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)
2. The measures at issue are specific
(a) Arguments of the European Communities
8.15 The European Communities argues that the subsidies are contingent upon compliance with local content requirements and, accordingly, are "specific" in the sense of Article 2 of the SCM Agreement. The following are the European Communities' arguments in this regard:
8.16 Article 1.2 of the SCM Agreement stipulates that:
A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II or shall be subject to the provisions of Part III or V only if such a subsidy is specific in accordance with the provisions of Article 2.
8.17 According to Article 2.3 of the SCM Agreement,
Any subsidy falling under the provisions of Article 3 shall be deemed to be specific.
8.18 Article 3.1 of the SCM Agreement then states that:
3.1 .... the following subsidies within the meaning of Article 1, shall be prohibited:
(b) subsidies contingent, whether solely or as one of several other conditions upon the use of domestic over imported goods
8.19 The grant of duty relief on imports of parts and components is contingent upon the finished vehicle or the parts and components into which the imported goods are assembled reaching a minimum local content percentage. Similarly, the grant of the exemptions from the Sales Tax on Luxury Goods is conditional upon the motor vehicles concerned meeting certain local content requirements. Finally, the grant of duty relief for imports of National Cars is conditional upon the overseas manufacturer of the cars purchasing a certain amount of Indonesian parts and components and incorporating them into the products exported to Indonesia.
428 Thus, three types of incentives at issue are "contingent upon the use of domestic over imported goods" within the meaning of Article 3.1 (b) and, accordingly, must be deemed "specific" in the sense of Articles 1.2 and 2 of the SCM Agreement.
8.20 Even if the subsidies at issue were not contingent upon the use of domestic over imported goods, they would still be "specific" pursuant to Article 2.1 of the SCM Agreement, since eligibility is limited to certain enterprises belonging to a certain industry and which meet certain non objective criteria. Furthermore, the decision whether to grant the subsidies is a discretionary one and, in practice, the benefits have been granted to only one enterprise: PT TPN.
8.21 Indonesia does not dispute that the measures are "specific subsidies" subject to the provisions of the SCM Agreement. Indeed, the measures were notified by Indonesia pursuant to Article XVI:1 of the GATT and Article 25 of the SCM Agreement on 28 October 1996, simultaneously with Indonesia�s withdrawal of its previous notification of some of the measures under the TRIMs Agreement. 429 Furthermore, in connection with this dispute, Indonesia admits that the measures at issue constitute subsidies contingent upon local content.
8.22 The European Communities also argues that Indonesia admitted during consultations that the June 1996 programme as well as the February 1996 programme are specific subsidies. 430
(b) Arguments of the United States
8.23 The United States argues that the tariff and tax benefits and the government-directed $690 million loan under the National Motor Vehicle programme are specific within the meaning of Article 2 of the SCM Agreement. The following are the United States' arguments in this regard:
8.24 Under Article 1.2 of the SCM Agreement, in order for a subsidy to be actionable under Part III of the SCM Agreement, the subsidy must be "specific in accordance with the provisions of Article 2". The tariff and tax subsidies and the government-directed $690 million loan under the National Motor Vehicle programme meet the specificity requirements of Article 2.
8.25 First, each of these subsidies is specific under Article 2.3, which provides: "Any subsidy falling under the provisions of Article 3 shall be deemed to be specific". Because the tariff and tax subsidies under the National Motor Vehicle programme are contingent on satisfying the local content requirements for a "national motor vehicle", these subsidies fall under Article 3.1(b) of the SCM Agreement, which refers to "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods". Likewise, the government-directed $690 million loan also falls under Article 3.1(b), because the evidence overwhelmingly demonstrates that the Government ordered the provision of the loan due to TPN�s status as a participant in the production of a "national motor vehicle." This status, in turn, was contingent on the satisfaction of the local content criteria of the National Motor Vehicle programme.
8.26 Second, these subsidies also are specific under Article 2.1 of the SCM Agreement, which sets forth criteria for determining specificity with respect to subsidies other than prohibited subsidies and regional subsidies.
431 Article 2.1 provides as follows:
In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is specific to an enterprise or industry or group of enterprises or industries (referred to in this Agreement as "certain enterprises") within the jurisdiction of the granting authority, the following principles shall apply:
(a) Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.
(b) Where the granting authority, or the legislation pursuant to which the granting authority operates, establishes objective criteria or conditions governing the eligibility for, and the amount of, a subsidy, specificity shall not exist, provided that the eligibility is automatic and that such criteria and conditions are strictly adhered to. The criteria or conditions must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification.
(c) If, notwithstanding any appearance of non-specificity resulting from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are: use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. In applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation. (footnotes omitted).
