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Indonesia - Certain Measures Affecting the Automovile IndustryReport of the Panel (Continued)
D. Claims of Local Content Requirements 14.58 The European Communities and the United States claim that the 1993 car programme, by providing for local content requirements linked to tax benefits for finished cars incorporating a certain percentage value of domestic products, and to customs duty benefits for imported parts and components used in cars incorporating a certain percentage value of domestic products, violates the provisions of Article 2 of the TRIMs Agreement, and Article III:4 of the GATT. 14.59 Japan, the European Communities and the United States also claim that the 1996 car programme, by providing for local content requirements linked to tax benefits for National Cars (which by definition incorporate a certain percentage value of domestic products), and to customs duty benefits for imported parts and components used in National Cars, violates the provisions of Article 2 of the TRIMs Agreement and Article III:4 of the GATT. 1. The relationship between the TRIMS Agreement and Article III of GATT 14.60 Since the complainants have raised claims that the local content requirements of the car programmes violate both the provisions of Article III:4 of GATT and Article 2 of the TRIMs Agreement, we must consider which claims to examine first. For Indonesia, this issue does not arise because it argues that the TRIMs Agreement does not add anything to Article III; it merely interprets Article III, elaborates the principles developed in the FIRA 665 panel report and applies them to trade-related investment measures. In deciding which claims to examine first, we must, initially, address the relationship between Article III of GATT and the TRIMs Agreement.14.61 In this regard, we note first that on its face the TRIMs Agreement is a fully fledged agreement in the WTO system. The TRIMs Agreement is not an "Understanding to GATT 1994", unlike the six Understandings which form part of the GATT 1994. 666 The TRIMs Agreement and Article III:4 prohibit local content requirements that are TRIMs and therefore can be said to cover the same subject matter. But when the TRIMs Agreement refers to "the provisions of Article III", it refers to the substantive aspects of Article III; that is to say, conceptually, it is the ten paragraphs of Article III that are referred to in Article 2.1 of the TRIMs Agreement, and not the application of Article III in the WTO context as such. Thus if Article III is not applicable for any reason not related to the disciplines of Article III itself, the provisions of Article III remain applicable for the purpose of the TRIMs Agreement. This view is reinforced by the fact that Article 3 of the TRIMs Agreement contains a distinct and explicit reference to the general exceptions to GATT. If the purpose of the TRIMs Agreement were to refer to Article III as applied in the light of other (non Article III) GATT rules, there would be no need to refer to such general exceptions. 667 14.62 Moreover, it has to be recognized that the TRIMs Agreement, in addition to interpreting and clarifying the provisions of Article III where trade-related investment measures are concerned, has introduced special transitional provisions including notification requirements. 668 This reinforces the conclusion that the TRIMs Agreement has an autonomous legal existence, independent from that of Article III. Consequently, since the TRIMs Agreement and Article III remain two legally distinct and independent sets of provisions of the WTO Agreement, we find that even if either of the two sets of provisions were not applicable the other one would remain applicable. And to the extent that complainants have raised separate and distinct claims under Article III:4 of GATT and the TRIMs Agreement, each claim must be addressed separately. 14.63 As to which claims, those under Article III:4 of GATT or Article 2 of the TRIMs Agreement, to examine first, we consider that we should first examine the claims under the TRIMs Agreement since the TRIMs Agreement is more specific than Article III:4 as far as the claims under consideration are concerned. A similar issue was presented in Bananas III, where the Appellate Body discussed the relationship between Article X of GATT and Article 1.3 of the Licensing Agreement and concluded that the Licensing Agreement being more specific it should have been applied first. 669 This is also in line with the approach of the panel and the Appellate Body in the Hormones 670 dispute, where the measure at issue was examined first under the SPS Agreement since the measure was alleged to be an SPS measure. 2. The application of the TRIMS Agreement 14.64 Article 2.1 of the TRIMs Agreement provides that " ... no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994." By its terms, Article 2.1 requires two elements to be shown to establish a violation thereof: first, the existence of a TRIM; second, that TRIM is inconsistent with Article III or Article XI of GATT. No claims have been raised with reference to a violation of Article XI of GATT. 14.65 Article 2.1 of the TRIMs Agreement refers to Article III generally. It is our view that the complainants have limited their TRIMs inconsistency claims to the aspects of the Indonesian car programmes that would violate the provisions of the TRIMs Agreement which prohibit any advantage conditional on meeting local content requirements. In other words, while the complainants have claimed that some other aspects of the same car programmes also violate the provisions of Article III:2 of GATT, they have not claimed that the tax discrimination aspects of the measures per se violate the TRIMs Agreement. Therefore, we will examine under the TRIMs Agreement, only the consistency of the local content requirements made effective through the custom duty and tax benefits of these car programmes. Later, we shall examine the consistency of the tax discrimination aspects per se of these car programmes with the provisions of Article III:2 of GATT. 14.66 We note also that Article 2.2 of the TRIMs Agreement provides: "2.2 An Illustrative List of TRIMs that are inconsistent with the obligations of national treatment provided for in paragraph 4 of Article III of GATT 1994 ... is contained in the Annex to this Agreement. 