(b) CKDs as "like" finished Timors

8.233 According to the parties, the GM Opel Optima and Vectra, the Ford Escort, the Peugeot 306 and the Chrysler Neon, among other models, are (or would be) imported into Indonesia in Completely-Knocked-Down ("CKD") (rather than CBU) form. Once in Indonesia, they are assembled and sold. The European Communities and the United States argue that these imports in CKD form are "like" finished Timors. Indonesia disagrees. The following are the parties arguments in this regard:

(1) Arguments of the European Communities

8.234 The proposition that CKD cars must be considered as "like" to assembled complete passengers where the CKD kit already has the "essential character" of the complete car is supported by a generally accepted principle of customs classification, now contained in Rule 2(a) of the General Rules for the Interpretation of the 1996 Harmonised System. According to this principle:

8.235 Given that Indonesia grants import duty relief for the importation of parts and components for the assembly of passenger cars when the local content of the cars into which they are assembled is more than 20 per cent, imported CKDs may be considered as having the "essential character" of a complete car in those cases where they have not benefited from import duty relief.

8.236 The criteria applied by Indonesia in order to classify the same products when imported into Indonesia still remain unclear. Indeed, the mere fact that those CKD kits benefit from a lower import duty rate does not necessarily mean that they are not classified within the same HS six-digit code as CBU cars. If it was confirmed that the CKD kits exported from the EC are classified by Indonesia as parts and components, rather than as passenger cars, the necessary implication would be that Indonesia does not follow General Interpretative Rule 2(a).

8.237 At any rate, whether or not Indonesia adheres in practice to General Interpretative Rule 2(a) is totally irrelevant to this dispute. The European Communities has invoked General Interpretative Rule 2(a) in support of its contention that CKD kits and CBU cars have "closely resembling characteristics" and, therefore, are "like" products for the purposes of the SCM Agreement. That argument has a general relevance and remains valid, irrespective of whether the importing Member concerned in a particular dispute complies with that rule or not.

8.238 In response to a question from the Panel regarding the condition in which the CKD kits are imported, and the nature and amount of value added in Indonesia, the European Communities stated the following:

8.239 Virtually all EC cars (of all models) are exported to Indonesia as CKD kits. The kits already include almost all the parts and componentes necessary for assembling the cars. The only parts and components which are purchased in Indonesia are low cost universal components, such as batteries and tyres, or accessories such as radios, CD-players and loudspeakers. As a result, the percentage of local added value is very low in all cases. According to the data provided by Indonesia in response to a question raised by the United States during the consultations, (see table below) in 1996, the local content percentage of the EC models assembled in Indonesia ranged from 6.4 per cent to 8.2 per cent.

(2) Arguments of the United States

8.240 The United States agrees with the European Communities that CKD passenger cars must be considered as "like to the assembled complete passenger cars in those cases where the CKD kit has already the 'essential character' of the complete car" for the reasons set forth by the European Communities. The United States would add that, to a large extent, world trade in automobiles is conducted in the form of the export and import of unassembled vehicles, as opposed to completely built-up, finished vehicles. Certainly that is the case in Indonesia, where the only passenger car that has been imported in CBU form and in sizeable quantities was the Kia Sephia during the one-year period in which the tariff and tax exemptions were in effect. Because a CKD passenger car has the essential character of a complete car, it would exalt form over substance to find that a CKD passenger car is not a like product to a finished car.

8.241 In response to a question from the Panel regarding the condition in which the CKD kits are imported, and the nature and amount of value added in Indonesia, the United States stated the following:

8.242 In the case of Ford, the Escort CKD kits would have been ordered in groups of 20 vehicles; i.e., an order could be for any multiple of 20 vehicles, such as 20, 40, 60, etc. The kits would have been packaged in waterproof, pre-engineered cases to accept the exact content of the kit, such as the correct number of hoods, fenders, engines, etc. The pre-engineered cases then would have been placed in standardized cargo containers for delivery to the port and subsequent ocean shipment. The CKD kit would have contained all of the individual parts necessary to build a complete Escort, except for locally procured parts and components, such as oil and gasoline.

8.243 With respect to local content, the initial local content of Ford Escorts would have been well below the 20 per cent threshold for obtaining tariff incentives under the 1993 Programme, although Ford planned on increasing the local content over time.

8.244 With respect to the Chrysler Neon, the kits would have been shipped in lots of 72 vehicles. Because under the project, as planned, Neons would have had less than 10 per cent local content, this would have resulted in 85 boxes per lot. The United States does not have a complete list of the components that would have been sourced from Indonesia. According to Chrysler officials, however, due to the low local content, the items that would have been sourced locally would have included such things as paints, oils, gasoline, and other commodities.

8.245 The United States has requested, but not received, information from General Motors concerning the precise composition of its CKD kits.

(3) Arguments of Indonesia

8.246 CKD cars are not "like" finished cars. Although various Customs regimes classify for tariff purposes incomplete, unfinished or unassembled products and finished products under the identical HTS number, this fact in and of itself does not make a completed "ready-to-sell" automobile a like product to an incomplete, unfinished or unassembled car that after importation requires the addition of critical components, labour, capital resources and equipment before it is "ready-to-sell".

8.247 Designation of unassembled and assembled products as like products results in comparisons between articles that are physically dissimilar with different customers and customer expectations. These resultant apples-to-oranges comparisons are economically and legally meaningless.