8.27 With respect to the tariff and tax subsidies, these are specific under paragraph (a), because Presidential Instruction No. 2/1996 and the various implementing decrees and regulations limit access to these subsidies to producers of motor vehicles. In other words, the subsidies are limited to a single industry, the automotive industry.
8.28 Finally, the tariff and tax subsidies are specific under paragraph (c). These subsidies are used only by Kia Timor and TPN, which clearly constitute "a limited number of certain enterprises" within the meaning of paragraph (c), second sentence. Moreover, the decision to limit these subsidies to Kia Timor and TPN constitutes the exercise of discretion within the meaning of paragraph (c), second sentence. The only explanation given for limiting these subsidies to Kia Timor and TPN is that it is the Government of Indonesia�s policy to do so. If true, this type of exercise of a government�s policy prerogatives is the paradigm of a discretionary decision.
8.29 With respect to the government-directed $690 million loan, the evidence demonstrates that this loan was "special credit" provided to a single firm, TPN. 432 At a time when the Government of Indonesia was clamping down on credit and cancelling other large projects433, TPN was able to obtain a massive loan package on very favourable terms that would not have been available to similarly situated firms. Clearly, the provision of this loan is specific within the meaning of Article 2.1(c).
8.30 Moreover, putting aside the evidence the United States has provided, it should be emphasized that, in the Annex V process, Indonesia refused to provide information that would have permitted a more thorough analysis of the specificity of the loan under Article 2.1(c). In Question 29(b) of AV/15, the United States sought information relating to the specificity of the government-directed $690 million loan. In particular, the United States asked the following: "Please describe other recent projects financed by state bank-led consortia, including the amount of financing provided and the terms of the financing." Indonesia refused to respond, stating that it "question[ed] the relevance of this request to the Annex V process." 434
8.31 Clearly, information relating to the specificity of a subsidy is relevant to the Annex V process, which, pursuant to paragraph 2 of Annex V, is aimed at obtaining "such information from the government of the subsidizing Member as necessary to establish the existence and amount of subsidization . . . " In light of Indonesia's non-cooperation with respect to information concerning the loan, the Panel should draw an adverse inference pursuant to paragraph 7 of Annex V and find the government-directed $690 million loan to be specific.
(c) Arguments of Indonesia
8.32 Indonesia also argues that the Government's grant of exemptions and reductions in import duties and the luxury tax to certain manufacturers and assemblers of automobiles and automotive parts are specific in the sense of Article 2 of the SCM Agreement. These arguments are set forth in part in Section V.D. See also Indonesia's further arguments in this regard in the following section.
(3) Indonesia's arguments that the measures are specific subsidies
8.33 The following are Indonesia's further arguments (in addition to those in Section V.D) that the measures at issue are specific subsidies:
8.34 Articles 1 and 2 of the Subsidies Agreement define a specific subsidy. They provide in the relevant part that "a subsidy shall be deemed to exist if ... there is a financial contribution by a government" where:
"government revenue that is otherwise due is foregone or not collected" (Article 1.1(a)(l)(ii)); and
a benefit is thereby conferred that is "specific to an enterprise or industry or group of enterprises or industries" (Article 2.1).
8.35 Under the 1993 incentive programme, the Government foregoes or does not collect revenue that is otherwise due by granting an exemption from or reduction in the rate of import duties on automotive parts and components. Thus, there is the requisite financial contribution by the Government.
8.36 The February 1996 national car programme exempts companies designated by the Government as producers of a national car from the payment of either import duties on automotive parts and components or the luxury tax. The Government, therefore, foregoes or does not collect revenue otherwise due from specific enterprises. (See also section V.D.2(a).)
8.37 In addition, the subsidy under the 1993 incentive programme falls under the provisions of Article 3 of the Subsidies Agreement. Thus, by virtue of Article 2.3 of that Agreement, there is the requisite specificity. The same is true of the February 1996 programme.
8.38 Indonesia also indicates at several points in its arguments that the June 1996 programme is (or was) a specific subsidy. (See, e.g., Section VII.D.3 and Section X.A). See also the arguments of the European Communities, above, quoting an Indonesian response to a written question in consultations.
B. Serious Prejudice Claims
1. Summary of claims
8.39 The European Communities and the United States note that the National Car Programme provides three types of benefits for National Cars in Indonesia: exemption from import duties on parts and components used for the assembly of National Cars; exemption from import duties on National Cars imported from Korea; and exemption from the Sales Tax on Luxury Goods on National Cars, whether imported from Korea or assembled in Indonesia. These incentives constitute "specific subsidies" within the meaning of Articles 1 and 2 of the SCM Agreement.
435
8.40 The European Communities and the United States observe that the subsidies are contingent upon the use of domestic over imported parts and components. As such, they would be prohibited by Article 3.1(b) of the SCM Agreement, were it not because, as a developing country Member, Indonesia benefits from the temporary exception to that prohibition provided in Article 27.3 of the SCM Agreement.