14.67 The United States and the European Communities claim that any measure that falls within the description of Item 1(a) of the Illustrative List of the TRIMs Agreement constitutes per se a TRIM inconsistent with Article 2 of the TRIMs Agreement. For the United States, if any Member, in whatever context, requires the purchase by an enterprise of a domestic product in order to obtain an advantage, that requirement by definition has investment consequences for such an enterprise, bringing the measure within the coverage of the TRIMs Agreement and confirming its violation thereof. The United States adds that, even if the identification of a relationship to investment were necessary to prove an inconsistency with the TRIMs Agreement, the Indonesian measures under examination fulfil such a condition, because the measures necessitate an investment in Indonesia (as a producer of motor vehicles or motor vehicle parts and components) to qualify for the various tax and customs duty incentives. 14.68 Japan rather argues that two elements must be shown to establish a violation of Article 2 of the TRIMs Agreement: first, there must be a TRIM; second, the measure in question must be inconsistent with Article III of GATT (or with Article XI of GATT). 14.69 The European Communities and Japan submit as well that the central aspect of the various measures included in the Indonesian car programmes is to develop domestic manufacturing capability of automobiles and automotive parts and components, and that they thereby qualify as "investment" measures. For these complainants, the Indonesian car programmes are "trade related" because they encourage the use of domestic over imported parts and thereby affect trade. 14.70 Indonesia argues that, while its subsidies may at times indirectly affect investment decisions of the recipient of the subsidy or other parties, these decisions are not the object, but rather the unintended result, of the subsidy. Indonesia adds that many subsidies will result indirectly in increased investment. Indonesia adds that these subsidies have not been adopted as investment regulations. Therefore, for Indonesia, the measures under examination are not trade-related investment measures. Indonesia also supports the argument put forward by India, a third party, that the TRIMs Agreement is basically designed to govern and provide a level playing field for foreign investment, and that therefore measures relating to internal taxes or subsidies cannot be construed to be trade-related investment measures. 14.71 We note that the arguments presented by the parties reflect different views on whether any requirement by an enterprise to purchase or use a domestic product in order to obtain an advantage, by definition falls within the Illustrative List or whether the TRIMs Agreement requires a separate analysis of the nature of a measure as a trade-related investment measure before proceeding to an examination of whether the measure is covered by the Illustrative List. However, if we were to consider that the measures in dispute in this case are in any event trade-related investment measures, it would not be necessary to decide this basic issue of interpretation. We note in this regard that the United States and the European Communities have also argued in the alternative that, even if it is necessary to show a relationship of a measure to investment, any such requirement would be satisfied in the case under consideration. 14.72 Therefore, we will first determine whether the Indonesian measures are TRIMs. To this end, we address initially the issue of whether the measures at issue are "investment measures". Next, we consider whether they are "trade-related". Finally, we shall examine whether any measure found to be a TRIM is inconsistent with the provisions of Article III and thus violates the TRIMs Agreement. (a) Are the Indonesian measures "investment measures"? 14.73 We note that the use of the broad term "investment measures" indicates that the TRIMs Agreement is not limited to measures taken specifically in regard to foreign investment. Contrary to India�s argument, we find that nothing in the TRIMs Agreement suggests that the nationality of the ownership of enterprises subject to a particular measure is an element in deciding whether that measure is covered by the Agreement. We therefore find without textual support in the TRIMs Agreement the argument that since the TRIMs Agreement is basically designed to govern and provide a level playing field for foreign investment, measures relating to internal taxes or subsides cannot be construed to be a trade-related investment measure. We recall in this context that internal tax advantages or subsidies are only one of many types of advantages which may be tied to a local content requirement which is a principal focus of the TRIMs Agreement. The TRIMs Agreement is not concerned with subsidies and internal taxes as such but rather with local content requirements, compliance with which may be encouraged through providing any type of advantage. Nor, in any case, do we see why an internal measure would necessarily not govern the treatment of foreign investment. 14.74 We next consider whether the Indonesian measures are investment measures. In this regard, we consider the following extracts (emphases added) from the official Indonesian legislation relevant and instructive. 