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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) Whether Indonesia's argument is characterized as lex specialis or conflict, if accepted, it would render Article III:2 of GATT 1994 a nullity

5.370 Whether Indonesia's argument is characterized as one based on lex specialis or "conflicts", Indonesia has not been able to explain how, under its argument, Article III:2 of GATT 1994 does not become a nullity. Likewise, Indonesia has not offered a scintilla of evidence that the Uruguay-Round negotiators intended such an outcome.

(8) Indonesia's erroneous assertion regarding the specificity of subsidies indicates that Indonesia was well aware of the flaws in its argument

5.371 Finally, on the subject of lex specialis and "conflicts", the United States would like to elaborate with respect to the question of whether or not most subsidies are specific. By way of background, one of the most troubling aspects of Indonesia's arguments is the statement that: "The purpose of most subsidies is to provide financial assistance to a targeted industry or a small group of industries." (See Section V.D.2(c).)

5.372 The reason why this sentence was so troubling is as follows. Several members of the United States interagency team working on this dispute have spent most of their careers in the subsidies/countervailing duty area and are considered as experts in the area. In particular, they were intimately involved in the development and evolution of the so-called "specificity test" under the United States countervailing duty law, and one member of the team can claim, with some justification, to be the author of Article 2.1 of the SCM Agreement. While there is no global "census" of all government measures that satisfy the SCM Agreement's definition of "subsidy", these individuals knew, based on their experience, that most subsidy programmes are not, in fact, targeted to a small group of industries. Instead, most subsidy programmes involve the provision of small amounts of financial assistance to numerous industry groups or sectors. The very reason for a specificity test is to avoid having to subject such programmes to unilateral or multilateral subsidy remedies.

5.373 Moreover, these types of generally available subsidy programmes do not show up in notifications to the SCM Committee, because, under Article 25.2 of the SCM Agreement, only specific subsidies must be notified. Likewise, since the specificity test became firmly established as a part of the United States countervailing duty law in the mid-'80's, these types of generally available subsidy programmes also have largely disappeared from countervailing duty proceedings, because petitioning domestic industries know that the U.S. investigating authorities will find such programmes to be non-specific and, thus, non-countervailable. In other words, the specific subsidies that show up in notifications to the SCM Committee or countervailing duty proceedings are only the "tip of the subsidies iceberg".

5.374 Thus, the members of the United States team were troubled by the above-quoted sentence by Indonesia. The United States team concluded that Indonesia must have inserted the sentence in question for a reason, and the task was to determine what that reason was. Ultimately, the riddle was solved by asking and answering the following series of questions:

Question Why would Indonesia make an assertion regarding the specificity of subsidies that is, at worst, inaccurate and, at best, unsupported by empirical evidence?

Answer Indonesia does not want the Panel to think about non-specific subsidies.

Question Why does Indonesia not want the Panel to think about non-specific subsidies? What is it about non-specific subsidies that makes them different from specific subsidies?

Answer Non-specific subsidies are non-actionable by virtue of Article 8.1(a).

Question Why is the non-actionability of non-specific subsidies relevant to Indonesia's argument that the SCM Agreement overrides provisions of GATT 1994?

Answer It must be the case that if the SCM Agreement trumps GATT, then measures currently considered to be violative of one or more provisions of GATT 1994 would become permissible if characterized as non-specific subsidies.

Question What types of measures would be most likely to become permissible if characterized as non-specific subsidies?

Answer Discriminatory tax measures that violate Article III:2.

5.375 The upshot of all this is that with respect to Indonesia's argument concerning the supremacy of the SCM Agreement, the United States suspects that Indonesia was aware of the fatal flaw in its theory (i.e., the fact that, under its theory, Article III:2 becomes a nullity) long before the complainants had discovered it. Indonesia's assertion regarding the alleged specificity of most subsidies was simply a smokescreen intended to divert the Panel's attention from the consequences of Indonesia's argument.

5.376 In the final analysis, whether or not most subsidies are specific is not relevant to this dispute. What is relevant is the fact that if Indonesia's argument is accepted, any Member will be able to construct and maintain a tax system that discriminates against imports without running afoul of its obligations under Article III:2. All that a Member has to do is ensure that the beneficiaries of such a system constitute a sufficiently large segment of the economy so as to render the system non-specific. Under Indonesia's theory, if the system is non-specific, it is not actionable under the SCM Agreement and Article III:2 no longer applies.