8.41 The European Communities and the United States claim that, nonetheless, the subsidies cause "adverse effects" to their respective interests in the form of "serious prejudice" within the meaning of Articles 6 and 27 of the SCM Agreement. Specifically, the subsidization of the National Cars has caused serious prejudice by (i) displacing or impeding imports of motor vehicles of European Communities and United States manufacturers into the Indonesian market; and (ii) resulting in significant price undercutting of motor vehicles of European Communities and United States manufacturers in the Indonesian market. Therefore, Indonesia is required, in accordance with Article 7.8 of the SCM Agreement, to withdraw them or to take appropriate steps to remove their adverse affects.
2. Basis for serious prejudice as a cause of action against Indonesia as a developing country
8.42 The European Communities and the United States argue, and Indonesia acknowledges that serious prejudice can be a cause of action against Indonesia in this dispute. The European Communities and the United States argue that such claims can be raised only if one of the situations described in Article 6.1(a) of the SCM Agreement exists. Indonesia indicates that 6.1(a) situations can be a basis for serious prejudice claims against developing countries, but that serious prejudice as a cause of action against developing countries also can be reached directly where the subsidies in question fall under the provisions of Article 3 of the Agreement. The following are the arguments of the European Communities, the United States, and Indonesia in this regard.
a. Arguments of the European Communities
(1) The subsidies are actionable under Part III of the SCM Agreement.
The subsidies would be "prohibited" by Article 3.1 (b) of the SCM Agreement but for the temporary exception for developing countries provided in Article 27.3 of the SCM Agreement.
8.43 Article 3.1 (b) of the SCM Agreement prohibits subsidies that are:
"... contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods".
8.44 This prohibition is subject to the temporary exception provided in Article 27.3 of the SCM agreement, which states that:
The prohibition of paragraph 1(b) of Article 3 shall not apply to developing country members for a period of five years, and shall not apply to least developed country Members for a period of eight years from the date of entry into force of the WTO Agreement.
8.45 As shown above, the subsidies at issue are contingent upon compliance with local content requirements and, accordingly, fall within the prohibition laid down in Article 3.1 (b).
8.46 Nevertheless, given Indonesia�s status as a "developing country Member", the prohibition of Article 3.1(b) will not apply to the measures in dispute for a period of five years from the entry into force of the WTO Agreement, i.e. until 1 January 2000.
(2) Article 27.3 does not preclude the "actionability" of the subsidies under Part III of the SCM Agreement
8.47 By its own words, Article 27.3 of the SCM Agreement excludes the application of the prohibition contained in Article 3.1(b) only, and of no other provision of the SCM Agreement. Therefore, Article 27.3 does not confer immunity against actions based on other provisions of the SCM Agreement and, in particular, against action under Part III of the SCM Agreement.
8.48 This is further confirmed by the express wording of Article 5 of the SCM Agreement, which provides that:
No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members... [emphasis added]
8.49 Thus, Article 5 applies with respect to all specific subsidies within the meaning of paragraphs 1 and 2 of Article 1 of the SCM Agreement, including those which are prohibited by Article 3. As demonstrated above, the measures at issue are specific subsidies. Consequently, Indonesia is subject in respect of those measures to the disciplines laid down in Article 5 of the SCM Agreement.
(3) The subsidies cause "adverse effects" to the interests of the Community in the form of "serious prejudice"
8.50 Article 5 of the SCM Agreement lists three different types of "adverse effects":
serious injury to the domestic industry of another Member;
nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994, in particular the benefits of concessions bound under Article II of GATT 1994;
prejudice to the interest of another Member.
8.51 Footnote 13 to subparagraph (c) of Article 5 of the SCM Agreement specifies that:
"The term �serious prejudice to the interests of another Member� is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994 and includes threat of serious prejudice".
8.52 The Community claims and will demonstrate below that the subsidies at issue cause "adverse effects" to its interests in the form of "serious prejudice".
(4) The European Communities is not precluded by Article 27.9 of the SCM Agreement from invoking "serious prejudice"
8.53 Article 27.9 of the SCM Agreement provides that, where a subsidy is granted by a developing country Member, "serious prejudice" can only be invoked if the subsidy in question falls within one of the categories "referred to" in Article 6.1 of the SCM Agreement.
8.54 Article 6.1 "refers", inter alia, to subsidies where the total ad valorem subsidization of the product concerned exceeds 5 per cent on the value of sales (or 15 per cent on the value of the total invested funds in the case where the recipient is in a start-up situation). As shown below, in the present case the amount of subsidisation is well above that percentage by any possible measurement. Accordingly, Article 27.9 of the SCM Agreement does not prevent the Community from invoking "serious prejudice" with respect to the subsidies in dispute.