14.75 With regard to the 1993 car programme, we note: - The "considerations section" of the Decree of the Ministry of Industry announcing the 1993 car programme states: "a. that within the framework of supporting and promoting the development of the automotive industry and/or the component industry in the future, it is deemed necessary to regulate the local content levels of domestically produced motor vehicles or components in connection with the grant of incentives in the imposition of import duty rates; b. that in order to further strengthen domestic industrial development by taking into account the trend of technological advance and the increase of the capability and mastering of industrial design and engineering, it is necessary to improve the relevant existing regulations already laid down;" - The "considerations section" of the 1995 amendment to the 1993 car programme states: "That in the framework of further promoting of the development of the motor vehicles industry and /or domestically produced components, it is considered necessary to amend..." 672 14.76 With regard to the February 1996 car programme, we note the following: - The title of the Presidential Instruction for the National Car programme (No.2) is "The Development of the National Automobile Industry". 673 - Paragraph a) of the "Considering" section of the Government Regulation No.20 states: "that in the effort to promote the growth of the domestic automotive industry, it is deemed necessary to enact regulations concerning the Sales Tax on Luxury Goods upon the delivery of domestically produced motor vehicles". 674 - In addition, the State Minister for Mobilization of Investment Funds/Chairman of the Investment Coordinating Board issued a decree entitled "Investment Regulations within the Framework of the Realisation of the Establishment of the National Automobile Industry" 675 which emphasized that the new measures were intended to promote investment, stating in its fifth considering: "5. that it is therefore necessary to issue a decree for the regulation of investment in the national automobile industry." - Article 2 of that same Investment Regulation by the Minister of State for Mobilization of Investment Funds/Chairman of the Investment Coordinating Board provides: "In order to realise the development of the national automobile industry as meant in Article 1: 1. ... 2. In the endeavour to realise the development of such national car industry, the investment approval will be issued to the automobile industry sector with tax facilities in accordance with legal provisions enacted specifically for such purpose." - The Decision relating to the investment facilities regarding the Determination of PT. Timor Putra National to Establish and Produce a National Car, entitled "Decision of the State Minister for the Mobilization of Investment Funds/Chairman of the Capital Investment Co-ordinating Board" states: "1. That in implementing a national car industry it is deemed necessary to determine investment approval for a car industry which will build and produce a national car. 2. That in the framework of investment for the car industry, PT.Timor Putra National has submitted an application and working program to build a national car industry and has obtained domestic investment approval (PMDN) NO.607/PMDN/1995, dated 9 November 1995". 676 14.77 With regard to the June 1996 car programme, we note that the "Considering" section of the Decree of the President of the Republic No. 4267 677 on the Extension (June) to the February 1996 car programme provides: "a. that the development of the national car is aimed at improving the nation�s self-reliance ... and to achieve this solid preparations and continuous support are necessary; b. that the preparation for domestic production of national cars require the availability of huge financing and therefore will be carried out in stages; c. that in connection with the preparations, it is considered necessary to establish a policy on the implementation stage of the production of national cars." - The "Considering" section of the Government Regulation No. 3667 678 states: "That within the framework of promoting the development of the automotive industry in the increased use of domestically produced automotive components, it is deemed necessary to grant Sales Tax on Luxury Goods facilities to the group of luxury goods upon delivery of certain motor vehicles" - The Elucidation to the Government Regulation No. 36 states: "Within the framework of speeding up the realisation of production of national motor vehicles using domestically made automotive components, it is necessary to promote the domestic automotive industry in order to further its growth particularly in the face of global competition. One of the endeavours which can be exerted is the provision of a tax incentive in the form of exemption from the assessment of Sales Tax on Luxury Goods on the delivery of certain motor vehicles which have achieved certain levels of local content." 14.78 We note also that Indonesia indicates 679 that the objectives of the National Car programme include the following: - To improve the competitiveness of local companies and strengthen overall industrial development; - To develop the capacity of multiple-source auto parts and components; - To encourage the development of the automotive industry and the automotive component industry; - To bring about major structural changes in the Indonesian automobile industry; - To encourage the transfer of technology and contribute to large-scale job creation; - To encourage car companies to increase their local content, resulting in a rapid growth of investment in the automobile industry. 14.79 Indonesia has also stated that PT TPN is a "domestic capital investment company". 