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)
VII. Article I:1 claims
A. Claims raised by Japan
1. The National Car Programme of February 1996
7.1 Japan claims that the National Car Programme of February 1996 (See Section III.A) violates Article I:1 of GATT 1994. The following are Japan's arguments in support of this claim:
(a) Article I:1 of GATT 1994 requires immediate and unconditional MFN treatment for imported parts and components
7.2 The National Car Programme introduced in February 1996 accords a special advantage including exemption from customs duty to automotive parts and components imported or to be imported from Korea for use in assembling National Cars. This advantage constitutes a violation of Article I:1 of GATT 1994 which requires the "immediate and unconditional" extension of general most-favoured-nation treatment to imports from member countries relative to the treatment of imports of like products from any other country.
7.3 As the 12 December 1995 letter from the President Director of TPN to the State Minister for the Mobilization of Investment Coordinating Board shows clearly, TPN, which is currently the only National Car producer, has expressed its intention to rely on Kia Motors, Korea. In particular, the President Director of TPN stated plainly that the company applied to obtain approval to "(1) [m]anufacture four-wheeled motor vehicles with the 'TIMOR' brand name at the KIA Motors Corp., South Korea factory which are then to be delivered to Indonesia in SKD form with a local production of 65,000 units from 1996, 1997, and 1998; [and] (2) [m]anufacture four-wheeled motor vehicles with the 'TIMOR' brand name at third party's/parties' licensed assembly plant(s) in Indonesia with its primary material imported from overseas (KIA Motors Corp.) starting from full-CKD and gradually decreasing by the use of local components/parts with a total production from 1997, 1998, and 1999 of 125,000 units." (Italics added.) The correspondence between the President Director and the State Minister shows that both of them understood that most of the parts and components for assembling national cars in Indonesia would be imported from Korea at least in the initial stages and that they intended to effectuate this understanding. Accordingly, TPN is expected to import many of the parts and components for the purpose of assembling National Cars only from Kia. The preferential treatment for National Cars, including the duty-free treatment of imported parts and components in particular, is likely to lead to benefits for imports of parts and components from Korea, compared with those from other countries.
7.4 Article I:1 of the GATT provides as follows:
"With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed in the international transfer of payments for imports or exports and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraph 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other parties."
7.5 In EC - Bananas III, a recent WTO panel articulated the following three-part test to determine whether an import measure violates Article I:1:
[an import measure] is inconsistent with the European Communities' obligations under Article I:1 [if] it constitutes [1] an advantage [2] of the type covered by Article I that is accorded to [products from one country or group of countries] but [3] which is not accorded to like products from all Members ...
334 33 (emphasis added).
The National Car Programme must be evaluated under the same three-part test. It violates Article I:1 because the customs duty and luxury tax exemptions (1) confers an advantage, (2) of the type covered by Article I:1, (3) to imports of automotive parts and components from Korea but not to imports of like products from other WTO members.
7.6 In addition, Article I:1 requires that MFN treatment be accorded "immediately and unconditionally", but the National Car Programme also violates this requirement.
(b) The National Car Programme of February 1996 in practice grants benefits only to automotive parts and components imported or to be imported from Korea in violation of Article I:1 of the GATT 1994
7.7 The February 1996 Programme grants benefits only to automotive parts and components from Korea. As such, it impermissibly provides advantages to Korean parts and components that are not accorded to parts and components from other WTO Members, in violation of Article 1 (regardless of whether or not the Programme constitutes a subsidy). In addition, such advantages can be accorded to imported parts and components from other countries only if they are for use in National Cars, in violation of the Article I:1 requirement of "unconditional" most favoured nation treatment. The discrimination in practice in favour of parts and components from Korea is precisely the sort of discrimination that preceding panels have long held to be inconsistent with Article I:1.
(1) Indonesia grants benefits solely to imports from Korea
7.8 While National Cars are required to meet certain local content levels, the balance of the parts and components necessary to assemble National Cars is imported. Indonesia provides the sole National Car producer, PT Timor, with the benefits of duty free treatment of such parts and components.
7.9 While there is no reference to Korea or a Korean company in Indonesia's regulations which establish and regulate the National Car Programme, the intended beneficiary of the Programme, PT Timor, has intended, since even prior to the formal establishment of the Programme, to import parts and components for assembly of National Cars only from a Korean company. Even before the initiation of the Programme, the State Minister for the Mobilization of Investment Coordinating Board supported this intent and Indonesia effectuated it through Presidential Instruction No.2/1996.
335 Accordingly, only certain automobile parts and components from Korea are granted duty free treatment, while parts and components from any other country including Japan are not.
