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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)


(b) Indonesia's customs import duties subsidy does not involve a "requirement" necessary to "secure an advantage" within the scope of Article III:4 of GATT 1994

5.401 Complainants erroneously contend that Indonesia's subsidized customs import duties are within the scope of Article III: 4 of the General Agreement. They claim that the issue is "not the reduction of duties, as such, but conditioning such reduction on the purchase of domestic parts and components."

5.402 The flaw in complainants' position is fundamental - the scope of Article III is limited to internal laws, regulations and requirements; subsidized customs import duties are border measures, not internal laws, regulations or requirements. No WTO or GATT precedent supports expanding the scope of Article III to cover border measures. Indeed, the precedents Complainants cite - Italian Machinery,266 EEC - Parts and Components267, EEC-Oilseeds268, Bananas III269 and FIRA270 - disprove their contention.

5.403 Italian Machinery involved credit facilities available only to purchasers of domestic tractors - clearly internal measures. The Panel's identification of the scope of Article III was simple and unambiguous: "¼ the intention of the drafters of [Article III of the General] Agreement was clearly to treat imported products in the same way as the like domestic products once they had been cleared through customs."271

5.404 EEC - Parts and Components involved: (i) "anti-circumvention duties" imposed on finished products assembled in the European Communities (not on imported parts); and (ii) the suspension of European Communities administrative proceedings where companies agreed to limit their use of imported parts. Both clearly are internal measures, not border measures. After stating that the European Communities's "anti-circumvention duties" were neither conditioned upon the importation of a product nor imposed at the time of importation, the Panel said: "the imposition of 'ordinary customs duties' for the purpose of protection is allowed unless they exceed tariff bindings. ¼ By contrast, internal taxes that discriminate against imported products are prohibited."272

5.405 Oilseeds involved payments to processors of domestic oilseeds. The principle the European Communities believes relevant appears to be that "¼ the exposure of a particular imported product to a risk of discrimination constitutes, by itself, a form of discrimination."273 Once again, as the first emphasized portion of the quote demonstrates, the measure at issue was an internal measure affecting a product that already had been imported, not a border measure.

5.406 What of Bananas III? There, too, the Appellate Body expressly declared:

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.274

The "advantage" within the scope of Article III:4 was the distribution of licences among eligible operators, something that occurred after importation and thus was an internal measure. The "import licensing requirement, as such", - the border measure - was not addressed because, as a border measure, it could not be within the scope of Article III.

5.407 Lastly, the FIRA decision, addressed at pages 99 to 100 of Indonesia's First Submission, provides Complainants no succour. In this, the leading GATT decision regarding local content regimes, the Panel found that corporate undertakings to purchase goods of Canadian origin, an internal requirement, were within the scope of Article III:4.275 As in the other cases Complainants cite, no border measure was involved.

5.408 Complainants have not pointed to any precedent declaring that Article III applies to border measures. They cannot. No such precedent exists because Article III applies only to measures regarding imported goods that have cleared customs.

5.409 What of the linkage of the level of customs import duties to the level of domestic content? Rather than seeking to transform a border measure into an internal measure so as to apply Article III, the proper approach is to analyze whether this domestic content subsidy is consistent with Indonesia's obligations, as a developing country, under the SCM Agreement.

2. Rebuttal of Japan to Arguments of Indonesia

5.410 Japan argues, in rebuttal to Indonesia's response to the claim under Article III:4 pertaining to the tariff measures, that the February 1996 programme violates GATT Article III:4 and cannot escape review as a purported "border measure" or "voluntary measure." The following are Japan's rebuttal arguments in this regard:

(a) The February 1996 programme violates GATT Article III:4

5.411 The February 1996 programme waives payment of the 35 per cent luxury tax and import duties of up to 65 per cent on automotive parts and components in connection with the National Car, conditioned on the National Car meeting certain local content requirements. Thus, it creates strong incentives for the National Car manufacturer to favour Indonesian parts and components over like imported parts and components, in clear violation of GATT Article III:4. (See Section V.C.1.)

(b) Indonesia's "border measure" defence has no merit

5.412 Regarding the local content requirement in connection with the import duty exemption, Indonesia argues that it is a "border measure," because "[c]ustom duties are, by definition (Article I:1 of the General Agreement), 'imposed on or in connection with importation.'" Indonesia further argues that it follows that such a measure cannot be an "internal regulation" subject to Article III:4. However, both the text of GATT Article III:4 and the GATT/WTO precedent cases disprove this assertion.

