to an unjustified relaxation of the rules on tax discrimination existing under GATT 1947, contrary to the object and purpose of the WTO Agreement

5.291 The WTO Agreement is premised on the preservation of the level of trade liberalization already achieved under GATT 1947. This is apparent already from the Preamble to the WTO Agreement, which reads in pertinent part as follows:

Resolved, therefore, to develop an integrated, more viable and durable multilateral trading system encompassing the General Agreement on Tariffs and Trade, the results of past trade liberalization efforts, and all of the results of the Uruguay Round of Multilateral Trade Negotiations,

Determined to preserve the basic principles and to further the objectives underlying this multilateral trading system.

5.292 The same objective of preserving the GATT "acquis" also underlies the incorporation into GATT 1994 of the text of GATT 1947, together with all the legal instruments adopted under that agreement230, as well as the provision made in Article XVI.1 of the WTO Agreement to the effect that the WTO shall be guided by the "decisions, procedures and customary practices" followed under GATT 1947, except as otherwise provided.

5.293 For that reason, the instances where the WTO Agreement permits measures which would have been contrary to GATT 1947 are few and exceptional. Such derogations have generally a temporary character and/or are restricted to areas where the GATT 1947 was not enforced de facto (e.g. the textile sector now covered by the Agreement on Textiles and Clothing) and/or where the applicability of the GATT 1947 was unclear or at least had been disputed by some Members (e.g. in the case of TRIMs now covered by the TRIMs Agreement or in the case of VERs and other "grey area" import restrictions now expressly subject to the Agreement on Safeguards).

5.294 In contrast, Indonesia's lex specialis argument would lead, if accepted by the Panel, to the permanent nullification of a basic GATT rule which was largely non controversial under GATT 1947 and which was never the subject of specific discussions during the Uruguay Round.

5.295 Under GATT Article III:2, first sentence, the application of an internal tax to an imported products "in excess of" that applied to a like domestic product is always prohibited. This prohibition is not conditional on a trade effects test nor is it qualified by a de minimis standard. As noted by the Appellate Body in Japan - Taxes on Alcoholic Beverages, "even the smallest amount of 'excess' is too much".231

5.296 If the SCM Agreement excluded the application of Article III:2 to subsidies, tax discrimination between like products would no longer be prohibited232. Instead, the complainant would have to prove that the measure causes "adverse effects" to its interests.233 Furthermore, if the tax exemption or reduction was granted to all domestic producers, it could not be considered as a "specific" subsidy within the meaning of Article 2 of the SCM Agreement and, therefore, would no be "actionable" at all.234

5.297 The consequences would be even less acceptable in the case of Article III:2, second sentence. In accordance with that provision, a Member is prevented from applying different taxes to two products which are "directly competitive or substitutable" so as to afford protection to its domestic production. Thus, for example, two previous Panels (one under GATT 1947235 and one under GATT 1994236) have found that by applying a lower excise tax to local shochu than to imported whisky (a competing product) Japan afforded protection to its domestic production of shochu, thereby infringing GATT Article III:2, second sentence. If Indonesia's lex specialis argument prevailed, Japan could argue that the tax differential constitutes a subsidy to its domestic shochu producers, which is therefore subject to the SCM Agreement and not to GATT Article III. Yet, the SCM Agreement is concerned only with the "adverse effects" caused by a subsidy with respect to imports of a "like product". It provides no remedy in those cases where the subsidy causes "serious prejudice" to a competing importing product.237 Thus, Indonesia's argument would have the consequence that a tax system which has already been condemned twice would have to be tolerated in the future.238

(b) There is no conflict between GATT Article III and the SCM Agreement

5.298 In the alternative, Indonesia argues that the Panel should find that there is a "conflict" in the sense of the General Interpretative Note to Annex 1 A between the SCM Agreement and GATT Article III.

5.299 As recalled pertinently by Japan (See Section V.E.1), the drafting history of that Note indicates clearly that the term "conflict" must be interpreted narrowly. The drafters distinguished consciously that notion from broader notions such as "inconsistency" or mere "difference". There was a general consensus among the negotiators that in practice the application of the rule laid down in the Note should be restricted to the very limited number of instances in which the obligations under the GATT and another Annex 1A agreement are truly irreconcilable. Clearly, the present case is not one of those instances.

