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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)


(c) Incentive measures are covered by the TRIMs Agreement

6.69 The Government of Indonesia also contends that "no consensus exist[ed] that subsidy measures also are subject to the disciplines of the TRIMs Agreement," that its incentives to encourage purchases of domestic goods over imports "are not TRIMs; they are subsidies", and thus "they are subject to the disciplines of the Subsidies Agreement". (See Section VI.D).

6.70 However, Indonesia's allegation contradicts the text of the TRIMs Agreement. The text of the Agreement requires only two elements for a measure to constitute a violation of TRIMs Article 2.1: first, the measure is an "investment measure related to trade in goods"; and second, the measure is "inconsistent with the provisions of [GATT] Article III or Article XI". As described in paragraph 3.14 above, it has been firmly established that GATT Article III:4 applies not only to mandatory measures but also to measures with which a company may comply voluntarily to obtain a benefit. Therefore, it is clear that TRIMs Article 2.1 also applies to such voluntary measures, or incentive measures, as long as they fall within the concept of "TRIMs".

6.71 The Illustrative List in the Annex of the TRIMs Agreement also demonstrates that the February 1996 Programme is a TRIM. That list explicitly provides that prohibited TRIMs include any local content requirement "compliance with which is necessary to obtain an advantage".

6.72 Because the text of the TRIMs Agreement clearly and unambiguously establishes that it applies not only to mandatory measures but also to measures "compliance with which is necessary to obtain an advantage", there is no need to resort to the drafting history to understand this point.321 In fact, however, a review of the preparatory work of the TRIMs Agreement confirms - unsurprisingly, in view of the plain text - that the negotiators decided to include so-called "incentive measures" in the TRIMs Agreement.

6.73 Although the preparatory work shows active discussion about the definition of a "TRIM" throughout the negotiations and a wide variety of views were expressed322, at the final stage a consensus was created, as discussed below.

6.74 Late in the TRIMs negotiations (i.e., October 1991 through 20 December 1991), the Chairman distributed texts for the purpose of discussion. The key phrase concerning incentive measures (i.e., "TRIMs .... compliance with which is necessary to obtain advantage") was included in the Chairman's first draft, removed in the revised text of 25 November 1991 at the behest of India and other developing countries, and revived in the Chairman's second draft after developed countries objected to the earlier deletion. Ultimately, this phrase was finally adopted, with the developing countries accepting it in exchange for the developed countries' acceptance of the five-year transition period. Indeed, the negotiating group rejected a proposal by one Member that would have expressly limited TRIMs to mandatory measures.

6.75 It is also relevant to note that the final TRIMs Agreement did not incorporate a position advanced by some developing countries that would have provided for only the disciplines of the SCM Agreement to apply, when a "subsidy" (as defined in the SCM Agreement) was granted contingent on meeting certain requirements, such as local content requirements. That position was rejected, because most Members recognized that it would create too large a loophole in the TRIMs Agreement. This loophole was avoided by leaving both the SCM Agreement and the TRIMs Agreement silent about their relationship, thereby ensuring that the disciplines of both would apply to measures that were both TRIMs and "subsidies."

6.76 Thus, it is clear that the positions advanced in the quotations from the preparatory work cited in Indonesia's First Submission were not adopted in the final text of the TRIMs Agreement. Of course, it is the text of a treaty itself that governs and any views expressed during the negotiations that do not comport with the text carry no weight.323

6.77 Finally, subsequent practice under the WTO, which is relevant to its interpretation324, confirms that TRIMs that fall within the SCM definition of "subsidy" have nevertheless been understood to also be subject to the TRIMs Agreement. This is demonstrated by the fact that even many developing country Members have included such measures in their notifications to the TRIMs Committee under Article 5.325 In fact, the Government of Indonesia itself notified the TRIMs Committee of the incentive measures in its 1993 automobile programmes, although it did so late and later withdrew the notification, apparently in connection with these proceedings.326

(d) Indonesia's arguments would render parts of the TRIMs Agreement virtually meaningless

6.78 Finally, it should also be noted that Indonesia's argument that incentive measures should be governed only by the SCM Agreement, not by the TRIMs Agreement, would render parts of the TRIMs Agreement virtually meaningless.

