8.451 In this case, the United States has previously demonstrated that three of the four necessary elements already exist. The government-directed $690 million loan (1) constitutes a subsidy, (2) is specific, and (3) exceeds 5 per cent ad valorem. Because the ostensible purpose of this subsidy is to fund the construction of the Cikampek facility where the Timor Kia Sportage will be assembled, the loan confers a subsidy on the Sportage. ⁵⁸⁹

8.452 In addition, the United States has shown that US light commercial vehicles imported and sold in Indonesia are "like" the Timor Kia Sportage. As set forth in Table 25, based on a comparison of specifications, the GM Opel Blazer is sufficiently similar to the Sportage to be considered a "like product".⁵⁹⁰

8.453 The only remaining question is what the effects will be of the Timor Kia Sportage once it is introduced into the Indonesian market some time next year. Based on the pricing strategy employed by TPN in connection with the Timor Kia Sephia, it is reasonable to assume that TPN will take advantage of the subsidies it receives from the Government to significantly undercut the prices of its competition within the meaning of Article 6.3©. As such, a threat of serious prejudice exists.

(2) Claim not pursued due to Panel's ruling on the admissibility of the $690 million government-directed loan

8.454 The United States claim of threat of serious prejudice was limited to the impact of the subsidized Sportage on light commercial vehicles of US manufacturers. The threat of serious prejudice claim was based on the related claim that the US$690 million government-directed loan to TPN (the purpose of which was to finance the construction of the Cikampek plant at which the Sportage will be assembled) constitutes an actionable subsidy. Because the Panel has dismissed the US claim regarding the loan, the United States is not currently pursuing its claim of threat of serious prejudice.

8.455 However, while the Panel has ruled that the US claims concerning the loan are inadmissible, the loan remains relevant to this case. Cf., Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel, and Other Items, WT/DS56/R, Report of the Panel issued 25 November 1997, para. 6.15. Indonesia asserted at the first meeting of the Panel that after TPN's start-up phase, the market will determine the winners and the losers, as it should." Indonesia's Statement to the Panel, page 2. This statement is simply contradicted by the fact that the Government of Indonesia ordered a consortium of banks to provide a $690 million loan to TPN on preferential terms. The loan is a subsidy, and, with a 10-year term, has a 10-year allocation period. In other words, TPN will be deemed to be receiving subsidies from the loan for the next ten years. The existence of the loan belies Indonesia's claim that, as of 1999, the "market" will determine the winners and the losers. Moreover, Indonesia's claim that the Government of Indonesia played no role in the provision of the loan is so at odds with the reported facts that it calls into question the credibility of other factual assertions made by the Government of Indonesia in this case.

8.457 The specific threat allegations of the EC relate solely to the putative effects of the February 1996 component of the National Car Programme and the specific threat allegations of the United States relate solely to the putative effects of the August 1997 loan. ⁵⁹¹ As discussed above, these allegations implicate the 5 per cent ad valorem standard of Article 6.1(a), as well as the generally available serious prejudice standards of Article 6.3. This does not, however, result in the application of different types of threat analyses to these different bases for actionability.

8.458 In this case, Article 27.8 operates to apply the general standards of Article 6.3 to any Article 6.1(a) allegations. As demonstrated below, complainants have failed to show by positive evidence, as they must under either Article 6.1(a) or 6.3, that their interests are threatened with serious prejudice. ⁵⁹²

(1) The actual and alleged subsidies provided pursuant to the February 1996 National Car Programme or the August 1997 loan to TPN, respectively, do not threaten serious prejudice to European Communities or US interests

8.459 Paragraphs (a) and (c) of Article 6.3 apply to the European Communities and United States threat of serious prejudice allegations. Both paragraphs expressly focus on the effect of the subsidy at issue on a "like product" of another Member. This threshold concept significantly limits the scope of the effects analysis that is to be undertaken here. As discussed above, Indonesia disagrees with the complainants' like product arguments.

(a) Complainants' threat allegations are based on inappropriate like product analyses

8.460 The complainants' threat allegations are based on inappropriate like product analyses. The EC takes an unduly expansive approach, boldly asserting that all motor vehicles falling within the category of passenger cars, as defined in Indonesia's regulations, constitute a single category of like products. The United States, in contrast, takes an unduly restrictive approach, looking only at limited engine, transmission, brake and dimension data for the Sportage and the Opel Blazer. ⁵⁹³ As discussed above, the Sportage is not (and will not be) a national car. Moreover, the application of customary like product criteria demonstrates the specious nature of each complainant�s approach.