5.300 As noted by the Panel Report on EC - Regime for the Importation, Sale and Distribution of Bananas, there is no "conflict" where, as in the present case:

... the rules contained in one of the Agreements listed in Annex 1A provide for different or complementary obligations in addition to those contained in GATT 1994.239

5.301 Instead, according to that Panel report, the concept of "conflict" is designed to deal with the following two situations:

... (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 permits240[emphasis added].

5.302 None of these two situations occurs in the present case.

5.303 Clearly, Indonesia is not subject to two mutually exclusive obligations, because there is nothing in the SCM Agreement which requires Indonesia to grant the subsidies at issue.

5.304 Nor does the SCM Agreement "permit explicitly" what the GATT Article III prohibits. In cannot be considered that a provision in an Annex 1A Agreement "permits explicitly" what GATT prohibits unless it states in positive terms a right to do it (e.g. "Members may apply or maintain measure X"), as opposed to merely abstain from prohibiting it. In addition, there must be identity between the prohibited measures and the explicitly permitted measures. An incidental overlap between two provisions which focus on two different types of measures does not constitute a "conflict". As shown below, none of these two conditions is met in the present case.

5.305 By its own words, Article 27.3 of the SCM Agreement is limited to stipulate a temporary exception to the prohibition contained in Article 3.1 (b) of the same agreement in favour of developing Members. It does not "authorise explicitly" developing Members to deviate from any other obligation, either in the SCM Agreement, such as Article 5, or in other agreements, such as GATT Articles III:2 and III:4.

5.306 From the mere fact that Article 3 of the SCM Agreement does not prohibit a certain type of subsidies, it cannot be inferred a contrario that Members have an "explicit right" to grant that type of subsidies in violation of a different obligation contained in another agreement, such as GATT Article III. For instance, the fact that Article 3 of the SCM does not prohibit the granting of subsidies in the form of an exemption from an indirect tax only for domestic goods (irrespective of their local content level), does not mean that Members have been granted thereby an "explicit authorization" to tax imported products in excess of domestic like products, contrary to the prohibition contained in GATT Article III:2. By the same token, the fact that Article 3.1(b) juncto Article 27.3 of the SCM Agreement does not prohibit, on a temporary basis, the granting of local content subsidies by developing Members cannot be construed as an "explicit authorization" for those Members to violate GATT Articles III:2 and III:4.

5.307 Article 5 of the SCM Agreement lays down an obligation not to cause "adverse effects" through the granting of "actionable subsidies". Clearly, this does not amount to an "explicit authorization" to take any measure which may be characterized as an "actionable subsidy" and which does not cause "adverse effects", even if such measure is contrary to the provisions of GATT.

5.308 Finally, Article 8 of the SCM Agreement provides that certain types of subsidies shall be considered as non-actionable. This means simply that those subsidies are non-actionable under Parts III or V of the SCM Agreement. It does not mean that Members have an "explicit right" to take measures which violate GATT Article III.

5.309 Furthermore, in the present case there can be no "conflict" because the required identity between the prohibited and the allegedly permitted measures does not exist. Article III prohibits measures which discriminate between imported and domestic products, whereas the measures allegedly permitted by the SCM Agreement are subsidies. These two categories of measures are conceptually different, even if certain individual measures may fall simultaneously within both categories. Given the lack of identity between the two categories of measures, it cannot be said that the SCM Agreement authorises "explicitly" what is prohibited by GATT Article III.

5.310 In EC - Regime for the Importation, Sale and Distribution of Bananas, the Panel elaborated on its interpretation of the notion of "conflict" in the Note by identifying as an example of such "conflict" the relationship between GATT Article XI:1 and Article 2 of the Agreement on Textiles and Clothing (the "ATC"):

For instance, Article XI:1 of GATT prohibits the imposition of quantitative restrictions, while Article XI:2 of GATT contains a rather limited catalogue of exceptions. At the same time, Article 2 of the Agreement on Textiles and Clothing authorises the imposition of quantitative restrictions in the textiles and clothing sector, subject to conditions specified in Article 2:1-21 of the ATC. In other words, Article XI:1 of GATT prohibits what Article 2 of the ATC permits in equally explicit terms. It is true that Members could theoretically comply with Article XI:1 of GATT, as well as with Article 2 of the ATC, simply by refraining from invoking the right to impose quantitative restrictions in the textiles sector because Article 2 of the ATC authorises rather than mandates the imposition of quantitative restrictions. However, such an interpretation would render whole Articles or sections covered by the WTO meaningless and run counter to the object and purpose of many agreements listed in Annex 1A which were negotiated to create rights and obligations which in parts differ substantially from those of the GATT 1994.241