6.79 As discussed (See Section VI.A), the text of the TRIMs Agreement clearly shows that an incentive measure, or a measure "compliance with which is necessary to obtain an advantage", is within the coverage of the Agreement. It appears that a TRIM that is an incentive measure would very often also be a "subsidy" under the SCM Agreement. Therefore, if an interpretation were taken that a measure, which constitutes both a "TRIM" under the TRIMs Agreement and a "subsidy" under the SCM Agreement, shall be governed only by the SCM Agreement, that would negate a substantial part of the TRIMs Agreement coverage.

6.80 Accordingly, a "TRIM" under the TRIMs Agreement should not be excluded from the coverage of the TRIMs Agreement, only because it constitutes a "subsidy" under the SCM Agreement.

2. Rebuttal arguments made by the European Communities

6.81 The following are the European Communities' rebuttal arguments to Indonesia's responses to the claims under the TRIMs Agreement:

(a) The measures at issue infringe GATT Article III and are therefore contrary to Article 2.1 of the TRIMs Agreement

6.82 Indonesia argues that the measures at issue do not infringe Article 2.1 of the TRIMs Agreement because they are not within the scope of, and therefore cannot be "inconsistent" with, Article III. The European Communities has shown (see Sections V.A.2 and V.C.2) that the measures at issue are inconsistent with GATT Articles III:2 and/or III:4. Therefore, they are contrary also to Article 2.1 of the TRIMs Agreement.

(b) Article 2.1 of the TRIMs Agreement lays down a legally distinct obligation

6.83 Indonesia claims that the TRIMs Agreement "interprets GATT Article III and does not add new obligations". Indonesia relies for this proposition on the following passage of the Panel Reports on EC regime concerning the Importation, Sale and Distribution of Bananas :

with the exception of its transitional provisions, the TRIMs Agreement, essentially interprets and clarifies the provisions of Article III (and also Article XI) were trade-related investment measures concerned. Thus the TRIMs Agreement does not add to or subtract from those GATT obligations, although it clarifies that Article III:4 may cover investment matters327.

6.84 Properly interpreted, this passage means that, in substance, the TRIMs Agreement is limited to restate and clarify the obligations laid down GATT Article III. Formally, however, Article 2.1 of the TRIMs Agreement lays down an obligation which is distinct from the obligation contained in GATT III. This is confirmed by the prior finding in the same Panel Report that the provisions of GATT and the TRIMs Agreement were "equally applicable" to the European Communities's import licensing procedures.328 Furthermore, if Article 2.1 of the TRIMs did not provide for an additional and distinct obligation, it would have been superfluous to stipulate in Article 3 of the TRIMs Agreement that all exceptions under GATT 1994 shall apply also to the provisions of the TRIMs Agreement. Likewise, it would have been unnecessary to sate in Article 4 of the TRIMs Agreement that developing Members shall be free to deviate from Article 2 "to the extent and in such manner" as Article XVIII of GATT and other related legal instruments permit those Members to deviate from GATT Articles III and XI.

(c) Even if it was found that there is a "conflict" between GATT Article III and the SCM Agreement, that conflict would not preclude a violation of Article 2 of the TRIMs Agreement

6.85 The General Interpretative Note to Annex 1A only applies to conflicts between GATT and the other Annex 1A Agreements. It does not apply to conflicts between the TRIMs Agreement and the SCM Agreement. Accordingly, even if it was found by the Panel that there is a "conflict" between GATT Article III and the SCM Agreement, such "conflict" would not preclude a violation of the legally distinct obligation contained in Article 2 of the TRIMs Agreement. In fact, the existence of a "conflict" between the SCM Agreement and GATT Article III would not make the measures concerned "consistent" with GATT Article III but merely exclude the application of that provision. Quite to the contrary, the existence of a "conflict" between the SCM Agreement and GATT Article III would presuppose necessarily that the measures are "inconsistent" with the latter.