7.10 Indonesia also provides a luxury tax exemption for National Cars. On its face, this measure gives advantages to the sales of National Cars. In addition, the luxury tax exemption also indirectly benefits parts and components imported or to be imported from Korea for the purpose of assembling National Cars. The increase of the National Cars' market share, thanks to the luxury tax exemption, would naturally expand sales and profits of Kia. As parts and components for assembly of National Cars are imported only from Kia, such indirect benefits are to be exclusively granted to Kia's parts and components. Accordingly, only certain parts and components from Korea are granted indirect benefits of the luxury tax exemption, while parts and components from any other country including Japan are not.
(2) The benefits for imports from Korea constitute an advantage that is covered by Article I:1
7.11 The duty free treatment is an "advantage" prohibited under Article I:1 because duty free treatment obviously is an advantage with respect to "customs duties and charges of any kind imposed on or in connection with importation. The luxury tax exemption is also an "advantage" prohibited under Article I:1 because the exemption relates to "internal taxes or other internal charges" that are "matters referred to in paragraph 2 ... of Article III." Accordingly, the first and second part of the EC - Bananas III three-part test are satisfied.
(3) The advantage is not accorded to "like products" from any country other than Korea
7.12 Article I:1 of GATT 1994 obliges the GOI to accord the advantage to "like products" from all WTO Members, not only from Korea.
7.13 With respect to the "likeness", the discussion in terms of Article III should apply with equal force. First, the Report of the Working Party on Boarder Tax Adjustments 336 suggests that the criteria, such as "the product's end users, consumers' tastes and habits, and the product's properties, nature and quality", should be used " for interpreting 'like or similar products' generally in the various provisions of GATT 1947". 337 Also in the Spain - Tariff Treatments of Unroasted Coffee the panel found whether the products in their end-use are "regarded as a well-defined and single product" to be relevant in determining whether they are "like products"338, for the purpose of Article I:1.
7.14 Under the preceding criteria, parts and components imported from Japan, or any other country, and those imported from Korea for assembly of National Cars constitute "like products" for the purpose of Article I:1. Parts and components from Japan and those imported from Korea for assembly of National Cars are in their end-use regarded as a single product, that is, parts and components for use in the assembly of automobiles. Similarly, automotive parts and components imported from Korea and those imported from Japan and other countries share the same or similar properties, nature and quality. Thus, the third part of the EC - Bananas III three-part test is satisfied.
(4) The advantage is not accorded "unconditionally"
7.15 Article I:1 of GATT 1994 also obliges the GOI to accord all advantages "unconditionally".
7.16 Under Indonesia's Programme, in order to benefit from the duty free treatment and the indirect effect of the luxury tax exemption, parts and components must meet certain prerequisites; i.e., they must be for the assembly of National Cars. Accordingly, the Programme establishes "conditional most-favoured-nation" treatment and, therefore, violates Article I:1. 339
(c) The fact that Indonesia's legislation does not explicitly discriminate in favour of Korean products cannot be a defence
7.17 Indonesia may contend that its regulations only establish requirements for preferential treatment, but without preference for any specific country, and, therefore, are consistent with Article I:1.
340 However, this defence cannot prevail for the following reasons.
7.18 First, in the precedent cases, including the Belgian Family Allowances341, Spain Coffee, and EEC - Imports of Beef from Canada 342 cases, the panels have found that measures are inconsistent with Article I even if they do not explicitly mandate discrimination between countries, as long as they introduce discrimination between countries. In this case, Indonesia's measures obviously have introduced discrimination between Korean products and other countries' products. Moreover, Indonesia established the measures, well knowing that they would have such effects. Therefore, Indonesia's measures appear to intend to discriminate, and in practice do discriminate, between products from those countries.
7.19 In United StatesStandards for Reformulated and Conventional Gasoline, the Appellate Body emphasized the relevance of such "knowledge" in the context of Article III:4 violation:
In our view, [the failure to mitigate regulatory impact on foreign suppliers] go[es] well beyond what was necessary for the Panel to determine that a violation of Article III:4 had occurred in the first place. The resulting discrimination must have been foreseen, and was not merely inadvertent or unavoidable. 343
Since the text of Article I:1 is no less stringent than that of Article III:4, the prior recognition and the impact of discrimination should be prima facie evidence of an Article I:1 violation. Thus although Indonesia may argue that the pioneer company is free to import from anyone, anywhere, Indonesia obviously knew how the benefits of the programme would be distributed among their trading partners and assisted the execution of the plan. In sum, this is a case of active intervention, which violates the Article I:1 of GATT 1994.
7.20 Second, as discussed, Article I:1 prohibits "conditional" most-favoured-nation treatment. Therefore, even if the regulations set out no preference for any specific country, they are "conditional," and thus inconsistent with Article I:1.
