7.74 Complainants concede that nothing in the regulations or decrees establishing either the February 1996 or the June 1996 programmes ³⁶⁵ mandates preferential treatment of automobiles, components or parts from any particular country. ³⁶⁶ Decree of the State Minister for the Mobilisation of Investment Funds No. 01/SK/1996 (27 February 1996) ³⁶⁷ expressly states that a national car producer has the freedom to determine the sources of technology and of components and parts. Further, the 7 June 1996 "Recognition of Registered Importer/Sole Agent (IT/AT)," file number 1410/MPP/6/1996, the document in which one would most expect to find such direction, contains no such limitation. ³⁶⁸ Indeed, there is nothing in the Recognition (or in any other official document) that even implies such an intention.

7.76 In Spain-Tariff Treatment of Unroasted Coffee (11 June 1981), BISD 28S/102, the government�s differential tariff treatment of "mild" coffee and other varieties of coffee was found to be discriminatory. In European Economic Community-Imports of Beef from Canada (10 March 1981), BISD 28S/92, the only agency authorized by the European Communities regulation to certify beef as high-quality beef was a United States Government agency the mandate of which was limited to certification of United States beef. Also, Japan miscites the Reformulated Gasoline case ³⁶⁹ as standing for the proposition that measures violate Article I if they "introduce" discrimination. This characterization is incorrect. Rather, the decision declares that United States authorities must have foreseen that the two separate regulatory regimes that they had established were discriminatory.

7.77 In each of the three above-cited cases, despite the absence of explicit discrimination, a particular result was mandated by government action. In none of them was the choice of supplier made by the private-party recipient of the subsidy found to constitute government-mandated de facto discrimination.

7.78 Even if certain Government officials were aware of TPN�s corporate intention to use Kia as a supplier, the legal structure of the national car programme did not compel or lead to this private-party decision or to imports from Korea. The essential fact remains that a private-sector choice, not government direction, was the reason why there were imports from Korea. Such a private choice is not within the scope of Article I of the General Agreement.

The term "like products," as used in Article I (MFN), can probably be considered in the light of the above preparatory concepts. ³⁷⁰

7.80 The narrow scope of the "like product" concept in Article I is emphasized by The Australian Subsidy on Ammonium Sulphate and the EEC - Measures on Animal Feed Proteins panel reports, which note that, unlike Article III:2, in which effects on both "like products" and "directly competitive or substitutable products" are relevant, the MFN obligation of Article I is limited to "like products". ³⁷¹

7.81 Passenger vehicles are highly differentiated; numerous physical and nonphysical characteristics determine each model�s properties, nature and quality and, thus, consumers� tastes, habits and preferences. These defining characteristics include quality, reputation, price, ride and comfort, standard features, safety features, available options, exterior size, interior space, engine size, technology, fuel type and fuel efficiency. Complainants have failed to establish that there is any "like product" to the Timor S515 in their unsuccessful efforts to establish serious prejudice, and they must also fail in the context of Article I. There simply is no car that matches the requisite physical and nonphysical characteristics of the Timor S515 to be considered a "like product" to it.

7.82 The same failing is true with regard to Complainants� arguments regarding automotive components and parts. Government experts have calculated that 93 per cent (by value) of the components and parts of the Timor are tailor-made to the specifications of that brand. The same is true (likely with slight variations in the percentage) with respect to all brands and types. (One does not and cannot, for example, use GM components in BMW sedans or Mercedes components in Toyota sedans.) Tailor-made components and parts that cannot be used in other makes and models are not "like products". Indeed, they are not even "directly competitive or substitutable". Thus, for assembled Timors and Timor components and parts, there can be no violation of GATT Article I since there are no "like products" which are discriminated against.

7.84 In June 1996, pursuant to Presidential Decree No. 42/1996 ³⁷²,TPN received a one-year subsidy for national cars made overseas. This treatment was necessary because TPN needed to import built-up Timors to establish the required marketing network and introduce a national car to the Indonesian buying public prior to the time that domestic production feasibly could begin.

The policy contained one quantity and two temporal limitations:

• the subsidy was granted only for the quantity of autos specified by the Minister of Industry and Trade (45,000 units);

• the subsidy was limited to one year; and

• the subsidy was granted only once.

7.85 Complainants accurately repeat Indonesia�s report that not all of the Timors imported under the June 1996 subsidy have yet been sold. ³⁷³ They note that the Government does not forgo the luxury tax until each car is sold. This also is true.

7.86 The problem with complainants' arguments is that they fail to accept that the June 1996 measure is a subsidy. Thus, regardless of whether or not it still is in effect (it is not in effect), it is a subsidy and, as such, is subject to the Subsidies Agreement, not Article I.