(9) Indonesia's assertion that it would not have signed the WTO Agreement if Article III applied to local content subsidies is legally irrelevant and factually suspect

5.377 At bottom, Indonesia's argument that the SCM Agreement overrides Article III is based on its claim that neither Indonesia nor any other developing country would have signed the WTO Agreement if Article III continued to apply to local content subsidies. Although Indonesia has yet to make this assertion in writing, one of Indonesia's representatives made the assertion in his oral presentation at the first meeting of the Panel.248 However, this assertion is legally irrelevant and factually suspect.

5.378 As a matter of law, it is irrelevant that a Member, with the benefit of hindsight, feels that it may have made a bad bargain, because neither panels nor the Appellate Body have the authority to renegotiate the bargains reflected in the text of the WTO agreements. As the Appellate Body has stated, panels and the Appellate Body must respect the balance of rights and obligations reflected in the language of the WTO agreements.249 More recently, in the India Mailbox case, the Appellate Body chastized a panel for attempting to read into the TRIPS Agreement words that are not there based on the "legitimate expectations" of Members.250 In that case, the Appellate Body stated the following:251

The duty of a treaty interpreter is to examine the words of the treaty to determine the intentions of the parties. This should be done in accordance with the principles of treaty interpretation set out in Article 31 of the Vienna Convention. But these principles of interpretation neither require nor condone the imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended.

5.379 As demonstrated above, when the principles of Article 31 of the Vienna Convention are applied, Indonesia's alleged "conflict" disappears. The fact that Indonesia wishes that Article III and the SCM Agreement said something other than what they in fact say is legally irrelevant.

5.380 In addition, the fact of the matter is that Indonesia did benefit from the last minute insertion of Article 27.3 into the text of the SCM Agreement, and the evidence suggests that Indonesia is well aware of the nature and the value of this benefit.

5.381 Because Indonesia is temporarily exempt from the prohibition in Article 3.1(b), there has been little discussion in this case regarding the procedures in Article 4 of the SCM Agreement for challenging prohibited subsidies. It is appropriate at this point to recall what those procedures are. Suffice it to say that the process under Article 4 is rapid - very rapid.

5.382 Under Article 4.4 of the SCM Agreement, a complainant may request the establishment of a panel within 30 days of the request for consultations, as opposed to the standard period of 60 days under Article 4.7 of the DSU. Under Article 4.6 of the SCM Agreement, a panel is to circulate its final report to all Members within 90 days of the date of the composition and the establishment of the panel's terms of reference, with no provision made for extensions. Under Article 12.8 of the DSU, a panel normally has six months (180 days) within which to issue its report, but may take up to nine months (270 days).

5.383 Under Article 4.8 of the SCM Agreement, following the issuance of a panel report, the DSB must adopt the report (or one of the parties must notify its decision to appeal) within 30 days, as opposed to the standard period of 60 days under Article 16.4 of the DSU. If a report is appealed, under Article 4.9 of the SCM Agreement, the Appellate Body normally must issue its report within 30 days of the notice of appeal, but may take up to 60 days. Under Article 17.5 of the DSU, the Appellate Body normally has 60 days in which to issue its report, but may take up to 90 days.

5.384 Finally, under Article 4.7 of the SCM Agreement, if a measure is found to be a prohibited subsidy, the subsidizing Member must withdraw the subsidy "without delay." By contrast, under Article 21.3 of the DSU, a Member has "a reasonable period of time" in which to comply with a DSB recommendation or ruling, the benchmark for which, pursuant to Article 21.3(c), is 15 months from the date of adoption of a panel or Appellate Body report.

