14.195 In response to questions posed by the Panel, the complainants provided the following information regarding the form in which their passenger cars were imported. The European Communities indicated that virtually all cars were exported to Indonesia in CKD kits. These kits include "almost all" the parts and components necessary for assembling the cars, the only parts and components purchased in Indonesia being low cost universal components such as batteries and tires, or accessories such as radios, CD-players and loudspeakers. Further, the European Communities stated (and Indonesia did not contest) that data provided by Indonesia during consultations indicated that the "local content" of EC passenger cars assembled in Indonesia ranged from 6.4 to 8.3 per cent in 1996 (it is unclear whether Indonesia considered the Optima to be a US or EC passenger car; the same data indicate that US passenger cars contained between 7.7 and 11.1 per cent local content in 1996). ⁷⁴² The United States indicated that Escorts would have been ordered in groups of 20 vehicles, packaged in waterproof, pre-engineered cases. 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." The local content initially would have been well under 20 per cent, although Ford planned on increasing that over time. The Neon would have been shipped in lots of 72 vehicles, filling 85 boxes. The items to be sourced locally would have included such things as paint, oil, gasoline and other commodities. No US or EC passenger car has achieved the 20 per cent local content level required to enjoy lower tariffs on imported parts and components.

14.196 It is not contested by Indonesia that the CKD kits imported or allegedly planned for importation into Indonesia are products "of another Member." Thus, the issue is whether those kits "have characteristics closely resembling", and are thus "like", completed Timors. In this respect we note, first, that the end uses of the imported CKD kits are the same as those of finished passenger cars (although additional steps are required before that end use is achieved). Second, given that the local content of the CKD kits is quite low, the overwhelming majority of the components in the CKD kits not only closely resemble but are physically identical to those found in the final product, with the only difference being that those components are unassembled rather than assembled. Thus, the question is whether the unassembled components can properly be considered to be "like" the finished product assembled from those components, i.e., whether the difference between a product assembled and unassembled is sufficiently important that the unassembled product does not "closely resemble" the assembled product.

14.197 We do not consider that an unassembled product ipso facto is not a like product to that product assembled. Recalling the view of the Appellate Body that tariff classification may be a useful tool in like product analysis⁷⁴³, we note that, under the General Rules for the Interpretation of the Harmonized System:

We think that a comparable approach to the relation between assembled and unassembled products makes good sense in the context of this dispute. It appears that, in order to avoid paying 200 per cent duties on CBU passenger cars, EC and US car producers ship to Indonesia virtually complete CKD kits that are effectively "cars in a box." Accordingly, we believe that they can properly be considered to have characteristics closely resembling those of a completed car.

This focus on the trade effects of subsidization is carried over into Part III of the SCM Agreement. Article 5 provides that no Member should cause, through the use of any subsidy, "adverse effects to the interests of other Members." One such adverse effect is "serious prejudice to the interests of another Member," which the SCM Agreement indicates is used in the same sense as in Article XVI:1. ⁷⁴⁴ Article 6.3 provides that serious prejudice may arise where one or several of four listed situations exist. As we have seen, the United States alleges two such situations, i.e., (i) that "the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member"; and (ii) that "the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same market" (emphasis added).

14.201 In our view, the text of Article XVI and of Part III of the SCM Agreement make clear that serious prejudice may arise where a Member's trade interests have been affected by subsidization. We see nothing in Article XVI or in Part III that would suggest that the United States may claim that it has suffered adverse effects merely because it believes that the interests of US companies have been harmed where US products are not involved. The United States has cited no language in Article XVI:1 or Part III suggesting that the nationality of producers is relevant to establishing the existence of serious prejudice. Accordingly, given that serious prejudice may only arise in the case at hand where there is "displacement or impedance of imports of a like product from another Member" or price undercutting "as compared with the like product of another Member", we do not consider that the United States can convert such effects on products from the European Communities into serious prejudice to US interests merely by alleging that the products affected were produced by US companies.

14.202 In light of our view that the existence of alleged harm to US companies is not a basis for a claim of serious prejudice to the interests to the United States, the question remains whether one Member may bring a claim that another Member has suffered serious prejudice as a result of subsidization. In our view the answer is no. It will be recalled that Article 7 of the SCM Agreement sets forth the steps to be taken by a Member which believes that it has suffered adverse effects within the meaning of Part III. Article 7.2 provides that:

It is clear from Article 7.2 that the dispute settlement procedures set forth in Article 7 may only be invoked by a Member where that Member believes that it has itself suffered serious prejudice as a result of subsidization.

