5.332 In light of the manifestly absurd results generated by Indonesia's argument, one should consider the negotiating history of the TRIMs Agreement and the SCM Agreement. While we are talking about Article III of GATT 1994 at the moment, Indonesia has argued that the TRIMs Agreement imposes no additional substantive obligations, but instead merely interprets Article III (See Section VI.D). The United States does not agree with Indonesia's characterization of the TRIMs Agreement, but, for the sake of argument, let us assume that Indonesia is correct.

5.333 Indonesia cites to a report of the Chairman of the Negotiating Group on Trade-Related Investment Measures (See Section VI.D). MTN.GNG/NG12/W/27 (19 July 1990). The report contained a bracketed Chairman's text, Article A2(c)(iii) of which read as follows:

A bracketed footnote 2 to clause (iii) further provided the following:

5.334 As Indonesia correctly notes, the question of whether TRIMs would include "incentive-based" measures, including measures that could be characterized as subsidies, was a bone of contention during the RIMs negotiations, as reflected by the brackets around the above-quoted language.

5.335 However, Indonesia leaves the drafting history at that, and fails to mention what happened thereafter. In the so-called Dunkel Draft, issued in December, 1991, the TRIMs Agreement appeared in what was, for substantive purposes, its final form. MTN.TNC/W/FA, page N.1 et seq (United States Exhibit 26). In the Dunkel Draft, paragraph 1 of the Illustrative List of TRIMs covered, as does its counterpart in the final TRIMs Agreement, TRIMs "compliance with which is necessary to obtain an advantage ... ." Thus, the battle over the inclusion of incentive-based measures had been resolved in favour of their inclusion, albeit by using different language from that in the Chairman's draft.

5.336 In addition, the notification requirements and transitional arrangements contained in Article 5 of the TRIMs Agreement also had reached their final form in the Dunkel Draft. Under Article 5 of the Dunkel Draft, countries had 90 days in which to notify existing non-conforming TRIMs, and were granted a period of time in which to eliminate them. Developing countries had five years, while least-developed countries had seven years. In addition, countries were precluded from introducing new non-conforming TRIMs.

5.337 Now let us turn to the version of the SCM Agreement in the Dunkel Draft, and, in particular, Article 27. MTN.TNC/W/FA, pages I.33-35 (United States Exhibit 27). There one finds no exemption for developing country Members from the prohibition in Article 3.1(b) against the use of local content subsidies. Instead, Article 27.3 of the Dunkel Draft consisted of what ultimately became Article 27.4, the provision dealing with developing country Member phase outs of export subsidies.

5.338 Thus, in the Dunkel Draft, to the extent there was a "conflict" between the SCM Agreement, Article III:4, and the TRIMs Agreement, the "conflict" was exactly the opposite of the "conflict" alleged by Indonesia. Under the draft SCM Agreement, developing country Members were prohibited from using local content subsidies, but under the TRIMs Agreement, developing country Members could use such subsidies for a limited period of time, provided that they notified them in a timely manner.

5.339 Of course, as Indonesia correctly notes, the negotiators were aware of the overlap between the TRIMs Agreement and the SCM Agreement, and they subsequently proceeded to deal with it. On December 15, 1993, the Trade Negotiating Committee issued a draft Final Act. In the draft SCM Agreement, a new provision appeared, Article 27.2bis. MTN/FA II-13, page 32 (United States Exhibit 28). This provision, which ultimately was renumbered as Article 27.3, granted developing and least developed country Members a time-limited exemption from the prohibition against local content subsidies in Article 3.1(b) of the SCM Agreement.

5.340 With the addition of Article 27.2bis, the "conflict" between Article III:4, the TRIMs Agreement, and the SCM Agreement in the Dunkel Draft was eliminated. In the case of developing and least developed Members, those TRIMs that were permitted by Article 5 of the TRIMs Agreement during the transition period no longer were prohibited by the SCM Agreement.

5.341 What this drafting history shows is that it was not the intent of the negotiators that the SCM Agreement override Article III:4 or the TRIMs Agreement. Instead, as was the case under GATT 1947, there was to be overlapping, if not identical, treatment of local content incentives under these different regimes.