8.461 The end-use criterion offers no guidance here because widely dissimilar vehicles, such as buses, motorcycles, vans and cars, serve to transport people and carry cargo. Indeed, animals and human-drawn means of conveyance also serve these purposes.

8.462 With respect to cars, consumer's tastes and habits and the product's properties, nature and quality are inseparable. Contrary to the positions taken by the European Communities and the United States, the markets for passenger cars and light commercial vehicles are very highly differentiated. It is widely recognized that consumers consider numerous physical and non-physical characteristics in making their purchasing decisions: quality; reputation; price; resale value; ride and comfort; standard features; safety features; available options; exterior size; interior space; engine size and technology (e.g., horsepower, in-line/V configuration, valve design); fuel efficiency; etc. ⁵⁹⁴

8.463 Finally, that with respect to tariff treatment, passenger cars are distinguished on the basis of total cylinder capacity and fuel type (gasoline versus diesel), with Harmonized Tariff System breakpoints occurring at 1000cc, 1500cc and 3000cc. ⁵⁹⁵ In this respect, it is especially important to note that the Timor is one of the few passenger cars sold in Indonesia with a cylinder capacity of less than 1500cc. ⁵⁹⁶

8.464 In sum, although it may be difficult to determine appropriate like product categories for the purposes of this proceeding, it should be abundantly clear that the categories urged by the European Communities and the United States are not appropriate. This is especially so considering that a restrictive interpretation of that phrase is required here. The European Communities and the United States have not met their burden of proving that products are like and of establishing acceptable like product categories. ⁵⁹⁷ As further discussed below, their failure to adduce appropriate evidence on those bases results in their failure to affirmatively demonstrate, as they must, that their interests are threatened with serious prejudice through the effects of the February 1996 programme or the 1997 loan to TPN.

(b) Complainants have failed to demonstrate that the effects of the February 1996 Programme or the August 1997 loan to TPN threaten serious prejudice

(1) The threat of serious prejudice standard

8.465 As a threshold matter, it is important to emphasize that the threat of serious prejudice standard must be very exacting. ⁵⁹⁸ For example, unsubstantiated conjecture, speculation and assumptions certainly could not constitute the "positive evidence" called for by Article 27.8. Moreover, the temporal dimension is also critical, given the fluidity of the economic and business environments (on both macro and micro levels). Projections and forecasts may be carefully developed, but they are all too susceptible to revision. Thus, the more remote an item is in time, the less reliable it is as a current indicator of future developments. In sum, the threat alleged must be real and imminent, and the threat standard must be applied cautiously and judiciously, especially when the rights of a developing country Member are at stake.

(2) The EC assertions

8.466 The European Communities: (i) asserts that future sales of the national cars imported under the June 1996 programme will cause (unspecified) serious prejudice; (ii) implies that national cars assembled in Indonesia under the February 1996 programme will displace or impede European Communities imports; and (iii) argues that TPN will be able and currently plans to set retail prices that will undercut significantly the prices of EC cars in 1998 and 1999. None of these points, however, supports an affirmative threat finding.

8.467 As for the European Communities' specific assertions, any overhang in the inventory of imported national cars is irrelevant to this proceeding. These cars benefitted only from the June 1996 programme, which has terminated.

8.468 The EC's future displacement/impedance ⁵⁹⁹ and price undercutting ⁶⁰⁰ arguments are also without merit. As discussed above, the European Communities' failure to develop and adduce like produce-specific evidence strips their already sketchy threat argument of any validity.

8.469 Nevertheless, the fact that the national car does not and will not compete significantly with EC cars is borne out by historical data. For example, notwithstanding the June 1996 programme, total Indonesian sales of passenger cars carrying European Communities brand names increased from 8,554 units in 1995 to 9,526 units in 1996. ⁶⁰¹ Moreover, taking 1996 as the reference year, the breakdown of passenger car sales by brand was as follows: Mercedes-Benz, 3,829 units (40.2 per cent of total European Communities sales); BMW, 3,608 units (37.9 per cent); Peugeot, 1,401 units (14.7 per cent); and Volvo, 688 units (7.2 per cent). ⁶⁰² It simply strains credulity to suggest that the small Timor is or will be a rival of Mercedes-Benz, BMW, Peugeot or Volvo. Thus, the historical data are yet another factor refuting the European Communities' assertions that the national car threatens to cause (or, in fact, has caused) serious prejudice to the European Communities' interests.