(d) The fact that only a certain portion of products from Korea are granted preferential treatment cannot be a defence either
7.21 Indonesia may contend that only a certain portion, or not all, of parts and components from Korea are granted preferential treatment, and that, therefore, the measure is not inconsistent with Article I:1. However, this defence also fails, for the following reasons.
7.22 First, the text of Article I:1 requires that any advantage to "any product" originating in any country shall be accorded to the like products from other Members of the WTO. The text does not prohibit advantages only when they are granted to "all products" or "most products" from a particular country. Thus, the GOI's possible contention must fail because it ignores the text of Article I. Indeed the recent WTO panel decision in the EC - Bananas III case confirmed that "Article I:1 obliges a Member to accord any advantage granted to any product originating in any country to the like product originating in the territories of all other Members, in respect [e.g.] of matters referred to in Article III:4."
344
7.23 Further, the 1989 GATT panel report on US - Section 337 of the Tariff Act of 1930 stated as follows:
The 'no less favourable' treatment requirement [is] an expression of the underlying principle of equality of treatment of imported products as compared to the treatment given either to other foreign products, under the most favoured nation standard, or to domestic products, under the national treatment standard of Article III .... The 'no less favourable treatment' requirement of Article III:4 [and, by analogy, Article 1.1] has to be understood as applicable to each individual case of imported products. 345
In the context of the Article III:2 violation, the WTO Appellate Body quoted this language from the Section 337 panel report to support its own conclusion that "dissimilar taxation of even some imported products as compared to directly competitive or substitutable domestic products is inconsistent with the provisions of the second sentence of Article III:2". 346 (Emphasis added.) The same reasoning was followed by other GATT/WTO panels (or Appellate Body) reports including the US Beverages panel which concluded that, with regard to Article III, the fact that only certain domestic products are treated preferentially does not cure an Article III inconsistency. There is no reason to apply a different rule with respect to Article I:1.
2. The Extended National Car Programme of June 1996
7.24 Japan claims that the extended National Car Programme of June 1996 (See Section III.A) violates Article I:1 of GATT 1994. The following are Japan's arguments in support of this claim:
(a) Indonesia granted benefits solely to imports of CBUs from Korea (i.e., National Cars assembled at the Kia factory in Korea) in violation of Article I:1 of GATT 1994
(1) Indonesia granted benefits solely to imports from Korea
7.25 Indonesia granted the duty free treatment and the luxury tax exemption solely to CBUs (i.e. National Cars assembled at the factory of Kia) imported from Korea.
7.26 Although it is not known whether the application for the authorization specified that the imports came from Korea, in fact all Timor cars imported under the June Programme have come from Kia in Korea, as Indonesia has confirmed. It is not at all adventitious, since Sedan/S515 -1500cc is a copy of Kia's Sephia model and, therefore, no foreign company, other than Kia, may produce the S515. Further, this fact was also easily predictable due to the statement in the 12 December 1995 letter of the president director of TPN to the State Minister for the Mobilization of Investment Coordination Board. This letter stated that TPN wished to "manufacture four-wheeled motor vehicles with the 'TIMOR' brand name at the KIA Motors Corp., South Korean factory which is then to be delivered to Indonesia in SKD form ..." (italics added) in the initial three years and, therefore, substantial production or involvement of Kia at least at the initial stage was expected from the outset.
(2) Indonesia violates Article I:1 of the GATT 1994
7.27 As discussed with regard to the "February 1996" Programme (Section VII.A.1), the duty free treatment and luxury tax exemptions are advantages accorded only to imports (in this case, imported CBUs) from Korea but not to imports (of CBUs) from Japan or any other country. As Indonesia admitted, the status of a "pioneer" company is not granted automatically. Indeed after over one and a half years, PT Timor is still the only company which has been granted this privileged status. It is even conceivable that PT Timor will remain the exclusive beneficiary of the Programme, because it is hard to imagine that there will be many "National" cars, granting unconditionally most favoured treatment to all trading partners in the end. In light of the magnitude of the privilege, it is difficult to believe that the present status is merely accidental. In addition, the fact that the 25 per cent counter-purchase requirement is imposed, which inherently limits the number of qualified exporting companies or countries, is expected to bring benefits only to the Korean company or Korea. Thus, this discriminatory treatment clearly constitutes the violation of Article I:1 of the GATT 1994. The arguments made in the context of the February 1996 Programme (See Section VII.A.1) are equally applicable to the advantages given to the imports of CBUs from Korea.
(b) The fact that the previous authorization has expired cannot be a defence
7.28 Indonesia may contend that the authorization made in June 1996 expired on 30 June 1997 and, therefore, the Government of Japan has no legal interest in contesting this authorization.
