14.86 For instance, the Decision to issue the Decree of the Minister of Industry Concerning The Determination of Local Content Levels of Domestically Made Motor Vehicles or Components attached to the Decree of the Ministry of Industry announcing the 1993 ⁶⁸¹ car programme states in its Article 2:

The Instruction of the President of the Republic of Indonesia No.2 of 1996 of the National Car programme (dated 19 February 1998) states in its "INSTRUCT ... SECONDLY:

"WITHIN the framework of establishment of the National Car Industry:

More specifically Regulation No. 20/1996 established the following sales tax structure where passenger cars of more than 1600cc and jeeps with local content of less than 60% would pay 35% tax; passenger cars of less than 1600cc, jeeps with local content of more than 60%, and light commercial vehicles (other than jeeps using gas) would pay 20% tax; and National Cars would pay 0% tax. ⁶⁸² We recall that one of the requirements for designation as a "National Car" is that the local content rate must be 20% at the end of the first year, 40% at the end of the second year and 60% at the end of the third year. ⁶⁸³

14.87 We also note with reference to the June 1996 car programme, that the Decree of the President of the Republic of Indonesia Number 42 of 1996 ⁶⁸⁴ on the production of National Cars provides in Article 1:

The Decree of the Minister of Industry and Trade adopted pursuant to this Presidential Decree 42 states in Articles 1, 2 and 3:

"Article 1

Article 2

Article 3

14.88 We believe that under these measures compliance with the provisions for the purchase and use of particular products of domestic origin is necessary to obtain the tax and customs duty benefits on these car programmes, as referred to in Item 1(a) of the Illustrative List of TRIMs.

14.89 We need now to decide whether these tax and customs duty benefits are "advantages" in the meaning of the chapeau of paragraph 1 of that Illustrative List. In the context of the claims under Article III:4 of GATT, Indonesia has argued that the reduced customs duties are not internal regulations and as such cannot be covered by the wording of Article III:4. We do not consider that the matter before us in connection with Indonesia�s obligations under the TRIMs Agreement is the customs duty relief as such but rather the internal regulations, i.e. the provisions on purchase and use of domestic products, compliance with which is necessary to obtain an advantage, which advantage here is the customs duty relief. The lower duty rates are clearly "advantages" in the meaning of the chapeau of the Illustrative List to the TRIMs Agreement and as such, we find that the Indonesian measures fall within the scope of the Item 1 of the Illustrative List of TRIMs.

14.90 Indonesia also argues that the local content requirements of its car programmes do not constitute classic local content requirements within the meaning of the FIRA panel (which involved a binding contract between the investor and the Government of Canada) because they leave companies free to decide from which source to purchase parts and components. We note that the Indonesian producers or assemblers of motor vehicles (or motor vehicle parts) must satisfy the local content targets of the relevant measures in order to take advantage of the customs duty and tax benefits offered by the Government. The wording of the Illustrative List of the TRIMs Agreement makes it clear that a simple advantage conditional on the use of domestic goods is considered to be a violation of Article 2 of the TRIMs Agreement even if the local content requirement is not binding as such. We note in addition that this argument has also been rejected in the Panel Report on Parts and Components. ⁶⁸⁵

14.91 We thus find that the tax and tariff benefits contingent on meeting local requirements under these car programmes constitute "advantages". Given this and our earlier analysis of whether these local content requirements are TRIMs and covered by the Illustrative List annexed to the TRIMs Agreement, we further find that they are in violation of Article 2.1 of the TRIMs Agreement.

14.92 We note that a violation of Article 2.1 of the TRIMs Agreement may be justified under Articles 3, 4 or 5 of the TRIMs Agreement. ⁶⁸⁶ However, Indonesia has not invoked any of the general exceptions of GATT as referred to in Article 3 of the TRIMs Agreement, nor the provisions available to developing countries referred to in Article 4. In addition, Indonesia does not claim that the measures in dispute benefit from the transitional period under Article 5 of the TRIMs Agreement. ⁶⁸⁷

14.93 The complainants have claimed that the local content requirements under examination, and which we find are inconsistent with the TRIMs Agreement, also violate the provisions of Article III:4 of GATT. Under the principle of judicial economy⁶⁸⁸, a panel only has to address the claims that must be addressed to resolve a dispute or which may help a losing party in bringing its measures into conformity with the WTO Agreement. The local content requirement aspects of the measures at issue have been addressed pursuant to the claims of the complainants under the TRIMs Agreement. We consider therefore that action to remedy the inconsistencies that we have found with Indonesia�s obligations under the TRIMs Agreement would necessarily remedy any inconsistency that we might find with the provisions of Article III:4 of GATT. We recall our conclusion that non applicability of Article III would not affect as such the application of the TRIMs Agreement. We consider therefore that we do not have to address the claims under Article III:4, nor any claim of conflict between Article III:4 of GATT and the provisions of the SCM Agreement.

14.97 Indonesia argues that there is a conflict between Article III:2 and the SCM Agreement in that the obligations contained in Article III:2 of GATT and the SCM Agreement are mutually exclusive. ⁶⁸⁹ For Indonesia, the obligations under both agreements cannot be complied with at the same time without the need to renounce explicit rights or authorizations contained in the SCM Agreement to maintain the subsidies at issue absent serious prejudice to like products. Indonesia refers to the interpretative note to Annex 1A of GATT and the Bananas III test. All parties have entered into lengthy argumentation on the relevance, application and consequences of these provisions.

