C. Claim under Article 28 of the SCM Agreement⁶⁰⁵

8.476 However, while Indonesia is not currently subject to the provisions of Article 3.1(b) prohibiting the use of local content subsidies, Indonesia is subject to the provisions of Article 28.2 of the SCM Agreement that prohibit the extension of the scope of subsidy programmes that are inconsistent with the provisions of the SCM Agreement. Article 28, which is entitled "Existing Programmes," applies to "[s]ubsidy programmes which have been established within the territory of any Member before the date on which such a Member signed the WTO Agreement and which are inconsistent with the provisions of this Agreement ... ." ⁶⁰⁶ Article 28.2 provides the following: "No Member shall extend the scope of any such programme, nor shall such a programme be renewed upon its expiry."

8.477 Indonesia has extended the scope of its pre-WTO tariff and tax subsidies in several ways. First, Decree No. 223/1995 revised the tariff subsidies previously available under Decree No. 645/1993 with respect to passenger car parts. The revision was as follows:

8.478 As the above table demonstrates, in the case of tariff incentives for passenger car parts, by creating new gradations of local content rates (i.e., the 40-50 per cent range and the 50-60 per cent range), Decree No. 223/1995 extends the range of the incentives available. For example, in the case of an assembler of passenger cars with a local content of 41 per cent, under Decree No. 645/1993, that assembler would have had to boost its local content to over 60 per cent in order to obtain the incremental benefit of an import duty rate of 0 per cent. Because 60 per cent local content may be an unattainable goal, the assembler would have had no incentive to increase local content beyond 41 per cent. ⁶⁰⁹ However, under Decree No. 223/1995, the assembler need not pass the 60 per cent local content target in order to obtain an additional subsidy; instead, it can reduce its import duty rate from 20 per cent to 10 per cent by achieving a local content rate of only 51 per cent.

8.479 Decree No. 82/1996 also extends the scope of the pre-WTO tariff incentives. Under Decree No. 82/1996, the producer or assembler of a "national motor vehicle" pays no import duties on imported parts if the vehicle has a local content of 20 per cent in the first year or 40 per cent in the second year. In the case of passenger cars, a producer or assembler of a passenger car with a local content rate of 20 per cent would have paid import duties at the rate of 80 per cent under Decree No. 645/1993, while a producer or assembler of a car with a local content rate of 40 per cent would have paid import duties at the rate of 60 per cent. Clearly, the adjustment of import duty rates from 80 per cent and 60 per cent to zero constitutes an extension of the scope of the tariff subsidy.

8.480 Second, Indonesia has extended the scope of its pre-WTO tax incentives. Recall that under Decree No. 647/1993, passenger cars with a cylinder capacity of less than 1600cc and jeeps were subject to a preferential luxury tax rate of 20 per cent, provided that the local content of such vehicles exceeded 60 per cent. Thus, Decree No. 647/1993 constituted an import substitution subsidy with respect to jeeps and certain passenger cars, the amount of the subsidy being the difference between the preferential 20 per cent rate and the 35 per cent rate applicable to the corresponding vehicles with a local content of 60 per cent or less.

8.481 However, Regulation No. 36/1996 increased the amount of the tax subsidy and expanded the types of vehicles eligible for the subsidy. Under Regulation No. 36/1996, the luxury tax is reduced from 20 per cent to zero for motor vehicles with a local content in excess of 60 per cent. In addition, instead of limiting the tax subsidy to jeeps, Regulation No. 36/1996 makes the tax exemption applicable to all light commercial vehicles. Finally, a "national motor vehicle" is subject to a luxury tax of zero even though it is only required to have a local content of 20 per cent in the first year and 40 per cent in the second year.

8.482 In summary, that Indonesia has significantly extended the scope of its pre-WTO local content subsidies. In so doing, Indonesia has acted inconsistently with the provisions of Article 28.2 of the SCM Agreement.