(d) The TRIMs Agreement may apply to subsidies

6.86 The TRIMs Agreement applies to any trade related investment measure which is inconsistent with GATT Article III. Given that GATT Article III may apply to measures which are "subsidies" within the meaning of the SCM Agreement, it follows that the TRIMs Agreement may also apply to "subsidies". This is confirmed by the Illustrative List. In accordance with its ordinary meaning, the term "advantage" used in the Illustrative List may include also "subsidies" within the meaning of the SCM Agreement.329

3. Rebuttal Arguments made by the United States

6.87 Noting that it agrees with the points made by Japan and the EC at the second meeting of the Panel, and, in particular, the arguments made by the European Communities (See Section VI.E.2(b)), the United States makes the following arguments in rebuttal to Indonesia's responses to the claims under the TRIMs Agreement:

(a) The tariff and tax incentives under the 1993 Programme and the National Car Programme are inconsistent with Article 2 of the TRIMs Agreement

6.88 With respect to Indonesia's violations of Article 2 of the TRIMs Agreement, Indonesia argues that the TRIMs Agreement imposes no new obligations, but is merely an interpretation of Article III of GATT 1994. Indonesia, of course, must advance this argument in light of its "conflict" argument (the flaws in which we have addressed (See Section V.E.III)), because the General interpretative headnote to Annex 1A addresses only alleged "conflicts" between the GATT 1994 and the provisions of another Annex 1A agreement, not alleged "conflicts" between two or more Annex 1A agreements other than GATT 1994.

6.89 In advancing its argument, Indonesia relies on a statement made by the panel in the Bananas III case at para. 7.185 of the report.330 Indonesia argues that the panel ruled that the TRIMs Agreement does not add any new obligations. However, that is not what the Bananas III panel said. While the panel said that the TRIMs Agreement "essentially" interprets Article III and Article XI of GATT 1994, the panel also noted that the TRIMs Agreement clarified those obligations and granted transition provisions. Moreover, the panel's holding simply was that in the context of that particular case, the panel did not need to make a specific ruling under the TRIMs Agreement, because it already had found the measures in question to be violative of Article III:4. That limited holding is far different from holding that the TRIMs Agreement does not, in itself, impose obligations.

6.90 Indeed, the Bananas III panel itself recognized that the TRIMs Agreement reflected a new balance of rights and obligations; namely, a trade-off between the clarification of obligations and the grant of transition periods. An additional trade-off that the panel did not mention was the addition of transparency requirements in the form of the notification provisions in Article 5. For purposes of our Autos dispute, the most important clarification was that "incentive-based" measures, such as Indonesia's local content incentives, are covered.

6.91 As the Appellate Body stated in the Wool Shirts case, page 16, where an agreement reflects a carefully drawn balance of rights and obligations of Members, "[t]hat balance must be respected".331 Rather than respecting the balance reflected in the TRIMs Agreement, Indonesia would have this Panel ignore it.

6.92 Indonesia's other argument is that the drafting history of the TRIMs Agreement somehow demonstrates that the TRIMs Agreement was not intended to impose a new balance of rights and obligations. This argument, too, is easily disposed of.

6.93 Indonesia cites to a statement made by the United States during the TRIMs negotiations that allegedly demonstrates the subordinate nature of the TRIMs Illustrative List. However, the statement in question was made in the context of a United States proposal that was not adopted, and, thus, is of limited, if any, relevance.

6.94 Second, Indonesia refers to the fact that an issue in the negotiations was whether subsidies could be considered an "incentive" or a "condition for receipt of an advantage" and, thus, subject to the TRIMs Agreement. As discussed previously in connection with Indonesia's "conflicts" argument, the drafting history of the TRIMs Agreement demonstrates: (1) that local content subsidies are covered by the TRIMs Agreement; and (2) that Article 27.3 of the SCM Agreement was added at the last minute to ensure that subsidies permitted by the transitional provisions of the TRIMs Agreement would not be precluded by the SCM Agreement. Indeed, the very fact that Article 27.3 was added to the SCM Agreement demonstrates that the drafters intended that local content subsidies would be covered by the TRIMs Agreement.