(1) The text of GATT Article III:4 shows that it applies to "all" measures "affecting" conditions of internal sale

5.413 First, the text of GATT Article III:4 provides that the Article shall be applied "in respect of all laws, regulations and requirements affecting [imports'] internal sale, offering for sale, purchase, transportation, distribution or use." Nothing in the text requires such laws, regulations, and requirements to affect only wholly internal matters, or in other words, not to have any connection whatsoever with the border. Nor is there any textual basis for the rigid distinction that Indonesia has attempted to draw between "border measures" and "internal measures". Rather, Article III:4, by its terms, applies to "all" measures "affecting [imports'] internal sale, [etc.]," regardless of how Indonesia chooses to describe its measures for purposes of these proceedings.276

5.414 In the instant case, the issue is not the reduction of import duties as such. The Government of Japan is not challenging the duties of up to 65 per cent that Indonesia maintains on imports of automotive parts and components. Instead, the issue here concerns the incentives, including the import duty incentive, created by Indonesia to encourage the purchase of domestic automotive parts and components over like imports. Providing an Indonesian automaker with incentives to purchase domestic parts and components clearly "affects" the conditions of "internal sale." Moreover, what is encouraged by this measure is a purely internal activity (i.e. purchase of domestic parts and components), which has little connection with "borders." Thus, regardless of whether the incentives involve "border measures" such as import duties, they "affect" conditions of internal sale for imported automotive parts and components and are covered by the plain text of GATT Article III:4.

5.415 It should likewise be noted that, in connection with the luxury tax exemption, the issue for purposes of Article III:4 is not the luxury tax exemption as such. The discriminatory luxury tax exemption as such violates Article III:2. What matters for purposes of Article III:4 is the local content requirements which must be satisfied to obtain the luxury tax exemption. By creating incentives to purchase Indonesian parts and components, the local content requirements accord Indonesian products more favourable treatment than like imported products, in violation of Article III:4.

(2) The GATT/WTO precedents also show that GATT Article III:4 applies to "border measures" that affect conditions of internal sale

5.416 Indonesia's argument is also inconsistent with the long-standing construction of Article III:4 that has been accepted by GATT and WTO panels since 1958. The early GATT precedent in Italian Discrimination Against Imported Agricultural Machinery, which has been cited approvingly many times since, stated that Article III:4 applies to laws "affecting internal sale, purchase, etc." and not only to laws "governing the conditions of sale or purchase." The Panel further elaborated, "the selection of the word 'affecting' would imply that the drafters of the Article intended to cover in paragraph 4 not only the laws and regulations which directly governed the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between the domestic and imported products on the internal market."277

5.417 Other, more recent decisions are even more directly on point in specifically holding that measures involving "border measures" and "affecting" the conditions of "internal sale" or purchase fall within the coverage of GATT Article III:4. For example, the Panel in United States - Section 337 of the Tariff Act of 1930 held that the "fact that Section 337 is used as a means for the enforcement of United States patent law at the border does not provide an escape from the applicability of Article III:4."278

5.418 This conclusion was most recently reaffirmed by both the Panel and the Appellate Body in EC - Regime for the Importation, Sale and Distribution of Bananas ("Bananas III").279 In that case, the European Communities argued, to both the Panel and the Appellate Body, that the measure at issue was a border measure, not an internal measure subject to GATT Article III:280, but that argument was not accepted. Instead, the Panel found that the European Communities' measures violated GATT Article III:4 in that they affected internal sales conditions, by allocating a certain portion of the licences required to import bananas at a reduced duty rate exclusively to operators who marketed certain quantities of domestic bananas. The Panel expressly held that "border measures may be within the purview of the national treatment clause" of Article III:4.281 It further stated, "if the mere fact that the European Communities regulations .... include or are related to a border measure such as a licensing requirement would mean that the Article III cannot apply, it would not be difficult to evade the GATT national treatment obligation."282 The Panel's finding was examined and upheld by the Appellate Body.283 Thus, it is clear that the Panel and the Appellate Body Report on Bananas III rejected an argument identical to Indonesia's in a very similar context.

5.419 Indonesia's curious attempt to claim that the Appellate Body's report in Bananas III supports its position not only fails, but undercuts the heart of its argument. Indonesia quotes the Appellate Body as stating:

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.