14.203 Our view on these issues is confirmed by Article 6.7, which allows a subsidizing Member to raise a defence to a displacement/impedance claim where "imports from the complaining Member" or "exports from the complaining Member" are affected by such factors as export prohibitions or restrictions, natural disasters, and arrangements limiting exports. These provisions of Article 6.7 assume that the products subject to a claim of serious prejudice arising from displacement or impedance originate in the complaining Member.

14.204 For the foregoing reasons, we find that the United States cannot assert that it has suffered serious prejudice as a result of displacement/impedance or price undercutting with respect to products that do not originate in the United States. ⁷⁴⁵

14.205 It will be recalled that the National Car programme provides a number of subsidies for the Timor. Under the February 1996 car programme, Timors assembled in Indonesia benefit from an exemption from import duties with respect to imported parts and components, as well as an exemption from the luxury sales tax, provided those Timors meet specified local content requirements. Under the June 1996 car programme, PT TPN was authorized to import up to 45,000 CBU Timors from Korea exempt from (200 per cent) import duties during the period 30 June 1996 to 30 June 1997 and to sell those Timors free of luxury sales tax provided that certain requirements regarding counter-purchase and use of Indonesian workers in Korea were satisfied. It will further be recalled that Indonesia submitted the results of an audit indicating that those requirements had not been met, and indicated that a process would begin to seek repayment of the subsidies provided with respect to those Korean-origin Timors. Indonesia now argues that the Panel should not consider the effects of the subsidies provided pursuant to the June 1996 car programme because it has now expired. Because assembly on a significant scale of the Timor in Indonesia has not yet begun, ⁷⁴⁶ subsidies pursuant to the "February 1996 programme" have yet to be provided to any substantial degree. Thus, Indonesia contends, no actual serious prejudice may be found to exist.

14.206 We do not agree with Indonesia that we are precluded from considering the effect of subsidies pursuant to the June 1996 car programme when analysing whether the subsidies in this case have caused serious prejudice to the interests of the complainants. We agree with the complainants that in this case there are a variety of different subsidy measures provided pursuant to a single National Car programme, and that it makes little sense to treat each one separately when analysing the existence of serious prejudice. Rather, we must assess the "effect of the subsidies" on the interests of another Member to determine whether serious prejudice exists, not the effect of "subsidy programmes." We note that at any given moment in time some payments of subsidies have occurred in the past while others have yet to occur in the future. If we were to consider that past subsidies were not relevant to our serious prejudice analysis as they were "expired measures" while future measures could not yet have caused actual serious prejudice, it is hard to imagine any situation where a panel would be able to determine the existence of actual serious prejudice. Thus, we decline to proceed on the course suggested by Indonesia. ⁷⁴⁷

To continue with Actual Sales and Market Share Data

⁷⁴² According to Indonesia, "[t]he local content of cars assembled in Indonesia is based on local value added . . . . [E]ach part and component is given an average weighted value with reference to a finished car (weight averaged over each car category). The level of manufacturing that occurs in Indonesia also is factored into the local content calculation."

⁷⁴³ Alcoholic Beverages (1996), op. cit., Appellate Body Report, p. 21.

⁷⁴⁴ SCM Agreement, Note 13 to Article 5.

⁷⁴⁵ We note that the issue addressed here is not whether the United States need demonstrate the existence of trade effects in order to establish the nullification or impairment of benefits arising from the violation of a provision of the WTO Agreement. It is well established that in such cases no demonstration of actual trade effects is required. Superfund, op. cit.. Rather, we are addressing a situation where the existence of adverse effects is the essence of the claim.

⁷⁴⁶ PT TPN is temporarily assembling 1,000 units per year at a plant in Tambun. Its full-scale facility at Karawang, which will have an annual capacity of 63,000 Timors, was not to begin production until sometime in 1998.

⁷⁴⁷ We recall that, late in the Panel process, Indonesia indicated that it had terminated subsidies pursuant to the National Car programme. For the reasons set forth in paragraph 14.9 supra, we nevertheless will proceed to consider whether subsidies pursuant to the National Car programme are causing serious prejudice to the interests of the European Communities and the United States.