(3) The US claim

8.470 The United States threat allegation is one-dimensional, focusing solely on the putative effects the yet-to-be-built Sportage will have on sales of the GM Opel Blazer. The United States first asserts that the August 1997 loan to TPN constitutes a specific subsidy that exceeds 5 per cent ad valorem, and claims all that is in question is what the effects will be of the Sportage when it is introduced into the market. ⁶⁰³ The United States then simply asserts that "[b]ased on the pricing strategy employed by TPN in connection with the Timor Kia Sephia, it is reasonable to assume that TPN will take advantage of the subsidies it receives from the Government to significantly undercut the prices of its [the Sportage�s] competition within the meaning of Article 6.3(c)." This is no more than unsubstantiated, unvarnished speculation that does not even remotely approach the type of positive evidence required by the SCM Agreement. This fact, coupled with the inadequate US like product analysis discussed above, is fatal to the threat allegation of the United States.

8.471 Further, Indonesia has informed the complainants and the Panel that it will not grant National Car status to a Sportage-type vehicle. ⁶⁰⁴

To continue with Claim under Article 28 of the SCM Agreement

⁵⁸⁹ To date, the Government of Indonesia has insisted that the Timor Kia Sportage will not be designated as a "national motor vehicle" and will not benefit from the tariff and tax subsidies under the National Motor Vehicle programme. Be that as it may, an issue remains as to whether the tariff and tax subsidies provided to the Sephia also provide benefits to the Sportage.

⁵⁹⁰ The United States also believes that the Jeep Cherokee and Jeep Wrangler are "like" the Sportage.

⁵⁹¹ The EC speaks generally of the continued effects of the terminated June 1996 programme and of the "estimated subsidisation rate (on sales value) of the cars assembled by PT TPN in Indonesia" and the United States asserts generally that National Car Programme subsidies threaten serious prejudice to US exports of light commercial vehicles, but such generalized pleading fails to satisfy even the most rudimentary positive evidence or due process standards.

⁵⁹² Thus, although the US Annex IV calculations regarding the August 1997 loan are flawed in several critical respects, the Government needs not here address their validity and accuracy. Also, although not within the scope of their specific threat allegations, and thus not germane, the same holds true for the application by the US and the EC of the 5%/15% tests to the February and June 1996 aspects of the National Car Programme. The calculations relating to the June 1996 programme are moot because the programme has been terminated. Similarly, the calculations relating to the February 1996 programme are moot because the only evidence of actual serious prejudice that is adduced relates exclusively to the now-terminated June 1996 programme. Article 6.1(a) is not implicated by the February 1996 programme because, as demonstrated below, Complainants have failed to satisfy the evidentiary standard imposed by Article 27.8 with respect to threat of serious prejudice.

⁵⁹³ Although not relevant, this errant approach also contaminates the like product analysis relied upon by the US with respect to passenger cars. The reliance of the US and, to a lesser extent, the EC on the DRI/McGraw-Hill market segmentation categories is also misplaced. First, the DRI/McGraw-Hill categories pertain to the European, not the Indonesian, car market. See AV/2, at Annex 1, p. 284. Second, cars with the same nameplate often differ significantly from market to market. Finally, there is disagreement among industry authorities as to how to segment the market. For example, a US industry authority places the more-advanced US version of the Kia Sephia in a "Budget" category, wholly apart from the Escort, Neon, and any Opel Optima-equivalent GM model. See Indonesia Exhibit 12.

⁵⁹⁴ Indeed, if all that mattered was a car�s general market segment, we would not observe the very significant price spreads that exist between cars in the same segment. For example, as set forth by the United States in Table 31, the March 1997 list price for a Daewoo Nexia DOHC 1500cc was 43 million rupiah, while the list price for a Honda Civic 4-door, AKP 1600cc was nearly 75 million rupiah.

⁵⁹⁵ See HTS Category 87.03. A number of countries also consider other factors (e.g., interior space; body type; number of cylinders; height) in further subdividing this category for statistical and other purposes.