7.87 Indonesia, in response to a question from the panel, subsequently further argued as follows regarding the process of importation and customs clearance:³⁷⁴

7.88 Article 2 of Customs Law No. 10/1995 ³⁷⁵ provides that a product is considered "imported" when it arrives in the customs territory of Indonesia (i.e. the territory of the Republic of Indonesia). A translation of the relevant sections of the Customs Law is attached.

7.89 The importer of the product is responsible for payment of the appropriate customs import duties, VAT, sales luxury tax, and advance payment of income tax at the moment of importation. In this case, the importer is TPN.

7.90 The importer is entitled to customs clearance upon presentation to the customs authorities of a customs declaration and proof of payment of the duties and taxes owing. Under Article 42 of the Customs Law, this obligation may be satisfied by payment of cash or deposit of security acceptable to Customs. In this case, under authority of Minister of Finance Decree No. 404 and Government Regulation No. 36, TPN was required to deposit a guarantee to cover the value of the customs import duties and luxury sales tax from which it would be exempt if it satisfied the requirements of the National Car Programme. TPN also was obligated to payment, in cash, of the VAT and income tax.

7.91 After importation and before completion of the customs clearance procedure, a product may be kept in "bonded storage". (See Article 44 of the Customs Law.) Bonded storage areas are operated by private entities, the importer or someone else with whom the importer has made a commercial arrangement, but they are under the control of Customs. The private party pays all costs associated with the facility and storage of the goods there. (In this case, then, TPN is incurring all costs associated with storage of the imported CBU's which have not received customs clearance.)

7.105 The February 1996 Programme was designed and intended to accord benefits exclusively to PT Timor and Kia products. This was clear from PT Timor's application for Indonesian Government assistance in October 1995 and from subsequent correspondence between PT Timor and the State Minister for the Mobilization of Investment Coordinating Board. ³⁷⁶

7.106 In particular, the "National Car Programme" began to be discussed at the latest in October 1995. ³⁷⁷ In particular, these proceedings have shown that Mr. Hutomo Mandala Putra, president director of PT Timor, sent a letter to Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Coordinating Board on 12 December 1995 and requested import duty and luxury tax exemptions for PT Timor. ³⁷⁸ To this request, Minister Sanyoto Sastrowardoyo responded by letter of 27 December 1995 "we fully support your plan to immediately realize the project." ³⁷⁹ It is made even more clear by the State Minister's "Domestic Investment Approval" of 9 November 1995 (No.607/I/PMDN/1995 (11/09/95)), which the Government of Indonesia provided to the Panel. ³⁸⁰ That document, and its attachments, reveal that the Government of Indonesia approved PT Timor's production of automobiles in Indonesia more than three months before the announcement of the February 1996 Programme and expressly stated that "Kia technology [was] to be developed into local technology".

7.107 Another result of the advance coordination between PT Timor and the Indonesian Government is that only PT Timor was in a position to apply in a timely manner for Pioneer status under the February 1996 Programme. PT Timor applied for Pioneer status on 28 February 1996³⁸¹, just one day after the Government of Indonesia enacted Decree of the State Minister for Mobilization of Investment Funds/Chairman of the Capital Investment Co-ordinating Board No. 01/SK/1996³⁸², which formally established the February 1996 Programme. On the same day, the Government of Indonesia first disclosed the February 1996 Programme by way of press release to the public and other automobile companies. ³⁸³ At the first Panel meeting, the Government of Indonesia revealed for the first time the decree granting Pioneer status to PT Timor (Ministry of Industry and Trade decree No.002/SK/DJ-ILMK/II/1996), which, oddly, was dated 27 February 1996, one day before PT Timor's application. Although the Government of Indonesia submitted the cover letter of the PT Timor's application as Attachment No. 14 of its First Submission, it failed to include the attachments thereto, which, according to the cover letter, set forth the details of PT Timor's working proposals, which cover such matters as share ownership, design and engineering, source of technology, development of production facilities, use of components, etc. ³⁸⁴ The Panel should infer from Indonesia's failure to submit PT Timor's working proposals that they further confirm that, from the beginning, the Indonesian Government and PT Timor worked hand-in-hand to develop measures that would funnel benefits exclusively to PT Timor and imports from Korea.

