6.1 Japan argues that the National Car Programme (see Section III.A) violates Article 2 of the TRIMs Agreement. The following are Japan's arguments in support of this claim:

6.2 Article 2:1 of the TRIMs Agreement provides that "no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994." The issues before this panel, therefore, are twofold: (i) whether or not the National Car Programme is a "TRIM", and (ii) whether or not it violates either of the relevant GATT articles. As we have demonstrated, the exemption from the luxury tax and the import duty on the basis of local content is in violation of Article III:4. Consequently, the second of the above has been met, and the focus of the analysis here is on the first of the two issues.

1. Indonesia's Programmes are "TRIMs" as defined in the TRIMs Agreement

6.3 There is no doubt that Indonesia's programmes constitute "investment measures related to trade".²⁹⁴ First, in the context of GATT/WTO, a "measure" is interpreted broadly. For example, in the case of GATS, it is expressly stated that "'measure' means any measure by a Member, whether in the form of law, regulation, rule, procedure, decision, administrative action, or any other form".²⁹⁵ In light of the usage of the term within the context of the TRIMs Agreement, the notion of a "measure" should be interpreted similarly. Government regulations requiring certain local content to obtain an exemption from a luxury tax or specifying levels of import duty thus constitute "measures" within the meaning of the TRIMs Agreement.

6.4 Second, Indonesia's programmes are all "trade-related investment measures". The National Car Programme has been established specifically "with a view to supporting the development of the automotive industry."²⁹⁶ The central aspect of the National Car Programme is to develop the domestic manufacturing capability of automobiles and automotive parts and components. The fact that the Programme includes "investment measures" is also obvious from the fact that one of its implementing regulations is entitled "Investment Provisions for Realization of the National Automobile Industry."²⁹⁷ The Programme indeed impacts on the automobile industry in Indonesia where foreign-owned manufacturers are actively participating. Furthermore, these are all "trade-related" since the Programme is conditioned on local contents requirements and thus naturally affects trade.

6.5 Indonesia has essentially confirmed this point in prior meetings of the WTO Committee on Trade-Related Investment Measures. In the Minutes of the Meeting Held on 30 September and 1 November 1996, the representative of Indonesia stated:

6.6 In addition, the Illustrative List in the Annex to the TRIMs Agreement, paragraph 1, specifically includes local content requirements as TRIMs that are inconsistent with Article III:4:

Indonesia's measures, which are contingent on compliance with local content requirements, thus clearly constitute prohibited TRIMs as set forth in the Illustrative List.

6.7 Furthermore, Japan considers that any TRIMs which violate GATT Article III, including both Article III:2 and Article III:4, are inconsistent with Article 2.1 of the TRIMs Agreement. Japan believes that the February 1996 Programme violates GATT Article III, is a "trade-related investment measure", and thus violates TRIMs Article 2.1.

2. Even if Indonesia's measures were deemed to constitute a subsidy, it is nonetheless also a TRIM

6.8 Indonesia claims that the measure is a "subsidy" rather than a "TRIM".²⁹⁹ However, the concepts of a TRIM and subsidy are not mutually exclusive. Nothing in the text, objective or purpose of the TRIMs Agreement would support the contention that a TRIM is no longer a TRIM simply because the local administering authority prefers to call it a subsidy rather than a TRIM.

3. Indonesia cannot enjoy the benefit of the transitional period

6.9 Nor can Indonesia enjoy the benefit of the five-year transitional period for developing countries stipulated in TRIMs Agreement, Article 5.2, in light of Indonesia's failure to comply with its notification and standstill obligations. The TRIMs Agreement, Article 5.2 requires notification for Members to benefit from the transitional period, and Article 5.4 imposes a standstill obligation during the period. Indonesia has complied with neither provision. First, there is no notification. Indonesia submitted a notification on 23 May 1995³⁰⁰, which specifies certain automotive related measures, but the notification was withdrawn in October 1996.³⁰¹ Second, even if the notification had not been withdrawn, its content is irrelevant to the National Car Programme. While the measures appeared in the notification may be tangentially related to the National Car Programme, the Programme itself was not specified in the notification. Moreover, the National Car Programme, which was introduced in 1996, could have never been notified in the notification, which was due within 90 days after the date of entry into force of the WTO Agreement (i.e., 1 January 1995) and was actually made by Indonesia in May 1995. Therefore, Indonesia cannot enjoy the benefit of the transitional period under Article 5.2. of the TRIMs Agreement.