But, far from supporting Indonesia's position, this quotation highlights its error. The quotation demonstrates that GATT Article III:4 does in fact apply to measures, such as Indonesia's import duty incentive, that "affect" internal sales conditions for imports regardless of whether such measures also have some relationship with the border. Indeed, the Appellate Body's statement so undercuts Indonesia's position and supports Japan's that it may be reformulated easily to apply to this case as follows:

At issue in this case is not whether any import duty, as such, is within the scope of Article III:4, but whether Indonesia's requirements which encourage internal purchase of domestic automotive parts and components within Indonesia are within the scope of this provision.

5.420 The other two cases cited by Indonesia likewise fail to support its argument. While it may be true, as Indonesia says, that the measures at issue in Canada - Administration of the Foreign Investment Review Act were not border measures, nothing about that decision supports the alleged interpretation that any measure related to border measures cannot be subject to GATT Article III:4. That Panel simply did not address this issue. Finally, as for EEC - Regulation on Imports of Parts and Components, Indonesia's assertion that the measures at issue there did not involve border measures is simply incorrect. The "advantage" found by that Panel to violate Article III:4 concerned the suspension of proceedings under the anti-circumvention provision of the anti-dumping legislation, which, contrary to Indonesia's characterization, obviously implicates border measures. In fact, the European Communities argued in that dispute that the measures "were not internal measures within the meaning of [GATT Article III]"284, which the Panel rejected.

5.422 Therefore, Indonesia's "border measure" defence is inconsistent with both the plain text of Article III:4 and its well-established understanding.

(c) Indonesia's "voluntary measure" defence has no merit

5.422 Indonesia also seems to argue that, since the measures at issue in this case are not mandatory measures but measures with which the company may comply voluntarily to obtain a benefit, they are not covered by GATT Article III:4 (see Section V.F.1). However, that argument does not have any merit.

5.423 Indonesia's argument is inconsistent with the firmly established interpretation of GATT Article III:4 that has been affirmed by many GATT/WTO panels. These decisions establish that where compliance with a certain measure is necessary to secure an "advantage," such a measure is covered by GATT Article III:4. For example, the Panel in Italian Agricultural Machinery found inconsistent with GATT Article III:4 an Italian law that created voluntary incentives for farmers to purchase domestic agricultural machinery by providing special credit terms to farmers for the purchase of domestic machinery, but not for imports.285 Other similar examples include the Panel Report on EEC - Parts and Components286 and the recent Panel and Appellate Body Reports on Bananas III.287

5.424 The well-established conclusion that GATT Article III:4 covers not only mandatory measures but also voluntary measures is reinforced by the Illustrative List of the TRIMs Agreement, which explicitly provides that "TRIMs that are inconsistent with .... [GATT Article III:4] include those .... compliance with which is necessary to obtain an advantage ...." (See also Section VI.A.)

3. Rebuttal of European Communities to arguments of Indonesia

5.425 The European Communities argues, in rebuttal to Indonesia's response to the claim under Article III:4 pertaining to the tariff measures, that import duty relief contingent on local content requirements violates GATT Article III:4 and cannot escape review as a purported "border measure" or "voluntary measure". The following are the European Communities' rebuttal arguments in this regard:

5.426 Indonesia argues that Article III:4 does not apply to the measures mentioned in numbers (v) and (vi) of part (b) of the European Communities' claims (See Section III.B), because they are border measures.

5.427 The European Communities would agree that the application of a reduced or zero customs duty rate on imports of automotive parts and components is a "border measure" which, if applied in isolation, would fall outside the scope of GATT Article III:4. In the present case, however, the granting of that tariff advantage is conditional upon the motor vehicles into which the imported parts and components are assembled reaching a certain percentage of local content. In order to reach that percentage, local assemblers must use local parts and components instead of imported ones. Therefore, it is indisputable that the measure "affects" the internal use within Indonesia of parts and components within the meaning of GATT Article III:4.

5.428 It is a well established principle that GATT Article III:4 does not apply only to "mandatory" measures but also where compliance with a certain measure (such as the local content targets at issue in the present case) is necessary in order to secure an advantage or benefit (such as the possibility to import inputs at a reduced or zero rate). As noted by the Panel Report on EEC - Regulation on Imports of Parts and Components:

... the comprehensive coverage of 'all laws, regulations or requirements affecting [emphasis added by the Panel] the internal sale, etc. of imported products suggests that not only requirements which an enterprise is legally bound to carry out, such as those examined by the FIRA Panel .... but also those which an enterprise voluntarily accepts in order to obtain an advantage from the government constitute 'requirements' within the meaning of that provisions288" [emphasis added].