5.385 What all of this means is that if Indonesia had not been exempted by Article 27.3 from the prohibition of Article 3.1(b) and the remedies of Article 4, this Panel would not be here. If the complainants in this case, including the United States, had been able to bring a complaint under Article 3.1(b) and Article 4, and assuming that a panel was composed on the same day as this Panel was (30 July 1997), the panel would have issued its ruling on the Article 3.1(b) claim no later than 28 October 1997.252 Indonesia would have filed its appeal no later than 27 November 1997.253 Indonesia would have filed its appellant submission on 2 December, and the complainants in this case would have filed their appellee submissions on 9 December.254 The oral hearing before the Appellate Body would have taken place on 12 December, and the Appellate Body's report would be due on 27 December.255 The panel and Appellate Body reports would be adopted by the DSB no later than 22 January 1998, the next scheduled meeting of the DSB. Following adoption, Indonesia then would have to withdraw the subsidies "without delay" under Article 4.7 of the SCM Agreement. While the phrase "without delay" has yet to be construed, presumably it must mean a time period far shorter than the "reasonable period of time" referred to in Article 21.3 of the DSU or the six-month period for withdrawal set forth in Article 7.9 of the SCM Agreement with respect to adverse effects cases. Thus, if Article 3.1(b) and Article 4 of the SCM Agreement were applicable to the Indonesian subsidies, the complainants could expect a withdrawal of the subsidies some time in the first half of 1998.

5.386 As things now stand, however, the Panel has indicated that it will not be issuing its report until the end of April 1998. Even then, in all likelihood, the issuance of the report simply will trigger an appeal by Indonesia that will further delay the withdrawal of the measures in question. Once the Appellate Body rules in complainants' favour and the Panel and Appellate Body reports are adopted by the Dispute Settlement Body, then if it is impracticable for Indonesia to comply immediately, Indonesia will have a "reasonable period of time" in which to bring its measures into conformity with its obligations.256 In short, the measures in question may not be withdrawn until some time in 1999.257

5.387 In the view of the United States, Indonesia has received quite a bargain. If Indonesia were subject to Article 3.1(b) and Article 4, we would be very close to the point at which the parties would be discussing the timing of Indonesia's withdrawal of its local content subsidies. However, because Indonesia is exempt from those provisions, the parties will not reach that stage until some time in late 1998.

5.388 Moreover, the evidence indicates that Indonesia understands full well the nature of the benefits it enjoys by virtue of its exemption from the expedited procedures for prohibited subsidies. Throughout the history of this dispute, officials of both Indonesia and TPN repeatedly have made statements to the public and the press that the National Car Programme is not in any jeopardy, because by the time the WTO dispute settlement process runs its course, the objectives of the National Car Programme will have been accomplished and TPN (or Kia Timor, depending on who one believes) will be firmly established as a bona fide (albeit subsidized) auto producer.258 Recently, even officials from Kia Motors have taken up the refrain, stating that it will "take at least from two to three years for the WTO to come up with mediation-crafted measures".259

5.389 Moreover, when one steps back a bit, it is clear that at a minimum, Indonesia is no worse off than it was before the entry into force of the WTO Agreement. Under GATT 1947, the tax incentives in question were prohibited by Article III:2 and Article III:4, and also were actionable under the serious prejudice provisions of Article XVI. Because of Article 27.3, however, nothing has really changed in that regard. The tax incentives continue to be prohibited by Article III:2 and Article III:4 of GATT 1994 and continue to be subject to a serious prejudice claim under the SCM Agreement. Thus, it is incredible for Indonesia to claim, as it has via Dr. Makarim, that it would not have signed the WTO Agreement if it had known that its local content subsidies would be subject to Article III. If that truly were Indonesia's belief, then it would not have been a Contracting Party of GATT 1947.

5.390 In summary, the Panel should be extremely sceptical of assertions by Indonesia that it somehow got a raw deal by signing on to a package under which local content subsidies are prohibited by virtue of Article III. As discussed above, Indonesia benefits from being temporarily exempt from the accelerated procedures of Article 4 of the SCM Agreement. At a minimum, it is no worse off than it was under GATT 1947.

(c) The tax incentives under the 1993 Programme and the National Car Programme are not protected by Article III:8(b) of GATT 1994

5.391 Indonesia appears to argue that the tax incentives provided under the 1993 Programme and the National Car Programme are protected by Article III:8(b) because the tax "subsidies" are received by producers or assemblers of automobiles. (See Section V.D.) This argument misses the point, and misstates the meaning of Article III:8(b) and the precedents relating thereto.