5.342 What this drafting history also highlights is that the "conflict" alleged by Indonesia in this case is an artificial one. If Indonesia had notified its pre-WTO TRIMs in accordance with the provisions of Article 5.1 of the TRIMs Agreement, they would have been protected under both the TRIMs Agreement and the SCM Agreement. As for Indonesia's post-WTO TRIMs, it was never the intention of the drafters to permit such measures under Article III:4 or the TRIMs Agreement, even though they might be temporarily exempt from the special remedies of the SCM Agreement.

(4) Indonesia's argument is inconsistent with established principles of public international law

5.343 Indonesia cites the report of the panel in the Bananas III case for the proposition that a "conflict" exists where a rule in one agreement prohibits what a rule in another agreement explicitly permits.²⁴³ However, Indonesia's reliance on Bananas III is misplaced for several reasons.²⁴⁴

5.344 First, neither the Bananas III panel nor Indonesia cites any support for the proposition that a "conflict," within the meaning of public international law, can exist in a situation where a rule in one agreement explicitly permits what a rule in another agreement prohibits, The absence of any citation is due to the fact that the rule under public international law is clear: a conflict exists only in situations where obligations are mutually exclusive; i.e., "when two (or more) treaty instruments contain obligations which cannot be complied with simultaneously." 7 Encyclopedia of Public International Law (North-Holland 1984), page 468.

5.345 Moreover, even assuming for purposes of argument that the statement by the Bananas III panel is correct, there still is no conflict between the rules of Article III and the rules of the SCM Agreement. This is because, as previously noted, footnote 56 of the SCM Agreement expressly contemplates that subsidy practices may be actionable under other relevant provisions of GATT 1994.

5.346 In addition, again assuming for purposes of argument that the statement by the Bananas III panel was correct, there is no conflict because the SCM Agreement does not "explicitly permit" local content subsidies. Indeed, all that Article 27.3 does is to exempt developing country Members, for a period of time, from the prohibition of Article 3.1(b). More generally, to the extent that "permit" is a synonym for "authorize," the authority to provide subsidies does not flow from the SCM Agreement, but instead from a Member's sovereignty. The SCM Agreement simply specifies the circumstances under which one Member that has suffered adverse trade effects may seek redress against subsidies provided by another Member. In addition, the SCM Agreement also prohibits certain types of subsidies, and provides a remedy against them, because they are considered to be presumptively distortive and a cause of adverse trade effects.

5.347 In addition, simply as a textual matter, it is impossible to conclude that a time-limited exemption from a prohibition (which is what Article 27.3 provides) constitutes a positive conferral of an "explicit right" to do something.

5.348 Finally the fact that the SCM Agreement may not prohibit a certain type of subsidy cannot be construed as the conferral of an explicit right to violate a different obligation contained in a different WTO agreement. For example, as the United States demonstrated at the first meeting of the Panel, an exemption only for domestic products from an indirect tax would be a non-specific (generally available) subsidy under the SCM Agreement. As such, it would be a non-actionable subsidy. However, the fact that such a subsidy is not prohibited by, or even actionable under, the SCM Agreement does not mean that Members are "explicitly permitted" to tax imported products in excess of domestic like products in violation of Article III:2. Likewise, the fact that developing country Members are temporarily exempted from the prohibition in Article 3.1(b) does not mean that they are "explicitly permitted" to violate Article III:2 and Article III:4.

5.349 Finally, it must be emphasized that under public international law "[t]here is a presumption against conflicts in that parties do not normally intend to incur conflicting obligations". 7 Encyclopedia of Public International Law (North-Holland 1984), page 470. This presumption flows logically from the basic maxim ut res magis valeat quam pereat, a principle that is embodied in the Vienna Convention, and which requires that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to its terms in the context of the treaty and in the light of its object and purpose. More specifically, what this means is the following²⁴⁵:

As discussed above, Indonesia's argument utterly fails to comply with this fundamental principle, because the Indonesian argument would render Article III:2 a nullity.

5.350 Two corollary principles flow from this fundamental principle. First, the burden is on Indonesia, as the party alleging a conflict, to demonstrate convincingly that a conflict exists. Indonesia has failed to satisfy this burden.

5.351 Second, the Panel must, to the extent possible, interpret the relevant provisions so as to avoid a conflict. As discussed below, existing WTO jurisprudence provides a vehicle for avoiding a conflict.