7.108 The June 1996 Programme was also designed and intended to accord benefits exclusively to PT Timor and Kia. The Government of Indonesia essentially concedes this point in its First Submission, admitting that the June 1996 Programme "was necessary because [PT Timor] needed to import built-up Timors to establish the required marketing network and introduce a national car to the Indonesian buying public prior to the time that domestic production feasibly could begin". (See Section II.B.2). Even more to the point, Indonesia has submitted a letter dated May 28, 1996, from PT Timor to the Indonesian Minister of Industry and Trade, which clearly states that PT Timor applied for the production of "motor vehicles under Timor S515 trade mark at Kia Motors Co. South Korea, to be shipped to Indonesia, totalling 65,000 units of motor vehicles for 1996-1997." ³⁸⁵ The Government of Indonesia, under Ministry of Industry and Trade's Recognition as Registered Importer/ Sole Agent (IT/AT) of Motor Vehicles (Number: 1410/MPP/6/1996) dated 7 June 1996, approved PT Timor's request, specifically designating the Timor S515, with detailed specifications in its attachment, as the car that could be imported and sold free of duties and luxury taxes. ³⁸⁶ In taking this action, the Indonesian Government fully knew that the designated model was and would be manufactured solely at the Kia facilities in Korea and established a legal regime that ensured that only Korean products would benefit from the June 1996 Programme.

(2) The National Car Programme denies unconditional MFN treatment to Japanese products and ensures that Korean products receive tax and tariff benefits denied to Japanese products

7.109 The Indonesian argument is also wrong as a matter of law. Certain Korean automobiles and automotive parts and components have been imported into, and sold in, Indonesia at favourable tariff and tax rates that are not available to other imports under Indonesian law. That is the very definition of a denial of MFN treatment.

7.110 The Indonesian argument that the discrimination results from decisions of PT Timor is clearly wrong, because it is the government, not a private company, that sets the discriminatory tariff and luxury tax rates. PT Timor operates in the discriminatory environment created by the Indonesian Government. Moreover, it is clearly the Government of Indonesia, not PT Timor, that established the Presidential Decree that accords advantages to imported automobiles on the conditions that the exporting enterprise purchase certain amounts of Indonesian parts and components and employ Indonesian workers. As discussed (See Section VII.A), GATT Article I:1 requires any advantage to be accorded unconditionally. As the precedent cases show³⁸⁷, granting this kind of advantage conditioned upon certain requirements is clearly a "conditional" advantage within the meaning of GATT Article I:1. This means that, even if the advantage accorded to products from Korea were an advantage available to like products from all other WTO Members, subject to the same conditions, the National Car Programme would still violate GATT Article I:1.

(3) The Precedent GATT/WTO Cases Support Japan's Argument

7.111 Indonesia alleges that the precedent panel cases do not support Japan's argument that such governmental actions constitute a violation of GATT Article I:1. In reality, the GATT and WTO precedents also undercut the Government of Indonesia's position.

7.112 First, it should be noted that Indonesia itself concedes that previous panels have found violations of Article I:1 in circumstances where "despite the absence of explicit discrimination, a particular result was mandated by government action" or where a legal structure "in fact compelled or led to a particular result." As demonstrated (See SectionVII.A), the National Car Programme provides exactly such a legal structure that compels or leads to a particular result, namely, granting advantages only to Korean products. Therefore, in its attempt to rebut Japan's arguments, Indonesia has instead conceded the point. ³⁸⁸

7.113 It should be also recalled that the Appellate Body recently reconfirmed the importance of de facto as well as de jure non-discrimination. In Bananas III, the Appellate Body explicitly stated, "Article I and II of the GATT 1994 have been applied, in past practice, to measures involving de facto discrimination," referring to the panel report in European Economic Community - Imports of Beef from Canada. ³⁸⁹

To continue with Indonesia's assertion that no goods are like Timors is simply wrong

³⁶⁵ As demonstrated in Section III, above, there can be no violation of Article I with respect to the June 1996 programme since it expired on 30 June 1997. However, even if the programme were still in effect (which it is not), it would not be inconsistent with Article I for the reasons set out in this section.

³⁶⁶ See Sections VII.A and B. See also Indonesia�s Statement to the Committee on Subsidies and Countervailing Measures in response to questions posed by Japan (G/SCM/Q2/IDN/9 (23 May 1997) at p. 3).

³⁶⁷ Indonesia Exhibit 4.

³⁶⁸ Indonesia Exhibit 13.

³⁶⁹ Report of the Appellate Body, United States-Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R (29 April 1996).

³⁷⁰ John Jackson, World Trade and the Law of GATT (1969) � 11.4 (emphasis added)(footnotes omitted).

³⁷¹ Report of the Working Party on The Australian Subsidy on Ammonium Sulphate (3 April 1950), BISD II/188 (para. 8 at p. 191). Report of the Panel on EEC - Measures on Animal Feed Proteins (14 March 1978), BISD 25S/49 (para. 4.20 at p. 68).

³⁷² Indonesia Exhibit 6. See also Decree of the Minister of Industry and Trade No. 142/MPP/Kep/6/1996 (Indonesia Exhibit 7), dated 5 June 1996 and, per Article 5 thereof, effective on that date. This decree was published promptly in the State Gazette, as is true regarding all decrees of the Minister of Industry and Trade.

³⁷³ The Government�s most current data is that, as of 31 October 1997, only 17,507 Timors imported under the subsidy remained unsold.