6.95 Third, Indonesia refers to a document, "US Paper on WTO Agenda"332, which states that "[o]ther issues that appear to require additional follow [sic] include: ... the relationship of the TRIMs Agreement with the Agreement on Subsidies and Countervailing Measures." The document was drafted for the so-called "Invisibles Committee" (senior Capital-Based Officials), which functions as an ad hoc and unofficial steering group of sorts. Other participants in the Committee had asked the United States to draft the paper as a means of "kick-starting" a collective assessment of the Singapore Ministerial and the ensuing and continuing work across the spectrum of WTO activities. Thus, the paper was a discussion paper, and was intended to provide a representative mix of Members' actual or perceived thoughts about where the WTO has been and where it ought to go. It definitely was not intended to convey US positions on particular issues.

6.96 With respect to the discussion of the TRIMs Agreement, the paper draws no conclusions about the legal relationships between the agreements cited, nor does it even suggest that there are conflicts among them. Instead, it merely expresses the commonsense and obvious point that in considering the future work of the TRIMs Committee, it might be appropriate to look at how the three agreements relate to one another given their obvious overlap. Given the views that Indonesia already had articulated in the TRIMs Committee and the SCM Committee, it is hardly surprising that this issue would be identified as one for further discussion. Also, by the time the paper was drafted, there already had been several "sleights of hand" by several Members that were making multiple notifications under the TRIMs and SCM Agreements and then later "withdrawing" some. Because a measure can be both a TRIM and a subsidy in substance, the italicized "Question for Discussion" in the paper appropriately suggests that Members should take a look at all of the notification provisions to see where gaps from one could fill in for another, or where improvements are needed in order to monitor phase-out obligations across agreements.

6.97 Thus, even if this Panel should find incorrectly that Article III:4 of GATT 1994 does not apply to the Indonesian tax and tariff incentives due to an alleged "conflict" with the SCM Agreement, those measures nonetheless violate Article 2 of the TRIMs Agreement.

(b) The Indonesian measures are "trade related investment measures"

6.98 Indonesia also argues that the measures in question do not violate Article 2.1 of the TRIMs Agreement because they are not "investment" measures. In the view of the United States, if a measure described in the Illustrative List of the TRIMs Agreement is being applied, nothing more need be shown to establish an Article 2 violation. If any Member, in whatever context, requires the purchase by an enterprise of a domestic product in order to obtain an advantage, that requirement by definition has investment consequences for such an enterprise, putting the measure within the coverage of the TRIMs Agreement. The United States is unaware of anything in the negotiating history of the TRIMs Agreement that would warrant a different conclusion.

6.99. Moreover, even if the identification of a relationship to an investment were necessary to prove an inconsistency with the TRIMs Agreement, the Indonesian measures in question fulfil such a condition, because they necessitate an investment in Indonesia (either as a producer of motor vehicles or motor vehicle parts) to qualify for the various tax and tariff incentives.

(c) The TRIMs Agreement imposed a new obligation on Indonesia

6.100 Indonesia's argument that because the TRIMs Agreement allegedly merely restates Article III, the TRIMs Agreement does not give rise to a separate obligation, reflects a fundamental misperception of the significance of the TRIMs Agreement. It is true that, to an extent, the TRIMs Agreement codifies the GATT 1947 panel jurisprudence concerning Article III:4 arising out of such cases as Italian Tractors, EC Parts and Components, and FIRA. However, because panel decisions were not, and are still not, stare decisis, Indonesia was not bound by this jurisprudence. Japan - Taxes on Alcoholic Beverages, WT/DS8/AB/R, Report of the Appellate Body adopted 1 November 1996, pages 14-16. By signing the WTO Agreement, Indonesia did become bound by this jurisprudence, as codified in the TRIMs Agreement. Thus, the TRIMs Agreement imposed a new obligation on Indonesia.