5.311 The relationship of Article 2 of the ATC to GATT Article XI is readily distinguishable from the relationship of the SCM Agreement to GATT Article III:

  • Article 2 of the ATC grants a positive right to do something, namely to maintain quantitative restrictions. On the contrary, the SCM Agreement does not confer a positive right to grant subsidies. Its only purpose is to create remedies against certain categories of subsidies.
  • There is total identity between the measures prohibited by GATT Article XI and those authorized by Article 2 of the ATC (quantitative restrictions in both cases). The SCM agreement and GATT Article III, on the other hand, are concerned each with a different type of measures (subsidies and measures which do not afford national treatment to imported products, respectively), even if the two categories may overlap in respect of certain individual measures.
  • According to the Panel, the application of GATT Article XI:1 to measures covered by Article 2 of the ATC would have rendered the latter Article "meaningless". In contrast, the application of Article III to subsidies does not render the SCM Agreement redundant. Quite to the contrary, its non-application would reduce GATT Articles III:2 and III:8 (b) to inutility.
  • According to the Panel, the ATC was negotiated with the object and purpose to derogate from the GATT. In fact, that intention is set out explicitly in Article 1.1 of the ATC Agreement. In contrast, there is no indication either in the text or in the drafting history of the SCM Agreement that it was negotiated with the intention of derogating from the GATT rules on national treatment. Moreover, unlike in the case of the ATC Agreement with respect to GATT Article XI, there would be no apparent rationale for such derogation. In particular, given that such derogation would be, again unlike in the case of the ATC with respect to GATT Article XI, permanent and not just temporary.

5.312 The absence of a conflict between the SCM agreement and GATT Article III is further confirmed by Article 32.1 juncto footnote 56 of the SCM Agreement, which as already discussed admits expressly the possibility that action against subsidies may also be taken under other GATT provisions, including Article III.

5.313 To conclude, it must be recalled that the relationship of the SCM Agreement to GATT Article III is formally identical to the relationship of GATT Article XVI to GATT Article III. The SCM Agreement does not "permit explicitly" subsidies which are contrary to GATT Article III any more than Article XVI did under GATT 1947. Thus, to hold that there is a "conflict" between the SCM Agreement and GATT Article III would be tantamount to admitting that there was also an "internal conflict" within GATT 1947. Yet, it is clear that the only purpose of the General Interpretative Note to Annex 1A was to solve the potential conflicts between GATT and the new agreements on trade in goods negotiated during the Uruguay Round which build upon the provisions of GATT. It was not the purpose of the Note to solve any inherited "internal conflicts" within GATT itself which, somehow, would have gone unnoticed for almost 50 years.

3. Rebuttal Arguments of the United States

5.314 The following are the United States' arguments rebutting Indonesia's general response to the claims raised under Article III of GATT 1994:

(a) The tariff and tax incentives under the 1993 Programme and the National Car Programme violate Article III of GATT 1994

5.315 The tariff and tax incentives under the 1993 Programme and the National Car Programme violate Article III:4 of GATT 1994 because: (1) they each constitute regulations or requirements that "affect" the sale, purchase, transportation and distribution of imported and domestic automotive parts and subparts; (2) imported automotive parts and subparts are "like" domestic automotive parts and subparts; and (3) they each discriminate against imported automotive parts and subparts. In addition, the tax incentives under the National Car Programme violate Article III:2, first sentence, of GATT 1994, because they result in the imposition of taxes on imported products that are in excess of those applied to like domestic products. Alternatively, these tax incentives violate Article III:2, second sentence, of GATT 1994 because: (1) imported passenger cars and domestic passenger cars are directly competitive or substitutable products that are in competition with each other; (2) the directly competitive or substitutable imported or domestic passenger cars are not similarly taxed; and (3) the dissimilar taxation is applied so as to afford protection.