³⁷⁴ Indonesia made the following additional arguments on this point: "Also with respect to claims under Article I of GATT 1994, the complainants argued that the June 1996 measures were still in effect because the luxury tax would not be foregone on the unsold cars until they were sold. This is not correct. The tax is due when the duties are due and then the consumer reimburses the company at the time of sale (TPN, of course, was exempt from this requirement). Secondly, TPN failed the Sucofindo audit (See Section X) and, thus, none of the remaining cars will receive the luxury tax exemption. So, even accepting complainants' position, the June 1996 measures have terminated. Thus, the Panel should reject complainants' Article I arguments."

³⁷⁵ Indonesia Exhibit 50.

³⁷⁶ See Application Letter dated 19 October 1995 from Mr. Hutomo M.P., President Director of PT. Timor Putra Nasional to Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Funds/Chairman of the Capital Investment Co-ordinating Board. (English translation) (Japan Exhibit-33, Indonesia Exhibit 25); Letter dated 12 December 1995 from Mr. Hutomo M.P., President Director of PT. Timor Putra Nasional to Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Funds/Chairman of the Capital Investment Coordinating Board. (English translation) (Japan Exhibit 34); Letter dated 27 December 1995 from Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Funds/Chairman of the Capital Investment Co-ordinating Board to Mr. Hutomo Mandala Putra, President Director of PT. Timor Putra Nasional. (English translation) (Japan Exhibit 35).

³⁷⁷ Application Letter dated 19 October 1995 from Mr. Hutomo M.P., President Director of PT. Timor Putra Nasional to Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Coordinating Board. (English translation) (Japan Exhibit 33).

³⁷⁸ Letter dated 12 December 1995 from Mr. Hutomo M.P., President Director of PT. Timor Putra Nasional to Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Coordinating Board. (English translation) (Japan Exhibit 34).

³⁷⁹ 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. (English translation) (Japan Exhibit 35).

³⁸⁰ Indonesia Exhibit 15.

³⁸¹ See Letter (No.071/PD/TPN/II/96) dated 28 February 1996 from Mr. Hutomo M.P., President Director of PT. Timor Putra Nasional to State Minister for the Mobilization of Investment Funds / Chairman of the Capital Investment Co-ordinating Board. (Indonesia Exhibit 14).

³⁸² Japan Exhibit 29.

³⁸³ Indonesian Observer, "Govt unveils new national car programme" (29 February 1996) (Japan Exhibit 70); The Asian Wall Street Journal, "Suharto Project For National Car shocks Industry - version of a Kia Sedan to be Called Timor, Son�s Firm Benefits" (29 February 1996) (Japan Exhibit 71); Jakarta Post, "PT Timor given tax exemptions" (29 February 1996) (Japan Exhibit 40); Indonesian Observer "Car Producers �surprised� by new govt ruling (29 February 1996) (Japan Exhibit 41); and Bisnis Indonesia, "Tunky: PT. Timor has Adapted Impres 02/1996, (29 February 1996). All of these news articles indicated that the press release announcing this programme was made on 28 February 1996. On 27 February 1996, two days before, a newspaper article reported the production of Kia- Timor cars in Indonesia, but this article did not refer to the National Car Programme at all. (Jakarta Post, Kia of S. Korea to produce cars in Indonesia (27 February 1996) (Japan Exhibit 72).

³⁸⁴ Indonesia submitted the working proposals on 12 January 1998, in response to a request from Japan. (Indonesia Exhibit 46).

³⁸⁵ Letter dated 28 May 1996 from Mr. Hutomo M.P., President Director of PT. Timor Putra Nasional to Minister of Industry and Trade of the Republic of Indonesia (Indonesia Exhibit 18).

³⁸⁶ The recognition of registered importer/sole agent (IT/AT) of motor vehicle (number: 1410/MPP/6/1997) and its attachment (Indonesia Exhibit 13).

³⁸⁷ Panel Report on Belgian Family Allowances, G/32, adopted on 7 November 1952, BISD IS/94. Working Party Report on Accession of Hungary, adopted on 30 July 1973, BISD 20S/34.

³⁸⁸ The Government of Indonesia also states that Japan "miscites" the US - Gasoline case, since "the decision declares that United States authorities must have foreseen that the two separate regulatory regimes that they had established were discriminatory." It further states, "[e]ven if certain Government officials were aware of TPN's corporate intention to use Kia as a supplier, the legal structure of the national car programme did not compel or lead to this private-party decision or to imports from Korea." However, again, it has already been fully demonstrated that the Indonesian authorities must have foreseen the discriminatory results and also that the legal structure of the National Cars Programme did compel and lead to the results. Therefore, the Government of Indonesia essentially admits its violation of GATT Article I.

³⁸⁹ Appellate Body Report on Bananas III, para. 232.