B. Claims Raised by the European Communities

6.10 The European Communities claims that Indonesia has violated its obligations under Article 2.1 of the TRIMs Agreement, as the following measures (See Section III.B) are TRIMs inconsistent with Article III of GATT 1994:

6.11 The following are the European Communities' arguments in support of this claim:

6.12 Article 2.1 of the TRIMs Agreement provides that:

6.13 The notion of TRIM ("Trade Related Investment Measure") is not defined in the TRIMs Agreement. Nevertheless, the Annex to the TRIMs Agreement contains what Article 2.2 of that Agreement describes as:

6.14 The above measures are "investment measures" because they are specifically designed to promote investment into the automotive sector with the purpose of achieving "full manufacturing" of motor vehicles in Indonesia. Further, the measures are "trade related" because they encourage the use of domestic parts and components over imported ones. Finally, as demonstrated above, the measures are inconsistent with Article III:4 and, in some cases, also with Article III:2, first sentence.

6.15 The above analysis is confirmed by the Illustrative List annexed to the TRIMs Agreement. Indeed, the measures at issue fall squarely within the category defined in Item 1 (a) of the Illustrative List, which reads as follows:

6.16 Article 5.2 of the TRIMs Agreement provides a temporary derogation from the obligation contained in Article 2 in respect of TRIMs which were in force at least 180 days before the entry into force of the WTO Agreement and which have been duly notified by the Member concerned within 90 days from the entry into force of the WTO Agreement, as required by Article 5.1 of the TRIMs Agreement. In the case of developing country Members, such as Indonesia, this temporary derogation has a duration of five years.

6.17 On 23 May 1995, Indonesia made a notification under Article 5.1 of the TRIMs Agreement³⁰². This notification, however, does not entitle Indonesia to invoke the temporary arrangement provided in Article 5.2 with respect to the measures at issue.

6.18 In the first place, Indonesia's notification was made more than 90 days after the entry into force of the WTO Agreement. Accordingly, it does not constitute a valid notification under Article 5.1.

6.19 Moreover, Indonesia's notification covered only the measures provided in Decree 645/93. The tax benefits provided in Government Regulation 36/96 and the incentives granted under the National Car Programme were introduced by Indonesia only after the entry into force of the WTO Agreement. For that reason, they were not, and could not have been, notified under Article 5.1.

6.20 On 28 October 1996 (i.e. immediately before the first round of consultations with the Community took place) Indonesia withdrew formally its notification. Allegedly because, based on a further analysis of the measures concerned, it had concluded that the measures were not TRIMs³⁰³. In reality, however, the obvious reason for withdrawing the notification was Indonesia's belated realisation that the notification would not only fail to provide the expected immunity for the notified measures, but, in addition, would represent an open admission that both the notified measures and the non-notified ones are contrary to Articles III:4 of GATT and 2 of the TRIMs Agreement.

C. Claims raised by the United States

6.21 The United States claims that Indonesia's system of tariff and tax incentives and the government-directed $690 million loan to TPN (See Section III.C) are inconsistent with Article 2 of the TRIMs Agreement. The following are the United States' arguments in support of this claim:

6.22 Indonesia's system of tariff and tax incentives and the government-directed $690 million loan to TPN are based upon the achievement of designated local content targets and, as such, discriminate against imported automotive parts (and subparts) in favour of their domestic counterparts. In addition to violating Article III:4 of GATT 1994, these measures also violate Article 2 of the TRIMs Agreement.

6.23 Article 2 of the TRIMs Agreements, in pertinent part, states the following:

6.24 Paragraph 1(a) of the Illustrative List, in turn, provides as follows:

6.25 The tariff and tax incentives provided by Indonesia fall squarely within the example of a TRIM in paragraph 1(a) of the Illustrative List. The tax and tariff incentives under the 1993 Programme and the National Car Programme require, within the meaning of Article 1(a) of the Illustrative List, "the purchase or use by an enterprise of products of domestic origin or from any domestic source ...". "Compliance" with these requirements "is necessary to obtain an advantage" within the meaning of Article 1 of the Illustrative List. As such, these incentives fall squarely within the Illustrative List. Under both the 1993 programme and the National Motor Vehicle programme, in order to obtain the "advantage" of tariff or tax reductions or exemptions, an "enterprise" must "comply" with the requirement to "use . . . products of domestic origin". Likewise, the provision of the government-directed $690 million loan to TPN was based on TPN's status as a participant in the production of a "national motor vehicle", a status which, in turn, was based on compliance with the requirement to satisfy the local content requirements for a "national motor vehicle". Therefore, the tariff and tax incentives and the provision of the government-directed $690 million loan constitute TRIMs that are prohibited by Article 2.1 of the TRIMs Agreement.