5.316 Indonesia has not disputed any of these conclusions that make up the elements of a violation of Article III:2 and Article III:4. Instead, Indonesia argues that Article III does not apply to the tax incentives because: (1) these incentives constitute "subsidies"; and (2) the SCM Agreement overrides Article III. In addition, and notwithstanding a ruling of the Appellate Body to the contrary, Indonesia argues that the tariff incentives are not governed by Article III:4 because they constitute "border measures". As the United States will demonstrate, not only are both arguments wrong as a matter of law, but, if accepted, they would have far-reaching and dangerous implications for the world trading system.

(b) Indonesia's argument that the SCM Agreement overrides Article III is unspported by the text of the SCM Agreement and GATT 1994, would result in the effective repeal of Article III:2, and is inconsistent with the negotiating history of the Uruguay Round, established principles of public international law, and WTO jurisprudence

5.317 In the case of the tax incentives provided under the 1993 Programme and the National Car Programme, Indonesia does not dispute that the measures violate Article III. Instead, it argues that Article III is inapplicable because the measures constitute subsidies, and, thus, according to Indonesia, are governed solely by the provisions of the SCM Agreement. According to Indonesia, because, under Article 27.3 of the SCM Agreement, Indonesia has a time-limited exemption from the prohibition against the use of local content subsidies contained in Article 3.1(b) of that agreement, only the provisions of the SCM Agreement apply. Any other result, according to Indonesia, results in a "conflict" within the meaning of the General Interpretative note to Annex 1A of the Marrakesh Agreement Establishing the World Trade Organization ("WTO Agreement"), because Article III prohibits what Article 27.3 allegedly permits. Indonesia's argument is wrong for a variety of reasons.

(1) Indonesia's argument is unsupported by the text of the SCM Agreement and GATT 1994

5.318 Indonesia's argument is premised on the existence of what it refers to as "an all-encompassing definition of subsidies" in the SCM Agreement that applies across the WTO agreements. However, the definition in the SCM Agreement is not "all-encompassing". When one looks at the text of the SCM Agreement, as one must under the Vienna Convention on the Law of Treaties ("Vienna Convention"), Article 1.1 states very clearly that the definition of "subsidy" contained therein is "For the purpose of this Agreement ...." In other words, the definition of "subsidy" is limited to the SCM Agreement.

5.319 Second, Indonesia's argument is also premised on what it refers to on page 91 of its first submission as "an all-encompassing structure of remedies ... ". Again, however, there is no such structure. Consider again the actual text of the treaty. Article 32.1 of the SCM Agreement provides as follows:

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.

Moreover, Article 32.1 contains a footnote 56, which reads as follows:

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

5.320 There can be no clearer indication that the drafters did not intend that the SCM Agreement be the exclusive remedy against a measure that happens to fall within that agreement's definition of a subsidy.

5.321 Indonesia argues that the complainants' interpretation of note 56 is wrong because they somehow ignore the words "relevant" and "appropriate". According to Indonesia, because the measures at issue are covered by the SCM Agreement, other GATT provisions are neither "relevant" nor "appropriate".

5.322 This is a classic example of tautological reasoning that assumes the answer to the question posed. According to Indonesia, because the SCM Agreement is lex specialis, no other provision of GATT can be "relevant" or "appropriate" within the meaning of note 56.

5.323 However, it is Indonesia that ignores the text of note 56, and essentially renders that provision superfluous, in violation of established principles of treaty interpretation. Indeed, if the SCM Agreement truly were lex specialis, there would be no reason for note 56.

5.324 Other provisions support the conclusion that the SCM Agreement was not intended to be the exclusive mechanism for challenging measures that can be characterized as subsidies. For example, Article VI:5 of GATT 1994 provides as follows:

No product of the territory of any contracting party imported into the territory of any other contracting party shall be subject to both anti-dumping and countervailing duties to compensate for the same situation of dumping or export subsidization.

Article VI:5 recognizes that export subsidies may be characterized as a problem of dumping or subsidization, and simply precludes Members from imposing both remedies in the case of a single act of subsidization. Article VI:5 belies Indonesia's claim that the remedies in the SCM Agreement are exclusive or all-encompassing.