(d) The notion of lex specialis is irrelevant in this case with respect to the relationship between Article III and the TRIMs Agreement

6.101 Insofar as the issues in this dispute are concerned, because Indonesia did not notify the measures in question pursuant to Article 5.1 of the TRIMs Agreement, there are no conflicting obligations between Article III and the TRIMs Agreement. Thus, the notion of lex specialis is irrelevant.

6.102 Having said that, however, the United States should note that in the Bananas III case, the Panel found, at para. 7.158, that in the absence of a "conflict" between GATT 1994 and the TRIMs Agreement, both agreements applied equally. This finding would not have been necessary if the Panel had considered that the TRIMs Agreement was lex specialis in relationship to GATT 1994.

6.103. More generally, Article III:2, Article III:4, and the TRIMs Agreement each impose legally distinct obligations on Members, and a single measure may be found to be inconsistent with all three.

To Continue with Article I:1 claims.


321 Vienna Convention on the Law of Treaties, arts. 31-32.

322 See Submission by Japan (MTN.GNG/NG12/W/12) dated 9 June 1988; Submission by Japan (MTN.GNG/NG12/W/20) dated 13 September 1989; Submission by India (MTN.GNG/NG12/W/18) dated 11 September 1989; Submission by the European Communities (MTN.GNG/NG12/W/22) dated 16 November 1989; Submission by the Nordic Countries (MTN.GNG/NG12/W/23) dated 22 November 1989; and Communication from the United States (MTN.GNG/NG12/W/24) dated 24 January 1990.

323 See Vienna Convention on the Law of Treaties, arts. 31-32. See also Appellate Body Report on Japan - Alcoholic Beverages II, pp. 10-12.

324 See Vienna Convention on the Law of Treaties, art. 31(3)(b).

325 Incentive measures were notified, for example, by Venezuela, on 12 April 1995, G/TRIMS/N/1/VEN/1, by South Africa, on 8 May 1995, G/TRIMS/N/1/ZAF/1, and by the Dominican Republic, on 10 May 1995, G/TRIMS/N/1/DOM/1.

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

327 See e.g. WT/DS27/R/USA, adopted 25 September 1997, at para 7.185.

328 Id. at para 7.158.

329 As recalled by Indonesia, one of the issues discussed during the negotiations of the TRIMs Agreement was whether the definition of TRIMs should cover subsidies. All the negotiating positions cited in Indonesia's submission correspond to this phase of the negotiations. Eventually, however, no agreement could be reached to prohibit (or otherwise limit the use) of any other TRIMs beyond those already prohibited by Articles III and XI of GATT 1947. In view of that, it was no longer considered necessary to define the notion of TRIMs, with the consequence that the question whether or not to include subsidies in that definition became moot.

It is worth noting that, despite the "lack of consensus" alleged by Indonesia, a majority of the Members which have made notifications under Article 5.1 of the TRIMs Agreement (15 out of a total of 24, according to the European Communities's own estimate) have included therein TRIMs linked to tax and tariff benefits which prima facie are subsidies within the meaning of Article 1 of the SCM Agreement. Namely, the list of such Members include Argentina, Chile, Colombia, Costa Rica, Dominican Republic, Egypt, Indonesia (withdrawn), Malaysia, Pakistan, Poland, Romania, Thailand, Uruguay, Venezuela and South Africa. Some of the notified schemes are remarkably similar to the ones at issue in this dispute. For instance, South Africa grants a rebate from an excise tax to motor vehicles which attain a minimum local content (G/TRIMS/N/1/ZAF/1), whereas Venezuela applies a lower import duty on imports of automotive parts and components by car assemblers which meet certain local content requirements (G/TRIMS/N/1/VEN/1).

330 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 25 September 1997, para. 7.185.

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

332 US Exhibit 40.