(5) The subsidies would be presumed to cause "serious prejudice" to the Community�s interests but for Indonesia�s status as a developing country Member
8.55 Article 6.1 provides that serious prejudice in the sense of Article 5 © shall be deemed to exist where the total ad valorem subsidisation of the products concerned exceeds 5 per cent on the relevant sales value (or 15 per cent on the value of invested funds where applicable). As demonstrated below, in the present case the amount of subsidization exceeds by far that threshold. Thus, in accordance with Article 6.1, the subsidies at issue would have to be deemed to cause "serious prejudice" to the European Communities.
8.56 Nevertheless, Article 27.8 of the SCM Agreement stipulates that the presumption of Article 6.1 shall not apply where, as in the present case, the subsidy is granted by a developing country Member. Article 27.8 further states that, in that case, serious prejudice must be demonstrated by positive evidence, in accordance with the provisions of paragraphs 3 through 8 of Article 6 of the SCM Agreement.
To continue with The subsidization is massive
428 This incentive could also be characterised as a subsidy contingent upon export performance of the type prohibited by Article 3.1 (a) of the SCM Agreement.
429 G/SCM/N/16/IDN. See also G/SCM/Q2/IDN/9 dated 23 May 1997
430 Thus, for instance, in reply to a written question from the Community, Indonesia stated that:
Under both the February 1996 and the June 1996 decrees, instructions and regulations, companies that satisfy the designated criteria are exempted from the luxury tax and customs import duties. All of the requisite elements of a subsidy are involved: a financial contribution by the government by virtue of revenue foregone; a benefit to the recipients by virtue of exemption from the luxury tax and customs import duties, and specificity, by virtue of limitation of the subsidy to those companies that meet the criteria of the February 1996 and the June 1996 decrees, instructions and regulations. Among the criteria for receipt of subsidies under the February 1996 and the June 1996 decrees, instructions and regulations is the obligation to achieve designated rates of local content. This constitutes �subsidies contingent .... upon the use of domestic over imported goods� within the meaning of Article 3.1 (b) of the SCM Agreement. See also Indonesia�s replies to questions from the Community, dated 25 November 1995, at points 2.a, 5.h, 5.I, and 6.l. (EC Exhibit B-4)
431 Regional subsidies are dealt with in Article 2.2.
432 "Analysts Warn About Loans for Timor Car", Jakarta Post, 13 August 1997 (US Exhibit 14, pp. 163-165).
433 The decision to grant the $690 million loan package came at a time when the Government of Indonesia, due to the depreciation of the rupiah and overly aggressive lending by banks, was clamping down on credit and canceling large projects, thereby making the loan to TPN all the more extraordinary. As one commentator noted of the decision to grant the $690 million loan, "The move appears to contradict government policy to clamp down on credit growth." ("Jakarta Plans New �National� Car," Financial Times (London), 7 May 1997, p. 4 (US Exhibit 14, pp. 110-111).) Indeed, the President of Indonesia, in his state of the nation address, announced "that all projects that were not a national priority would be shelved given the �new realities� facing the country." ("Timor Car Project Not to Be Rescheduled in Face of Currency Crunch," Agence France Presse, 20 Aug. 1997 (US Exhibit 14, pp. 170-171)). It was further reported that:
President Soeharto, in his National Day Address last Saturday, called on the business community to select projects for implementation carefully in view of the currency upheaval currently confronting the economy. Soeharto said the government and business should review their investment projects to ascertain which should be given top priority and which should be postponed.
("Timor Car Project Won�t Be Rescheduled," Jakarta Post, 21 August 1997 (US Exhibit 14, pp. 172-173); See also, "Indonesia: Jakarta Pledges to Cut Big Projects," Financial Times (USA) (17 September 1997)
(US Exhibit 15, pp. 3-4).) As a result, according to the Coordinating Minister for Economy and Finance, the Government "took stock of projects according to their scale of priority. Obviously, high priority programs will not be axed." However, when asked by reporters whether the Timor car project would be rescheduled, the Coordinating Minister responded that "the term �national� classifies it as a high priority project." ("Ministers Review Projects Rescheduling," Business Daily, 8 Sept. 1997 (US Exhibit 14, pp. 174-175).) This followed an earlier statement by the Coordinating Minister that "Everyone must support the [national car] program." ("13 Banks Ordered to Finance Timor Car Project," The Jakarta Post, 7 May 1997, p. 12 (US Exhibit 14, pp. 112-114)).
434 AV/16, p. 3.
435 The Community considers that the benefits granted for the assembly of other motor vehicles and parts and components thereof under the 1993 Deregulation Package and under the National Car Programme are also "specific subsidies" within the meaning of Articles 1 and 2 of the SCM Agreement. Nevertheless, the Community has decided no to take action against those subsidies under Part III of the SCM Agreement within the framework of the current dispute. The Community reserves its right to do so in the future, if necessary.
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