5.325 More generally, it has long been recognized that the GATT provisions that deal explicitly with subsidies are not the only provisions that are relevant to subsidies. In this regard, the following statement by Prof. John Jackson is worth noting:242

However, there are certain measures in other articles of GATT [other than Article XVI] that bear on the freedom of a nation to subsidize and that offer a measure of remedy for a GATT member that is harmed by another's subsidy. Four other articles in particular must be related to Article XVI. These are Article VI on anti-dumping and countervailing duties, Article XIX regarding increases of imports that threaten serious injury (the "escape clause"), Article XXIII regarding nullification and impairment, and Article III regarding national treatment.

5.326 In short, Indonesia's argument is contradicted by the text of the relevant agreements, and must be rejected for that reason.

(2) Indonesia's argument would result in the effective repeal of Article III:2

5.327 Aside from the fact that Indonesia's lex specialis argument ignores the text of the relevant agreements, the flaws in its argument can best be appreciated when one considers how Indonesia's theory operates with respect to Article III:2 of GATT 1994.

5.328 In this case, Indonesia argues that the tax discrimination in favour of Indonesian motor vehicles is a subsidy because it constitutes foregone government revenue within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement. According to Indonesia, because this tax discrimination constitutes a subsidy, it can be remedied only under the SCM Agreement.

5.329 However, consider the consequences of Indonesia's argument. Suppose that a Member discriminates against imports across the board, so that all domestic products are taxed at one rate, and all imported products are taxed at a higher rate. Assume also that no local content requirements are involved. Based on Indonesia's logic, this tax discrimination constitutes a subsidy in the form of revenue foregone that is provided to all producers of domestic products and that can be remedied only under the SCM Agreement. Yet, when one turns to the SCM Agreement, one finds that there is no remedy. This is because under the SCM Agreement, a subsidy that is available to all domestic products is not specific within the meaning of Article 2 of the SCM Agreement, and, as such, is non-actionable under Article 8.1(a) of the SCM Agreement.

5.330 Thus, the consequence of Indonesia's argument is that Article III:2 effectively has been repealed and Members are free to engage in economy-wide tax discrimination against imported products. Article III:2 no longer applies, because it has been overridden by the SCM Agreement, but the SCM Agreement provides no redress because the "subsidy" is non-actionable.

5.331 There is not the slightest bit of evidence that the Uruguay Round negotiators intended such a dramatic and dangerous outcome. Moreover, the drafting history of GATT 1947 indicates that the drafters expressly rejected such an outcome. In particular, during the Havana negotiations, the drafters of Article III rejected the following proposal by Cuba:

The provisions of this Article shall not preclude the exemption of domestic products from internal taxes as a means of indirect subsidization in cases covered under Article XVI.

The absurd consequences of Indonesia's argument reveal exactly how erroneous that argument is.

To Continue with Indonesia's argument is contradicted.


230 See paragraph 1 of Annex 1A.

231 Appellate Body Report on Japan - Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS 10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, at p. 23.

232 Article 3.1 (b) of the SCM Agreement only prohibits subsidies contingent upon the use of domestic over imported goods but not subsidies which are granted only upon the production or sale of domestic products, to the exclusion of imported products.

233 See Article 5 of the SCM Agreement.

234 See Article 8.1 (a) of the SCM Agreement.

235 Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages, adopted on 10 November 1987, BISD 34S/83.

236 Panel Report on Japan - Taxes on Alcoholic Beverages, WT/DS8/R, WT/DS10/R, WT/DS11/R, as modified by the Appellate Body Report, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996.

237 In addition, to the extent that the subsidy is granted to all Japanese shochu producers, Japan could argue that the subsidy is not "specific" within the meaning of Article 2 of the SCM Agreement.

238 Indonesia might try to argue that the SCM Agreement is not lex specialis with respect to Article III:2, second sentence, but this would lead to an equally anomalous results: the remedy would be more rigorous in the case of discriminatory taxation between competing products than in the case of discriminatory taxation between like products.

239 See e.g. Panel Report on EC - Regime for the Importation, Sale and Distribution of Bananas, adopted 25 September 1997, WT/DS27/R/USA, at para 7.155.

240 Id., para 7.154.

241 Id. at footnote No 390.

242 J. Jackson, World Trade and the Law of GATT, � 15.4, page 377 (1969) (Emphasis added).