(5) Existing WTO jurisprudence recognizes that the subject matter of the WTO agreements can overlap

5.352 Existing WTO jurisprudence recognizes that the subject matter of the WTO agreements can overlap. The Appellate Body acknowledged this point most recently in Bananas III, where it stated the following²⁴⁶:

5.353 Like the relationship between GATT 1994 and GATS discussed in Bananas III, the coverage of Article III and the SCM Agreement overlap, but the focus of each is different. The focus of the SCM Agreement is on subsidies, which in the context of this case, happen to be specific (or actionable) because their receipt is made contingent on the basis of discrimination against imported goods. By contrast, the national treatment provisions of Article III focus on the discrimination.

5.354 This difference in focus can be appreciated by considering the remedy applicable to prohibited subsidies under the SCM Agreement. Under Article 4.7 of the SCM Agreement, if a panel finds a measure to be a prohibited local content subsidy, the panel must "recommend that the subsidizing Member withdraw the subsidy without delay".²⁴⁷ A panel is not allowed to recommend that the subsidizing Member eliminate the local content contingency of the subsidy.

5.355 More generally, if a Member were to violate Article III:4 by making use of domestic inputs a condition for the receipt of a subsidy, the measure would continue to be a violation of Article III:4 if the subsidy element were replaced with some other form of incentive or disincentive. On the other hand, if the local content aspect of a subsidy were dropped, the subsidy would continue to be subject to the SCM Agreement, although the nature of the relevant discipline under the SCM Agreement might be affected.

5.356 Thus, the Panel can avoid a "conflict" by simply recognizing that Article III and the SCM Agreement have overlapping coverage, but a different focus. In so doing, the Panel will have complied with its obligation under public international law principles to avoid interpreting Article III and the SCM Agreement in a manner that gives rise to a conflict.

(6) GATT and WTO Panels and the Appellate Body have not relied on the concept of lex specialis to determine that one WTO agreement takes precedence over another

5.357 In response to a question from the Panel concerning GATT/WTO panel reports, the United States stated that the concept of lex specialis had been discussed in the following reports.

5.358 In EEC Restrictions on Imports of Apples from Chile, L/5047, Report of the Panel adopted 10 November 1980, BISD 27S/98, although the term lex specialis was not used, the European Communities argued that with respect to Chile's claim under Article I of GATT 1947, the European Communities "action, being a quantitative restriction, should be examined in connection with the most-favoured-nation type commitment contained in Article XIII." Para. 3.2. The panel agreed with the European Communities. Para. 4.1. However, this case involved the relationship between different provisions of a single agreement, GATT 1947, as opposed to the relationship between different agreements.

5.359 In European Economic Community - Restrictions on Imports of Dessert Apples - Complaint by Chile, L/6491, Report of the Panel adopted 22 June 1989, BISD 36S/93, the same issue arose, and this time the European Communities did invoke expressly the concept of lex specialis. Para. 5.2. As in the prior case, the panel agreed with the European Communities, stating as follows: "[Article XIII] deals with the non-discriminatory administration of quantitative restrictions and is thus the lex specialis in this particular case." Para. 12.28. Again, however, this case involved the relationship between different provisions of a single agreement.

5.360 In Panel on Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, L/6304, Report of the Panel adopted 22 March 1988, BISD 35S/37, Canada argued that Article III of GATT 1947 was not relevant to the case because Article XVII contained the only obligation related to state trading. Para. 3.47. The EEC argued in response that Article XVII was not a lex specialis exempting state-trading from all other provisions of GATT 1947. Para. 3.48. The panel declined to reach the issue because it already had found that the measures in question violated Article XI. Para. 4.26. In dicta, however, the panel opined that Article III:4 was also applicable to state-trading enterprises, at least in certain situations. Id. Although the panel did not address the issue, this case, too, involved the relationship between different provisions of a single agreement.

5.361 In Bananas III, the concept of lex specialis was raised in several different ways. European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/USA, Report of the Panel, as modified by the Appellate Body, adopted 25 September 1997. First, the panel ruled that Article XIII:2(d) was lex specialis vis-à-vis Article XIII:1. Para. 7.75. This issue involved the relationship between different paragraphs of a single article of a particular agreement.