8.483 Indonesia has not contested the United States' description of the precise manner in which Indonesia extended the scope of these subsidies. Indonesia makes two arguments in response: (1) because Article 27.3 does not contain an express standstill provision comparable to the standstill provision concerning export subsidies in Article 27.4, the drafters must have intended to preclude a standstill provision for local content subsidies; and (2) local content subsidies used by developing country Members are not "inconsistent with the provisions of the Agreement" within the meaning of Article 28.1. The United States submits that both arguments are wrong.

8.484 The first argument ignores the text of Article 28 and the drafting history of Article 27.3. With respect to the text, Article 28, by its terms, applies to all Members, not merely developed country Members. If the drafters had intended that Article 28 apply only to developed country Members, presumably they would have said so explicitly. Instead, the provisions of Article 28 apply to all Members, except as modified by other provisions of the Agreement. While Article 27.3 may modify the deadlines in Article 28.1(b) for eliminating subsidies that are inconsistent with the SCM Agreement, Article 27.3 does not modify the notification requirements of Article 28.1(a) or the standstill requirements of Article 28.2.

8.485 Concerning the drafting history of Article 27.3, in the discussion of the TRIMs Agreement, above, the United States has demonstrated how Article 27.3 was a last minute insertion into the text of the SCM Agreement that was intended to avoid prohibiting those local content subsidies that would be permitted under the transition provisions of the TRIMs Agreement. In making this last minute insertion, not all of the necessary conforming changes were made. For example, Article 27.7 of the SCM Agreement clarifies that the expedited procedures of Article 4 do not apply to a developing country Member in the case of export subsidies which are in conformity with the provisions of paragraphs 2 through 5. Article 27.7 should have been revised to include a reference to local content subsidies, but it was not, and one must read this omitted reference into Article 27.7, as all the parties in this case have done.

8.486 Therefore, the absence of a standstill provision in Article 27.3 comparable to the provision in Article 27.4 should not be interpreted as a deliberate decision by the drafters to exclude developing country local content subsidies from the general standstill obligation of Article 28.2. This is especially true in light of the comparable standstill provision in Article 5.4 of the TRIMs Agreement.

8.487 Turning to Indonesia�s argument that local content subsidies of developing country Members are not "inconsistent with" the provisions of the SCM Agreement, "inconsistent with" simply is not a synonym for "prohibited by." If the drafters had intended that Article 28.1 encompass only subsidies that are prohibited by the SCM Agreement, they easily could have used the more precise phrase "prohibited by".

8.488 Finally, Indonesia�s limited interpretation of Article 28 is inconsistent with the object and purpose of the SCM Agreement, which was to increase disciplines on the use of export and local content subsidies. Although the deadline for elimination of these subsidies is phased in for certain classes of economies, nowhere is there a provision in the SCM Agreement that expressly condones the unilateral extension of, or increase in, these types of subsidies during the phaseout period. To the contrary, the only two provisions in the SCM Agreement that expressly address this issue, Articles 27.4 and 28.2, condemn such extensions or increases.

8.489 In summary, Indonesia has failed to rebut the existence of a violation of Article 28.2 of the SCM Agreement.

8.497 Moreover, even if Article 27.4 did apply to domestic content subsidies (which, to repeat, it does not), the preclusion against increasing the level of subsidies would not apply to Indonesia. Article 27.4 applies to "[a]ny developing country Member referred to in paragraph 2(b) [of Article 27]." By its terms it does not apply to Article 27.2(a) developing country Members�those "referred to in Annex VII" of the Subsidies Agreement. ⁶¹⁰ Indonesia is an Annex VII developing country Member - it is so listed in paragraph (b) of that Annex. For this reason as well, Indonesia's domestic content subsidy is not covered by the provisions of Article 27.4.