8.248 The phrase "essential character" is a tariff classification concept. It is not a concept that can be used as the dispositive factor when complainants attempt to cobble together an unworkable comparison analysis.

(c) "Imports" from/"exports" by complainant

8.249 In response to a question from the Panel, the United States addressed the question of whether serious prejudice to the interests of the United States could arise in terms of displacement/impedance and price undercutting where the products being displaced/impeded or whose prices were being undercut were not of US origin. The following are the United States' arguments in this regard:

(1) Arguments of the United States

8.250 With respect to the Escorts that Ford planned to import into Indonesia, according to Ford�s project plan for Indonesia, they would have been sourced from Europe. With respect to the Opel Optimas and Vectras imported into Indonesia, it is the understanding of the United States that imports of Opel Optimas and Vectras have ceased as a result of the National Car programme, although it is possible that cars from inventory may still be available for sale in Indonesia. Prior to the introduction of the National Car programme, Opels were sourced from Europe. With respect to the Chrysler Neons to be imported into Indonesia, they would have been sourced from the United States; specifically, from Chrysler�s plant in the state of Illinois.

8.251 It is the understanding of the United States that there are no passenger cars of US origin, in CBU or CKD form, that currently are imported into Indonesia. See AV/13, US Answer to Question #6. While the stray import of a US-origin passenger car cannot be ruled out, as demonstrated below, the US manufacturers cancelled their plans to export passenger cars to Indonesia due to the introduction of the National Car programme. Therefore, at present, vehicle exports (other than trucks) of US origin consist of kits of GM (Opel) Blazers and Jeep Cherokees, both of which fall into the category of "light commercial vehicles."

8.252 It is the view of the United States that serious prejudice to the interests of the United States in terms of displacement/impedance and price undercutting may arise where the products being displaced/impeded or whose prices are being undercut are not of US origin. The reasons for this are as follows:

8.253 Article 6.1 of the SCM Agreement refers to "[s]erious prejudice in the sense of paragraph (c) of Article 5 ... ." Article 5(c), in turn, refers to "serious prejudice to the interests of another Member". In addition, footnote 13 to Article 5(c) states as follows: "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." The second sentence of Article XVI:1 states as follows: "In any case in which it is determined that serious prejudice to the interests of any other contracting party is caused or threatened by any such subsidization, the contracting party granting the subsidy shall, upon request, discuss with the other contracting party or parties concerned, or with the CONTRACTING PARTIES, the possibility of limiting the subsidization." Thus, one has to start with Article XVI:1.

8.254 The second sentence of Article XVI:1, by its terms, does not limit a Member's right to complain about serious prejudice to situations where the products that are being affected by subsidies are of that particular Member's origin. Instead, Article XVI:1 refers to a Member's "interests", the ordinary meaning of which is "the state of being concerned or affected esp. with respect to advantage or well-being". Because General Motors and Ford are undeniably US companies, the United States has a legitimate concern with respect to the well-being of those companies. Thus, actions that affect those companies, or products produced and sold by those companies, affect the interests of the United States within the meaning of Article XVI:1. In other words, under Article XVI:1, the United States has an "interest" in exports from the EC of the products of US companies, such as General Motors and Ford. The standard of Article XVI:1, through footnote 13, is incorporated into Part III of the SCM Agreement as a basic principle. Had a different result been intended, the drafters could have easily used different language.

8.255 It is true that some of the provisions of Article 6 do and some do not mesh perfectly with this basic principle. Paragraphs (a) through (c) of Article 6.3, for example, simply refer to the effects on like products from "another Member", as opposed to products from the complaining Member, and are consistent with the basic principle of Article XVI:1 and Article 5(c). Paragraph (d) of Article 6.3 does not refer to the effects on like products at all.

8.256 On the other hand, Article 6.7, which describes situations in which serious prejudice shall not arise under Article 6.3, refers to imports or exports from the complaining Member. In the view of the United States, however, the specific rules in Article 6.7 should be interpreted in light of the basic principle in Article XVI:1, as incorporated into Article 5©, and should not be used to override the basic principle.

(2) Arguments of Indonesia

8.257 Indonesia argues that the fact that no products of US origin are sold in Indonesia means that the United States has no claim of serious prejudice. The following are Indonesia's arguments in this regard:

8.258 The United States admits that:

Thus, the United States has reduced its serious prejudice claim to one, quite simple, inadequately substantiated allegation: But for the Indonesian measures, Chrysler would have gone forward with its supposed "plans" to try to sell the Neon in Indonesia. Even if this were true, it would not amount to serious prejudice. Therefore, the Panel should reject the United States claims and reject its complaint.

4. Article 6.3(a) of the SCM Agreement - displacement/impedance of imports

(a) Arguments of the European Communities

8.259 The European Communities claims that the subsidies at issue cause "serious prejudice" to the interests of the Community in the way described in paragraphs (a) and (c) of Article 6.3 of the SCM Agreement. The following are the European Communities' arguments in support of this claim:

8.260 In accordance with Article 6.3 of the SCM Agreement, serious prejudice in the sense of Article 5 © may arise:

8.261 The use of the alternative conjunction "or" in the chapeau of Article 6.3 clearly indicates that the presence of one of the factors listed in that provision may be sufficient to establish the existence of serious prejudice.

8.262 The Community claims and will demonstrate here below that the subsidies under consideration cause serious prejudice to the interests of the Community in the manner described in paragraphs (a) and (c) of Article 6.