5.429 The "advantage" in question may consist of a benefit granted with respect to a border measure, such as for instance a tariff exemption or reduction. This has been confirmed by the recent Panel reports on EC - Regime for the Importation, Sale and Distribution of Bananas.289

5.430 One of the measures in dispute in that case were the so-called "operator category rules" for the allocation of licences to import of "third country" bananas at lower tariff rates within a tariff quota. In accordance with those rules, 30 per cent of the tariff quota was reserved for operators who had marketed during a preceding three-year period bananas of European Communities origin or of traditional ACP sources.

5.431 The Panel found that the requirement to market bananas of European Communities origin afforded more favourable treatment to those bananas than to like imported bananas and therefore violated Article III:4 of GATT. In reaching this conclusion the Panel rejected expressly an argument submitted by the European Communities to the effect that the measures were border measures and as such not subject to Article III:4. The Panel restated the view of a previous (unadopted) Panel Report dealing with the same matter that

"... a requirement to purchase a domestic product in order to obtain the right to import a product at a lower rate of duty under a tariff quota is therefore a requirement affecting the purchase of a product within the meaning of Article III:290".

5.432 The situation is identical in the present case. In order to obtain the right to import parts and components at a lower rate of duty, the assemblers of motor vehicles are required to use (and purchase previously if they do not manufacture them internally) domestic parts and components, thereby affording more favourable treatment to those parts and components than to like imported parts and components.

5.433 The findings of the Panel Reports on EC - Regime for the Importation, Sale and Distribution of Bananas with respect to the operator category rules were upheld by the Appellate Body on appeal.291 Indonesia misreads the findings of the Appellate Body. The obvious meaning of the passage of the Appellate Body report cited by Indonesia in its submission (See Section V.F.1) is that while, in principle, import licensing requirements are not within the scope of Article III:4, the requirements applied by the European Communities went "far beyond the mere import licence requirements needed to administer the tariff quota" and affected the "internal sale, offering for sale... etc" of bananas. By the same token, in the present case, the local content targets go beyond what is necessary to apply a tariff reduction/exemption and affect the internal use of parts and components within the meaning of Article III:4.

4. Rebuttal of United States to arguments of Indonesia

5.434 The United States argues that Indonesia's argument that Indonesia's tariff incentives do not violate Article III:4 of GATT 1994 because they are "border measures" has been rejected by the Appellate Body. The following are the United States' arguments in this regard:

5.435 Indonesia argues that the tariff incentives under the 1993 Programme and the National Car Programme do not violate Article III:4 of GATT 1994 because Article III:4 does not address "advantages" that are conferred in the form of border measures. According to Indonesia, "There can be no serious argument that internal regulation is involved. Therefore, Article III of the General Agreement, including Article III:4, is inapplicable.".

5.436 To the contrary, there can be no serious argument that internal regulation is not involved. Indonesia's argument consists of a discussion of panel decisions that found violations of Article III:4, but that did not involve border measures. From this, Indonesia concludes that Article III:4 does not cover advantages conferred in the form of border measures.

5.437 This is a classic non sequitur. The fact that these panels were not dealing with border measures does not prove that advantages conferred in the form of border measures are not covered by Article III:4. All it proves is that these panels did not address the question.

5.438 However, the Appellate Body has addressed and rejected the very argument advanced here by Indonesia. In Bananas III, in connection with the European Communities's licensing regime, the European Communities argued that (1) the panel erred in finding the licensing regime to be an internal measure subject to Article III:4, and not a border measure, and (2) the panel misunderstood the notion of internal measures in GATT 1994.292 However, the Appellate Body flatly rejected this argument. Of particular relevance is the following discussion of the Appellate Body regarding hurricane licences293:

Hurricane licences allow for additional imports of third-country (and non-traditional ACP) bananas at the lower in-quota tariff rate. Although their issuance results in increased exports from those countries, we note that hurricane licences are issued exclusively to European Communities producers and producer organizations, or to operators including or directly representing them. We also note that, as a result of the European Communities practice relating to hurricane licences, these producers, producer organizations or operators can expect, in the event of a hurricane, to be compensated for their losses in the form of "quota rents" generated by hurricane licences. Thus, the practice of issuing hurricane licences constitutes an incentive for operators to market European Communities bananas to the exclusion of third-country and non-traditional ACP bananas. This practice therefore affects the competitive conditions in the market in favour of European Communities bananas ... .

For these reasons, we agree with the Panel that the European Communities practice of issuing hurricane licences is inconsistent with Article III:4 of the GATT 1994.