5.362 In Bananas III, the concept of lex specialis also was raised in connection with the relationship between (1) the Licensing Agreement and Article XIII; and (2) the TRIMs Agreement and Article III. The issue relating to the Licensing Agreement was described as follows:

5.363 The issue relating to the TRIMs Agreement was described as follows:

5.364 In resolving these issues concerning the relationship between GATT 1994 and the Annex 1A agreements, the panel did not rely on the concept of lex specialis. Instead, the panel relied on the General Interpretative Note to Annex 1A of the WTO Agreement, the note that deals with conflicts between GATT 1994 and the other Annex lA agreements. Paras. 7.157-7.163. The United States will not reiterate its prior arguments concerning this aspect of the Bananas III report, but instead emphasizes the following points. First, if the panel had thought that the concept of lex specialis governed the relationship between GATT 1994 and the other Annex 1A agreements, there would have been no need to resort to the General Interpretative Note. Second, if the concept of lex specialis operated in the manner suggested by Indonesia, the General Interpretative Note would be superfluous, because there can be no conflict where, by virtue of lex specialis, a single agreement controls.

5.365 The concept of lex specialis also was invoked in the Bananas III appeal. WT/DS27/AB/R, Report of the Appellate Body adopted 25 September 1997. The European Communities challenged the panel's particular application of Article 1.3 of the Licensing Agreement, arguing that Article 1.3 is lex specialis for the administration of import licensing procedures, while Article X:3(a) of GATT 1994 is lex generalis for the administration of all "laws, regulations, decisions, and rulings ...". Para. 32. In response, the complainants argued that only in the event of a conflict between GATT 1994 and a provision of another Annex 1A agreement (such as the Licensing Agreement) would the provision of the latter agreement prevail. Para. 70.

5.366 The Appellate Body concluded that Article X:3(a) and Article 1.3 both applied in the sense that both provisions gave rise to separate and distinct obligations. Para. 204. However, the Appellate Body stated that the panel should have applied the Licensing Agreement first

The Appellate Body did not find that one agreement trumped the other on the basis of lex specialis.

5.367 Finally, the concept of lex specialis was invoked by the United States in EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/R/USA, Report of the Panel circulated 18 August 1997, for the proposition that the panel should begin its analysis with the SPS Agreement. Para. IV.5. Without expressly endorsing the United States invocation of lex specialis, the panel decided to first examine claims raised under the SPS Agreement. Para. 8.42. The panel's decision on this particular point was not raised on appeal. WT/DS26/AB/R, Report of the Appellate Body circulated 16 January 1998.

5.368 Thus, while the concept of lex specialis has been invoked from time to time, in no instance has a panel or the Appellate Body relied on this concept to determine that one WTO agreement trumps another. To the contrary, such relationships have been resolved by applying the General Interpretative Note, which deals with conflicts between GATT 1994 and other Annex 1A agreements. As the United States previously has demonstrated, however, there is no conflict between the provisions of GATT 1994 and the SCM Agreement.

5.369 With respect to Japan's point regarding the General Interpretative Note, Indonesia fails to rebut Japan's argument. Japan's argument, as the United States understands it, is that if the SCM Agreement truly were lex specialis, it would control automatically, whether or not a "conflict" existed, and there would be no need for the General Interpretative Note. Put differently, to the extent that there is a rule of lex specialis in the WTO Agreement, it is found in the General Interpretative Note.

To Continue with Whether Indonesia's argument is characterized, it would render Article III:2 a nullity .

²⁴³ European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R, Report of the Panel, as modified by the Appellate Body, adopted on 25 September 1997, para. 7.159.

²⁴⁴ Among other things, the panel's statement concerning the definition of a "conflict" was dicta inasmuch as the panel found that no conflict existed. Unfortunately, because this aspect of the panel report was not appealed, the Appellate Body was not presented with the opportunity to correct the panel's error.

²⁴⁵ 1966 Yearbook of the International Law Commission, Vol. II at 219; See also, United States - Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, Report of the Appellate Body adopted 20 May 1996, pages 24-25 ("One of the corollaries of the 'general rule of interpretation' in the Vienna Convention is that interpretation must give meaning and effect to all the terms of a treaty. 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."); and Japan - Taxes on Alcoholic Beverages, WT/DS8/AB/R, Report of the Appellate Body adopted 1 November 1996), pages 11-12.

²⁴⁶ European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, Report of the Appellate Body adopted 25 September 1997, para. 221 (footnote omitted).

²⁴⁷ Under Article 1.2 and Appendix 2 of the DSU, Article 4.7 is a special or additional rule or procedure that prevails over the general rules of the DSU.