7.29 However, Presidential Decree No.42/1996 remains in effect. (See Section X). Indonesia may designate other models to be imported as National Cars, under Presidential Decree No.42/1996. Further, at least one more vehicle model manufactured by Kia has been reported to be included in the National Car programme and to be eligible to receive authorization for importation as a National Car. On 5 November 1996, Kia announced in Seoul, Korea that "the company plans to manufacture 50,000 utility vans a year in Indonesia beginning in 1998. 'After discussions with our joint venture partner PT Timor Putra Nasional and the Indonesian Government, we have agreed to include production of utility vans in Indonesia's national-car project,' Kia's Executive Vice President Kim Seung-ahn said." A PT Timor spokesman confirmed that "Yes, we do have such a plan and I think it will be included (in the national car programme)."
347 In May 1997, Mr. Soemitro Soerachmad, chief executive of PT Timor's distribution subsidiary, said "'the company [PT Timor] had agreed with Kia Motors of South Korea to import the Sportage, a small sport utility vehicle, from early 1998.'... . The Sportage, a lightweight sports utility vehicle, called the J520i in Indonesia, will ..... qualify for the same tax and tariff breaks enjoyed by the Timor ... . However, Mr. Soemitro indicated early batches of the new model might have to be imported from Korea in completely built-up form pending completion of a new plant." 348 Therefore, the Government of Japan faces a tangible threat of further, renewed harm by reason of Indonesia's standing regulations.
7.30 Moreover, some preceding panels have examined measures and presented complete reports even though the relevant measures were terminated during the panel process, even prior to the formation of the panel. 349 Therefore, the fact that the authorization made in June 1996 expired on 30 June 1997 is irrelevant to this proceeding.
B. Claims Raised by the European Communities
7.31 The European Communities claims that the following measures are inconsistent with Indonesia�s obligations under Article I:1 of GATT:
(1) the exemption from customs duties on imports of National Cars;
(2) the exemption from the Sales Tax on Luxury Goods for imported National Cars;
(3) the exemption from the Sales Tax on Luxury Goods for National Cars assembled in Indonesia; and
(4) the exemption from customs duties on imports of parts and components for the assembly of National Cars in Indonesia.
7.32 The following are the European Communities' arguments in support of these claims:
7.33 Article I:1 of GATT is expressed as follows:
With respect to customs duties and charges of any kind imposed on or in connection with importation ... and with respect to all matters referred to in paragraphs 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating ... in any other country shall be accorded immediately and unconditionally to the like product originating in .... all other contracting parties.
To continue with Measures concerning the importation of National Cars
334 33 Report of the Panel on EC - Bananas III, para.7.194.
335 Letter dated 27 December 1995 from Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Coordinating Board to Mr. Hutomo Mandala Putra, President Director of PT. Timor Putra Nasional (Japan Exhibit 35).
336 Working Party Report on Border Tax Adjustment, para.18.
337 Report of the Appellate Body on Japan-Alcoholic Beverages II, p.20.
338 Spain - Tariff Treatment of Unroasted Coffee, L/5135, adopted 11 June 1981 (BISD 28S/102) para. 4.7.
339 In the 1973 Working Party Report on the "Accession of Hungary," the GATT secretariat stated that "the prerequisite of having a co-operation contract [between the Hungarian government and importing companies] in order [for importing companies] to benefit from certain tariff treatment appeared to imply conditional most-favoured-nation treatment and would, therefore, not appear to be compatible with the [GATT]." (BISD 20S/34) (1974), at 36 para.12 adopted 30 July 1973.
340 In fact, Indonesia has presented this sort of argument in its replies to questions posed by Japan in the context of the updated subsidies notification. See SUBSIDIES/Replies to Questions posed by Japan concerning the Updating Notification of INDONESIA [G/SCM/Q2/IDN/9] (Japan Exhibit 20).
341 Belgian Family Allowances, G132 (BISD 1S/59, 2S/18 and 7S/68), adopted 7 November 1952.
342 EEC - Imports of Beef from Canada L/5099 (BISD 28S/92), adopted 10 March 1981.
343 Report of the Appellate Body on United States - Standards for Reformulated and Conventional Gasoline (WT/DS2/AB/R) p.28.
344 Report of the Panel on EC - Bananas III, para. 7.194.
345 United States - Section 337 of the Tariff Act of 1930, L/6439 (BISD 36S/345), paras. 5.11, 5.14, adopted 7 November 1989.
346 Report of the Appellate Body on Canada - Periodicals, page 28.
347 The Indonesian Observer, "PT Timor plans to manufacture utility vans", 6 November 1996, (Japan Exhibit 54).
348 Financial Times, "Jakarta Plans New National Car", May 1997 (Japan Exhibit 55).
349 EEC Measures on Animal Feed Proteins, L/4599, adopted 14 March 1978 (BISD 25S/49); See also, United States - Prohibition of Imports of Tuna and Tuna Products from Canada, L/5198, adopted on 22 February 1982 (BISD 29S/91).
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