9.3 The Appellate Body report in the EC - Bananas III case emphasized that Article X:3(a) does "not apply to the laws, regulations, decisions and rulings themselves, but rather to the administration of those laws, regulations, decisions and rulings.". ⁶¹¹

9.4 In June 1996, Indonesia authorized PT Timor to import automobiles duty free in accordance with the provisions of Presidential Decree No. 42, although the counter-purchase requirement, which is clearly set out in the Decree of the Minister of Trade and Industry No. 142/MPP/Kep/6/1996 ⁶¹²,was obviously not met. The Indonesian trade statistics show that it is quite unlikely that TPN and Kia have met the 25% counter-purchase requirement, which is clearly set forth in the governmental decree. ⁶¹³ Following this authorization, almost 40,000 automobiles were imported duty free, and sales of those automobiles were also exempted from the luxury tax as discussed. These facts constitute violations of Article X:3(a) of GATT 1994, for the following reasons.

9.5 First, Presidential Decree No.42/1996 ⁶¹⁴ and the Decree of the Minister of Trade and Industry No.142/MPP/Kep/6/1996 fall within the scope of Article X:1 of GATT 1994, since they are obviously regulations pertaining "to rates of duty, taxes or other charges".

9.6 Second, Indonesia granted authorization to PT Timor, resulting in exemptions from duties and the luxury tax, clearly in violation of the Presidential Decree No. 42 and the Decree of the Minister of Trade and Industry No.142/MPP/Kep/6/1996. In other words, Indonesia administered its regulations in a partial and unreasonable manner.

9.7 Therefore, Indonesia granted benefits to automobiles imported by PT Timor in violation of Article X:3(a) of GATT 1994.

To continue with Response of Indonesia

⁶⁰⁵ Japan, in its first submission alleged that Indonesia had violated Article 28 of the SCM Agreement. Japan did not, however, make a claim with respect to this alleged violation.

⁶⁰⁶ Article 28.1, SCM Agreement.

⁶⁰⁷ Decree No. 645/1993 only had a category of 40% to 60%.

⁶⁰⁸ Decree No. 645/1993 only had a category of 40% to 60%.

⁶⁰⁹ Indeed, most observers consider the attainment of 60% local content for passenger cars as extremely problematic. "In Defence of the National Car Project," Business Times (Singapore), 10 June 1996 (US Exhibit 14, pp. 72-74).

⁶¹⁰ Complainants cannot successfully assert that the second sentence of Article 27.4 is not limited to developing country Members referred to in paragraph 2(b) of Article 27. The first sentence of Article 27.4 expressly refers to paragraph 2(b) countries. The third sentence refers to desired extension of the eight-year phase-out requirement for export subsidies. It can apply only to paragraph 2(b) countries because paragraph 2(a) (i.e., Annex VII) countries are not required to phase out their export subsidies within eight years. In addition, the second sentence itself speaks of eliminating export subsidies "within a period shorter than that provided for in this paragraph." (Emphasis added.) That period can only be the eight-year period for phase-out of export subsidies by paragraph 2(b) countries. Accordingly, analysis of the text of the second sentence of Article 27.4 and of its context confirm that the entirety of Article 27.4 applies only to paragraph 2(b) countries.

⁶¹¹ Report of the Appellate Body on EC - Bananas III, para. 200.

⁶¹² Decree of the Minister of Trade and Industry No.142/MPP/Kep/1996 (Japan Exhibit 43).

⁶¹³ During the period from January 1996-December 1996, the total amount of automotive parts and components exported from Indonesia to Korea was $5,777,843, which includes not only parts and components for "Sedan/S515-1500cc", but also for other models produced by Kia Motors and for vehicles produced by other Korean companies (see Japan Exhibit 50). On the other hand, the value of the National Cars imported from Kia Motors during the period from June 1996 through December 1996 was $131,242,800 (see Japan Exhibits 30 and 31). Accordingly, it is quite obvious that, as far as the period from June 1996 through December 1996 is concerned, the value of the counter-purchase by Kia could never amount to 25 per cent of the import value of the National Cars (i.e. $32,810,700).

⁶¹⁴ Presidential Decree No.42/1996 (Japan Exhibit 9).