6.26 With respect to the 1993 programme, Indonesia, as a developing country, could have taken advantage of the notification and transitional arrangements of Article 5 of the TRIMs Agreement. Paragraphs 1 and 2 of Article 5 provide, in pertinent part:

6.27 Indonesia did notify, pursuant to Article 5.1, that portion of the 1993 programme providing tariff incentives. However, that notification was untimely, because it was made on 23 May 1995, well after the deadline for notifying TRIMs under Article 5.1 had closed.³⁰⁴ Moreover, the notification did not cover that portion of the 1993 programme providing tax incentives.³⁰⁵ Subsequently, Indonesia withdrew that portion of its notification pertaining to the tariff incentives for motor vehicles.³⁰⁶ As a result, Indonesia has not notified any of the TRIMs described above, and, thus, is ineligible to take advantage of the transitional arrangements in Article 5.2.³⁰⁷

D. Response by Indonesia to Claims under the TRIMs Agreement

6.28 Indonesia argues, in response to the claims under the TRIMs Agreement, that the TRIMs Agreement interprets Article III of the GATT 1994, and adds no new obligations; thus it cannot alter the fact that Article III is not applicable. The following are Indonesia's arguments in this regard.

1. Summary

6.29 At the start of the Uruguay Round negotiations, the United States, the European Communities, Japan and other developed countries had grand plans for an agreement that would broadly discipline investment measures. Throughout the negotiations, however, the developed countries' efforts were countered by virtually all developing countries. To avoid the absence of any agreement at all, the agreed-upon TRIMs text provides that the type of local content measure found to be inconsistent with Article III of the General Agreement in Canada-Administration of the Foreign Investment Review Act (7 February 1994), BISD 30S/140, (as well as another type of measure previously found to be inconsistent with Article XI) should also be proscribed as a TRIM. In other words, to be a TRIM, a measure must be inconsistent with GATT Articles III or XI.

6.30 Article 2.1 of the TRIMs Agreement states:

The TRIMs Agreement does not add any new obligations; it merely interprets Article III. This was recognized in the Report of the Panel on European Communities-Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/USA (22 May 1997), which declares at paragraph 7.185:

6.31 As demonstrated (See Section V.D), Indonesia's luxury tax subsidy is not inconsistent with Article III of the General Agreement. Therefore, the TRIMs Agreement is not germane to this dispute.

2. The TRIMs "Illustrative List" cannot alter the fact that Article III is inapplicable

6.32 Complainants seek to use the TRIMs Illustrative List as the tail to wag the Article III dog, claiming that the Indonesian measures fall within the scope of paragraph 1(a) of the List and hence are TRIMs.

6.33 During the Uruguay Round negotiations, the United States clearly indicated the subordinate nature of the Illustrative List. The official minutes of the 10-11 July 1989 meeting of the TRIMs negotiating group record the following exchange:

6.34 The United States, the European Communities, Japan and other developed countries had extensive negotiating goals for the TRIMs Agreement, but at the end of the negotiation the parties could not even agree upon basic definitions such as "investment" measure and "trade-related." The only "general criteria" that survived the negotiating process and was reflected in the final text of the TRIMs Agreement was that a TRIM must be inconsistent with the obligations of either Article III or XI of the General Agreement. In sum, because the luxury tax subsidy is not inconsistent with Article III, it cannot be proscribed by the TRIMs Agreement.

To Continue with Subsidies are governed by the subsidies agreement.

²⁹⁴ TRIMs Agreement Article 1.

²⁹⁵ 94 GATS Article XXVIII(a).

²⁹⁶ Government Regulation No. 36/1996 (Japan Exhibit 25), preamble.

²⁹⁷ Decree of the State Minister for Mobilization of Investment Funds/Chairman of the Investment Coordinating Board No.01/SK/1996 (Japan Exhibit 29).

²⁹⁸ G/TRIMS/M/5 (Japan Exhibit 63), para. 24, 27 November 1996.

²⁹⁹ See Notification under Article 5.1 of the Agreement on Trade-Related Investment Measures, Indonesia Addendum (G/TRIMS/N/1/IDN/1/Add.1) (Japan Exhibit 18); SUBSIDIES / Replies to Questions posed by JAPAN Concerning the Updating Notification of INDONESIA (G/SCM/Q2/IDN/9) (Japan Exhibit 20), 2.(iii).

³⁰⁰ Notification under Article 5.1 of the Agreement on Trade-Related Investment Measures, Indonesia (G/TRIMS/N/1/IDN/1) (Japan Exhibit 17).

³⁰¹ Notification under Article 5.1 of the Agreement on Trade-Related Investment Measures, Indonesia Addendum (G/TRIMS/N/1/IDN/1/Add.1) (Japan Exhibit 18).

³⁰² G/TRIMS/N/1/IDN/1, dated 1 June 1995.

³⁰³ G/TRIMS/N/1IDN/1/Add.1, dated 31 October 1996.

³⁰⁴ G/TRIMS/N/IDN/1 (1 June 1995).

³⁰⁵ Id.

³⁰⁶ G/TRIMS/N/IDN/1/Add. 1 (31 October 1996).

³⁰⁷ Of course, Indonesia could not have notified its TRIMs under the National Motor Vehicle programme, because Indonesia did not introduce those TRIMs until after the 90-day notification window of Article 5.1 had closed.

³⁰⁸ MTN.GNG/NG12/11 at para. 55 (emphasis added).