5.392 Insofar as Article III:4 is concerned, Article III:8(b) provides that the provision of a subsidy exclusively to a producer of a like domestic product and not to a foreign producer does not violate the non-discrimination requirements of Article III:4. However, insofar as Article III:4 is concerned, in the case of Indonesia's tax incentives, the imported products discriminated against through the local content requirements are automotive parts and subparts, not finished automobiles. Thus, the fact that these tax incentives may constitute subsidies to purchasers of Indonesian automotive parts and subparts (i.e. producers of finished automobiles or finished parts) does not excuse the discriminatory treatment accorded to imported automotive parts and subparts.260

5.393 Moreover, Article III:8(b) does not insulate the Indonesian tax incentives from the requirements of Article III:2. In the Canada Periodicals case, the Appellate Body affirmed that Article III:8(b) "was intended to exempt from the obligations of Article III only the payment of subsidies which involves the expenditure of revenue by a government".261 In so ruling, the Appellate Body quoted with approval the following passage from the United States - Malt Beverages case:262

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.

5.394 Indonesia's tax incentives do not involve the expenditure of revenue by Indonesia. For that reason, also, they are not protected by Article III:8(b). Indonesia's argument to the contrary is that the introduction of the SCM Agreement effectively has amended the scope of Article III:8(b). This is nothing more than a recycled version of Indonesia's "conflicts" argument, which the United States has addressed previously and exposed as a specious argument that is unsupported by the text of the agreements, their drafting history, public international law principles, and WTO jurisprudence.

F. Additional arguments regarding the claims under Article III:4 of GATT 1994 pertaining to the tariff measures

1. Specific response by Indonesia

5.395 In addition to its general response concerning all of the claims under Article III of GATT 1994, Indonesia makes a specific response with respect to the claims that the tariff measures at issue violate Article III:4 of GATT 1994. The following are Indonesia's arguments in this regard:

(a) The customs import duties schedules for automotive companies using differing levels of domestic content are consistent with Article III:4 of GATT 1994 because the schedules are border measures which are not subject to Article III:4 of GATT 1994 and are subsidies Indonesia is permitted to maintain

5.396 Customs duties are, by definition (Article I:1 of GATT 1994), "imposed on or in connection with importation" and hence are border measures rather than internal regulations. Therefore they are not covered by Article III:4 (or any of Article III) of GATT 1994 which, as the title to the Article itself notes, is limited to "National Treatment on Internal Taxation and Regulation."263

5.397 As previously discussed, under the 1993 Incentive Programme, the level of the import duty imposed on imported automobiles and automotive parts is set by reference to the proportion of parts and components produced in Indonesia that are used in each particular automobile model. Similarly, under the February 1996 national car programme, producers designated as producers of a national car and meeting the criteria for that programme are exempt from import duties on imported parts and components. Both programmes grant exemptions from customs import duties, which are - irrefutably - border measures. There can be no serious argument that internal regulation is involved. Therefore, Article III of the General Agreement, including Article III:4, is inapplicable.

5.398 This conclusion is not affected by the Report of the Panel in Canada-Administration of the Foreign Investment Review Act (FIRA) (7 February 1984), BISD 30S/140, which is the leading GATT decision regarding local content regimes. In FIRA corporate undertakings to purchase goods of Canadian origin became part of the conditions under which each proposed investment was approved, and derogations therefrom could be legally enforced. This legal obligation to purchase domestic goods was a "requirement" affecting the internal sale of a product and thus was within the scope of Article III:4. No border measures were involved.

5.399 For similar reasons the Report of the Panel in EEC-Regulation on Imports of Parts and Components (16 May 1990), BISD 37S/132, is inapposite. There, suspension by the European Communities of an anti-dumping circumvention proceeding depended on the undertaking of the Japanese respondent companies to change their sourcing from imported parts and materials to parts and materials produced in the European Communities. Neither the "advantage" found by the Panel (suspension of an EEC administrative proceeding) nor the undertaking to use EEC goods was a border measure. The same is true with respect to the Report of the Appellate Body in European Communities - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R (9 September 1997). As the Appellate Body stated:

At issue in this appeal is not whether any import licensing requirement, as such, is within the scope of Article III:4, but whether the European Communities procedures and requirements for the distribution of import licences for imported bananas among eligible operators within the European Communities are within the scope of this provision. Id. at para. 211 (emphasis added).