14.98 In examining this issue, we need not decide whether the test suggested by the Bananas III panel report with regard to the interpretative note to Annex 1 A is the correct one in the WTO context. Indonesia argues that there is a conflict because the SCM Agreement "explicitly authorizes" Members to provide subsidies that are prohibited by Article III:2 of GATT. Assuming that such "explicit authorization" is the correct conflict test in the WTO context, we find that, whether or not the SCM Agreement is considered generally to "authorize" Members to provide actionable subsidies so long as they do not cause adverse effects to the interests of another member, the SCM Agreement clearly does not authorize Members to impose discriminatory product taxes. Nor does a focus on Article 27.3 suggest a different approach. Whether or not Article 27.3 of the SCM Agreement can be reasonably interpreted to "authorize", explicitly or implicitly, the provision of subsidies contingent on the use of domestic over imported goods (an issue we do not here decide), Article 27.3 is unrelated to, and cannot reasonably be considered to "authorize", the imposition of discriminatory product taxes.

14.99 We also recall that the obligations of the SCM Agreement and Article III:2 are not mutually exclusive. It is possible for Indonesia to respect its obligations under the SCM Agreement without violating Article III:2 since Article III:2 is concerned with discriminatory product taxation, rather than the provision of subsidies as such. Similarly, it is possible for Indonesia to respect the obligations of Article III:2 without violating its obligations under the SCM Agreement since the SCM Agreement does not deal with taxes on products as such but rather with subsidies to enterprises. At most, the SCM Agreement and Article III:2 are each concerned with different aspects of the same piece of legislation. ⁶⁹⁰

14.100 We find, therefore, that Article III:2 is applicable to the present dispute.

14.101 We shall now examine the validity of the complainants� claims under Article III:2 of GATT.

14.103 It has been established ⁶⁹¹ that Article III:2 contains two standards, depending on whether the imported and domestic goods are considered to be "like products" subject to the requirements of the first sentence of Article III:2, or whether the imported and domestic goods are rather considered as being "directly competitive or substitutable goods" subject to the requirements of the second sentence of Article III:2. If a complainant raises a claim under the first sentence of Article III:2, it must establish that the imported products are taxed "in excess" of any domestic like products. If a complainant raises a claim under the second sentence of Article III:2, it must establish that the imported products are "not similarly taxed" to the domestic "directly competitive or substitutable goods" and that the dissimilar taxation is "applied ... so as to afford protection to domestic production".

To continue with Article III:2, first sentence

⁶⁸¹ Decree of the Ministry of Industry No. 114/M/S/6/1993, 9 June 1993.

⁶⁸² See paragraphs 2.28 et seq. of the Descriptive Part. Regulation No. 36/1996 increased the tax incentive available by providing that passenger cars and light commercial vehicles with a local content in excess of 60% would pay 0% tax. See paragraphs 2.36 et seq. of the Descriptive Part.

⁶⁸³ See paragraphs 2.24 et seq. of the Descriptive Part.

⁶⁸⁴ The Decree of the Minister of Industry and Trade Number: 142/MPP/Kep/6/1996 Regarding the Production of the National Car, 5 June 1996.

⁶⁸⁵ In Parts and Components, the panel recognized that requirements that an enterprise voluntarily accepts to gain government-provided advantages are nonetheless "requirements" (italics in original): "5.21 The Panel noted that Article III:4 refers to "all laws, regulations or requirements affecting (the) internal sale, offering for sale, purchase, transportation, distribution or use." The Panel considered that the comprehensive coverage of "all laws, regulations or requirements affecting" the internal sale, etc. of imported products suggests that not only requirements which an enterprise is legally bound to carry out, . . . but also those which an enterprise voluntarily accepts in order to obtain an advantage from the government constitute "requirements" within the meaning of that provision ... ." Panel Report on EEC - Regulation on Imports of Parts and Components, BISD 37S/132, adopted on 16 May 1990.

⁶⁸⁶ We recall our view that Article III:8(b) of GATT does not constitute a defense to any measure providing discrimination between imported and domestic products, including local content requirements. See paragraph 14.43 supra.

⁶⁸⁷ Article 5 of the TRIMs Agreement offers a transitional period to developing countries that allows them to maintain any notified TRIM, existing 180 days prior to 1 January 1995. Such TRIMs are to be phased out by 1 January 2000. Notifications under Article 5 were required to be made by 31 March 1995. We note that on 23 May 1995, Indonesia made a notification with respect to its 1993 Incentive System to the TRIMs Committee under Article 5 of the TRIMs Agreement. On 28 October 1996, Indonesia notified the TRIMs Committee that it was withdrawing its notification related to automobiles because it considered that this programme was not a TRIM.

⁶⁸⁸ As defined by the Appellate Body in Shirts and Blouses, op. cit., pp. 17-20.

⁶⁸⁹ See paragraphs 5.145 to 5.204 of the Descriptive Part.

⁶⁹⁰ We refer to our discussion on this matter in Section C above, paragraphs 14.28 ff supra.

⁶⁹¹ Alcoholic Beverages(1996), op. cit., Appellate Body Report, p. 17.