680 14.80 On the basis of our reading of these measures applied by Indonesia under the 1993 and the 1996 car programmes, which have investment objectives and investment features and which refer to investment programmes, we find that these measures are aimed at encouraging the development of a local manufacturing capability for finished motor vehicles and parts and components in Indonesia. Inherent to this objective is that these measures necessarily have a significant impact on investment in these sectors. For this reason, we consider that these measures fall within any reasonable interpretation of the term "investment measures". We do not intend to provide an overall definition of what constitutes an investment measure. We emphasize that our characterization of the measures as "investment measures" is based on an examination of the manner in which the measures at issue in this case relate to investment. There may be other measures which qualify as investment measures within the meaning of the TRIMs Agreement because they relate to investment in a different manner. 14.81 With respect to the arguments of Indonesia that the measures at issue are not investment measures because the Indonesian Government does not regard the programmes as investment programmes and because the measures have not been adopted by the authorities responsible for investment policy, we believe that there is nothing in the text of the TRIMs Agreement to suggest that a measure is not an investment measure simply on the grounds that a Member does not characterize the measure as such, or on the grounds that the measure is not explicitly adopted as an investment regulation. In any event, we note that some of the regulations and decisions adopted pursuant to these car programmes were adopted by investment bodies. (b) Are the Indonesian measures "trade-related"? 14.82 We now have to determine whether these investment measures are "trade-related". We consider that, if these measures are local content requirements, they would necessarily be "trade-related" because such requirements, by definition, always favour the use of domestic products over imported products, and therefore affect trade. To continue with Illustrative List of the TRIMs Agreement665 Panel Report on Canada: Administration of the Foreign Investment Review Act, BISD 30S/140, adopted on 7 February 1984, hereafter called FIRA. 666 The General Agreement on Tariffs and Trade 1994 ("GATT") is defined as to consist of: (a) the provisions in the General Agreement on Custom duties and Trade, dated 30 October 1947, annexed to the Final Act Adopted at the Conclusion of the Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment (excluding the Protocol of Provisional Application), as rectified, amended or modified by the terms of legal instruments which have entered into force before the date of entry into force of the WTO Agreement; (b) the provisions of a series of the legal instruments (protocols and decisions) set forth below that have entered into force under the GATT 1947 before the date of entry into force of the WTO Agreement; (c) six Understandings on the interpretation of provisions of GATT 1994; and (d) the Marrakesh Protocol to GATT 1994. 667 We note that a similar drafting technique was used with the TRIPS Agreement which cross-refers to provisions of other international treaties. 668 We note that Indonesia has put emphasis on a particular statement of the Bananas III panel concerning the relationship between Article III of GATT and the TRIMs Agreement. We consider that that statement has to be understood in the particular context of that dispute between two developed countries (no transition period was therefore applicable) where the panel had already reached a conclusion that the measure at issue violated Article III:4 of GATT. Therefore there was no need to further discuss the TRIMs Agreement since any action to remedy the inconsistency found under Article III:4 of GATT would necessarily remedy inconsistencies under the TRIMs Agreement. In the present case, we have to address the legal relationship between these two agreements. 669 The Appellate Body in Bananas III stated in paragraph 204:"Although Article X:3(a) of the GATT 1994 and Article 1.3 of the Licensing Agreement both apply, the Panel, in our view, should have applied the Licensing Agreement first, since this agreement deals specifically, and in detail, with the administration of import licensing procedures. If the Panel had done so, then there would have been no need for it to address the alleged inconsistency with Article X:3(a) of the GATT 1994." 670 Panel and Appellate Body reports on EC - Measures Concerning Meat and Meat Products (Hormones) Complaints by the United States and Canada, WT/DS26 and DS48, adopted on 13 February 1998, hereafter called Hormones. 671 Decree of the Ministry of Industry No 114/M/S/6/1993, 9 June 1993. 672 Decree of the Minister of Industry no 108/M/S/5/1995, on the amendment of the attachment I to Decree of the Minister of Industry Number 114/M/S/6/1993, 23 May 1995. 673 Instruction of the President of the Republic of Indonesia No.2 of 1996, 19 February 1996. 674 Government Regulation No. 20 of 1996, 19 February 1996. 675 Decree of the State Minister for Mobilisation of Investment Funds/Chairman of the Investment Coordinating Board No.01/SK/1996, 27 February 1996. 676 Decision of the State Minister For the Mobilization of Investment Funds/Chairman of the Capital Investment Co-Ordinating Board; Number 02/SK/1996, 5 March 1996. 677 Presidential Decree No.42 Concerning the Production of National Automobiles, 4 June 1996. 678 Government Regulation No. 36/1996: The Amendment of Government Regulation No.50 of 1994 Regarding the Implementation of Law No.8 of 1993 on Value Added Tax on Goods and Services and Sales Tax on Luxury Goods as amended by Law No.11 of 1994, as Lastly Amended by Government Regulation No. 20 of 1996, 4 June 1996. 679 See paragraph 6.51 of the Descriptive Part. 680 See paragraph 6.50 of the Descriptive Part. |
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