⁵⁹⁶ It is also noteworthy that two other vehicles fitting in the HTS 1000cc to 1500cc category (the Mazda MR-90 (1400cc) and the Ford Taxi (1300cc)), are sold at prices below those charged for the Timor. See AV/14, at Attachment U-22/1 at 3; AV/13, at Attachment 7.

⁵⁹⁷ See generally Japan-Taxes on Alcoholic Beverages, WT/DS8/R (1 November 1996), Panel Report, at p. 117, para. 6.14 (complainants have burden of proof to show like product in Article III:2 dispute).

⁵⁹⁸ Article 15.7 of the Subsidies Agreement, which pertains to the imposition of countervailing measures, is especially instructive in this respect. It provides, in pertinent part: "A determination of a threat of material injury shall be based on facts and not merely on allegation, conjecture or remote possibility. The change in circumstances which would create a situation in which the subsidy would cause injury must be clearly foreseen and imminent." Article 15.8, in turn, extends an additional cautionary note, even where the imposition of countervailing measures is warranted: "With respect to cases where injury is threatened by subsidized imports, the application of countervailing measures shall be considered and decided with special care."

Further guidance can be found in the pronouncements of various GATT bodies that have addressed the same threat concept in the anti-dumping context. The Report of the Group of Experts on "Anti-dumping and Countervailing Duties" states: "With respect to cases where material injury is threatened by dumped imports, the Group stressed that the application of anti-dumping measures had to be studied and decided with particular care." (13 May 1959) BISD 8S/145 (para. 16 at p. 150)(emphasis in original). The Committee on Anti-dumping Practices stated: "[A]nti-dumping relief based on the threat of injury must be confined to those cases where the conditions of trade clearly indicate that material injury will occur imminently if demonstrable trends in trade adverse to domestic industry continue, or if clearly foreseeable adverse events occur." Recommendation Concerning Determination of Threat of Material Injury (21 October 1985), BISD 32S/182 (para. 5 at p. 183). See also Korea-Anti-dumping Duties on Imports of Polyacetyl Resins from the United States (27 April 1993), BISD 40S/205 (para. 271 at p. 293).

⁵⁹⁹ Although not applicable here, GATT panels addressing displacement/impedance claims have imposed a high burden of proof on the complainants, requiring them to provide clear and substantial evidence to support their claims. See French Assistance to Exports of Wheat and Wheat Flour (21 November 1958), BISD 7S/46 (para. (c) at p. 55); EC�Refunds on Exports of Sugar (6 November 1979), BISD 26S/290 (para. 4.28 at pp. 314-315 and para. (f) at p. 319).

⁶⁰⁰ Of course, Article 6.5 requires that any price comparisons shall be made at the same level of trade and at comparable times and that due account must be taken of any other factor affecting price comparability. Neither the EC nor the US has even attempted to account for "any other factors" in its analysis.

⁶⁰¹ See AV/14, at Attachment U-21/1-B (does not include Opel brand). Both the US and the EC include sales of Opel in their statistics and serious prejudice calculations. The Government asks that the Panel issue a ruling regarding which of the Complainants should be allowed to claim Opel sales as its own.

The EC understandably ignores its substantial increase in sales and instead focuses on market share, claiming that its market share increased "only marginally" from 1995 to 1996 and "fell dramatically" during the first half of 1997. Such market share developments are meaningless, however. As the EC itself states: "Since 1992 and until 1996, exports of passenger cars from the Community grew at a faster pace than demand, resulting in significant gains in terms of market share." This demonstrates that market share and demand growth are not necessarily correlated. Many extraneous factors influence this relationship, including changes in customer preferences.

⁶⁰² See AV/14, at Attachment U-21/1-B.

⁶⁰³ Notwithstanding the US allegation, the loan is not a subsidy because its terms are fully consistent with commercial considerations and, in any case, the loan is outside the scope of this proceeding. The Government, however, needs not debate the point here because the alleged effects do not threaten serious prejudice to US interests.

⁶⁰⁴ In this regard, Indonesia has submitted to the complainants and to the Panel a letter to TPN from the Ministry of Industry and Trade denying National Car benefits for a Sportage-type vehicle (No. 1039/DJ-ILMK/X/1997 of 21 October 1997, Indonesia Exhibit 42, Attachment E).