5.439 Like the hurricane licences in Bananas III, the tariff incentives provided by Indonesia may constitute border measures. However, the manner in which they are awarded constitutes an incentive to favour Indonesian automotive parts and subparts over imported parts and subparts, thereby affecting the competitive conditions in the Indonesian market in favour of Indonesian parts and subparts. As such, they violate Article III:4.

To Continue with Claims Under the Trims Agreement.


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

267 EEC-Regulation on Imports of Parts and Components (16 May 1990), BISD 37S/132.

268 European Economic Community-Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins (25 January 1990), BISD 37S/86.

269 European Communities-Regime for the Importation, Sale and Distribution of Bananas (9 September 1997), WT/DS27/AB/R.

270 Canada-Administration of the Foreign Investment Review Act (FIRA) (7 February 1984), BISD 30S/140.

271 Italian Discrimination Against Imported Agricultural Machinery (23 October 1958), BISD 7S/60, 64, para. 11 (emphasis added).

272 European Economic Community-Regulation on Imports of Parts and Components (16 May 1990), BISD 37S/132, 192, para. 5.4.

273 European Economic Community-Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins (25 January 1990), BISD 37S/86, 125, para. 141 (first emphasis added).

274 European Communities-Regime for the Importation, Sale and Distribution of Bananas (9 September 1997), WT/DS27/AB/R, 85, para. 211 (emphasis added).

275 Canada-Administration of the Foreign Investment Review Act (FIRA) (7 February 1984), BISD 30S/140.

276 Indonesia seems to rely on the title of GATT Article III, underscoring the word "internal" in the title language "National Treatment on Internal Taxation and Regulation." However, the Government of Indonesia makes mistakes in interpreting the title, as is obvious from the text of GATT Article III:4. A regulation is subject to GATT Article III:4 if it affects conditions of internal sale.

277 Panel Report on Italian Discrimination Against Imported Agricultural Machinery ("Italian Agricultural Machinery"), L/833, adopted on 23 October 1958, 7S/60, 64, para.12. (Emphasis in original.)

278 Panel Report on United States - Section 337 of the Tariff Act of 1930 ("US - Section 337"), L/6439, adopted on 7 November 1989, BISD 36S/345, 385-386, para. 5.10. See also Panel Report on EEC - Regulation on Imports of Parts and Components, L/6657, adopted on 16 May 1990, BISD 37S/132, 197.

279 Panel Report on EC - Regime for the Importation, Sale and Distribution of Bananas ("Bananas III"), WT/D2S7/R/USA, adopted on 25 September 1997, as modified by the Appellate Body. Appellate Body Report on Bananas III, WT/DS27/AB/R, adopted on 25 September 1997.

280 Panel Report on Bananas III, paras. 4.265-4.271. Appellate Body Report on Bananas III, paras, 33-36.

281 Panel Report on Bananas III , para. 7.176.

282 Id., para. 7.177.

283 Appellate Body Report on Bananas III, paras. 209-211.

284 Panel Report on EEC - Parts and Components, para.3.43.

285 Panel Report on Italian Agricultural Machinery, paras. 11-12. See para. 3.07 above.

286 Panel Report on EEC - Parts and Components, para. 5.21. See para. 3.11 above.

287 Panel Report on Bananas III, para. 7.178. Appellate Body Report on Bananas III, paras. 211- 214. See paras. 3.09-3.10 above.

288 Panel Report on European Communities - Regulation on imports of Parts and Components, adopted on 16 May 1990, 37S/132, 197, para 5.21. This principle has been applied also by other Panels. Thus, the Panel Report on Italian discrimination against Imported Agricultural Machinery (adopted on 23 October 1958, BISD 7S/60, 64, para 12) found that an Italian law providing especial credit terms to farmers for the purchase of agricultural machinery conditional on the purchase by the farmers of Italian machinery was contrary to Article III:4. Similarly, the Panel Report on EEC - Payments and subsidies paid to Processors and Producers of Oilseeds and Related Animal Feed Proteins (adopted on 25 January 1990, BISD 37S/86, 124-125) concluded that the payment by the Community of subsidies to the processors of oilseeds who purchased oilseeds of Community origin was contrary to Article III:4.

289 See e.g. Panel Report on EC - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/GTM, WT/DS27/R/HND, adopted on 25 September 1997, at paras 7.171-7.182, 7.216-7.219 and 7.244-7.250.

290 Id. at para 7.179, quoting the Panel Report on EEC - Import regime for Bananas, issued on 11 February 1994 (not adopted), DS 38/R, para 146.

291 Appellate Body report on EC - Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted on 27 September 1997, at para 211.

292 Id. at para. 33.

293 Id. at para. 213-214.