The "advantage" within the scope of Article III:4 was the distribution of licences among eligible operators (an internal measure) and not the border measure (the licensing requirement) itself.

5.400 In the instant case, there is no classic local content requirement obligating a company to purchase locally.264 All automotive companies are free to choose where to source automotive parts and components. Each company makes a corporate decision about whether it wishes to benefit from the subsidization of customs import duties granted to those choosing to use specified levels of domestically produced parts and components.265

To Continue with Indonesia's customs import duties subsidy does not involve a "requirement".


248 The written version of Indonesia's statements differ from the oral presentations, and, unfortunately, panels do not prepare transcripts of their meetings. However, the members of the United States delegation distinctly recall Indonesia making the assertion in question.

249 United States - Measure Affecting Imports of Woven Wool Shirts and Blouses, WT/DS33/AB/R, Report of the Appellate Body adopted 23 May 1997, page 19.

250 India - Patent Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, Report of the Appellate Body issued 19 December 1997, para. 45.

251 Id.

252 Although this issue has never been definitively decided, presumably an Article 3.1(b) claim would have to be pursued separately from other claims if the complainant wished to take advantage of the accelerated timetable of Article 4.

253 It would be Indonesia appealing, of course, because there is no question that the subsidies in question fall under Article 3.1(b).

254 Annex 1 (Timetable for Appeals), Working Procedures for Appellate Review, WT/AB/WP/3 (28 February 1997).

255 Id. Again, because there is no question that the Indonesian subsidies fall under Article 3.1(b), there would be no need for the Appellate Body to extend its deadline of 30 days.

256 With respect to the United States claim of serious prejudice, under Article 7.9 of the SCM Agreement, Indonesia would have six months in which to withdraw the subsidies or remove the adverse effects.

257 The United States assumes that Indonesia will abide by its commitment to the IMF to withdraw the measures once the DSB has ruled against it.

258 "RI to Finish Car Program by '99", Jakarta Post, 23 April 1997 (US Exhibit 14, p. 105); "Indonesia Preparing Team to Defend Nat'l Car Policy at WTO", ANTARA, 9 May 1997 (US Exhibit 14, p. 117); "Astra, Indomobil Roped in to Speed Up Timor Car Project," Business Times (Singapore), 16 May 1997 (US Exhibit 14, p. 121); "Bumpy Road Ahead for Motoring Plan", South China Morning Post, 8 June 1997 (US Exhibit 14, p. 132) (quoting a TPN official as stating that the WTO dispute "will not impact our activities. The WTO takes time."); and "Timor in Trouble at WTO and at Home", Business Times (Singapore), 25 June 1997 (US Exhibit 14, p. 144) ("Jakarta is gambling that it has time on its side.").

259 "Timor President's Resignation Won't Affect Kia in Indonesia", Asia Pulse, 4 November 1997 (US Exhibit 24, p. 25).

260 Italian Agricultural Machinery, L/833, Report of the Panel adopted 23 October 1958, BISD 7S/60, 64, para. 14.

261 Canada - Certain Measures Concerning Periodicals, WT/DS31/AB/R, Report of the Appellate Body adopted 30 July 1997, page 34.

262 Id. quoting from BISD 39S/206, para. 5.10, adopted 19 June 1992.

263 The United States' argument that the import duty incentives are within the scope of Article III:4 (See SectionV.C.3 and V.F.4) is simply wrong.

264 The United States Government officially acknowledges this in the April 1997 report entitled Indonesia's Automotive Market Summary prepared by the United States Department of Commerce (see Indonesia Exhibit 11) The Department declares that "local content requirements are not explicit" in the 1993 Incentive Programme.

265 Even the United States recognizes that Indonesia's system of sliding tariff rates is not a local content regime as that term has been understood and used in the WTO and the GATT. During the 26 October 1989 meeting of the Uruguay Round negotiating group on TRIMs, the United States defined local content as "a barrier that could not be overcome no matter how much better an imported product might be." (MTN.GNG/NG12/13 at para. 43.) The Indonesian subsidy programmes, unlike the undertakings in FIRA or EEC-Parts and Components, do not present a barrier that cannot be overcome. Each company can choose whether it is in its commercial interest to source a certain amount locally and pay one rate of duty on imported parts or to source less in Indonesia and pay a different duty rate.