THE DISPUTE OVER THE INDONESIAN NATIONAL CAR PROGRAM

| Case Study A |  Case Study B |

Simulations & Questions for Students Case A | Case B 
 
| Teaching Note Available upon request from ICDP |

CASE STUDY
CASE B

Part I
Consultations and Negotiations 

Bilateral Consultations

By early June of 1996, the dispute over the Indonesian National Car Program had moved to the level of government-to-government discussions.  The bilateral consultations between Indonesia and each of the three complaining governments—Japan, the United States and the European Union—lasted through the summer, fall and winter of 1996–97 and well into the spring of 1997.  By the fall of 1996, the Japanese and the US governments and the European Commission had all decided to begin WTO dispute settlement proceedings by requesting consultations in accordance with the terms of the DSU.  These consultations proceeded concurrently with the bilateral consultations.  All three complaining parties were ready to reach a negotiated settlement and delayed requesting a WTO dispute settlement panel when the mandatory 60-day minimum consultation period expired.  On the other hand, all three countries considered the issue important enough that they were prepared to have it raised at the highest levels of their governments.  When by May 1997 WTO consultation and the bilateral negotiations had not resolved the matters, the trade agencies in the Japanese and US governments and the EU Commission, one-by-one, announced that they would request the formation of a WTO dispute settlement panel. 

The Japanese Approach  -- Japanese officials initially sent conflicting signals regarding the National Car Program, as noted in Part I.  From June of 1996 to June of 1997, Japanese officials attempted to resolve the national car problem through bilateral talks while at the same time slowly moving toward a WTO dispute settlement panel.  In late July of 1996 Japanese trade officials in MITI still expressed the hope that Indonesia would not actually import “national cars” from South Korea.  One MITI official noted that Indonesia had not yet approved a shipment of national cars from Korea.  The MITI officials said:  “We are cool-headedly dealing with national car project separately,” and stressed that Japan was talking a careful stance so that other aspects of Japan’s bilateral relations with Indonesia would not be affected.  He even said, “We don’t want to cause any speculation that Japan is reducing ODA (development aid) or yen loans because of this problem.”[1]  After meeting with President Soeharto and Trade Minister Tunky Ariwibowo on September 13, Japanese Trade Minister Shunpei Tsukahara said that Japan would continue to hold bilateral talks even if it decided to take action within the WTO.  He also noted that Japan must verify that the TPN cars had actually cleared customs duty-free before making a definitive decision about the WTO case.[2]  

In November and December of 1996 Japan and Indonesia held WTO consultations pursuant to the procedures in the WTO Dispute Settlement Understanding.  After the second round Japanese officials said that “We did not see any new proposals today from the Indonesian side to resolve the matter.” 

Japan could have requested the formation of a dispute settlement panel following the failure of the consultations in December, but waited until April 17.  Even at this point, Japanese officials were sending mixed signals.  The Japanese Foreign Minister Yukihito Ikeda said in early May that: “We are willing to take up the issue in a discussion again in a bid to maintain our harmonious relations in many fields with Indonesia.”[3] The Japanese auto industry also much preferred a negotiated settlement to a confrontational WTO proceeding.  In January, the industry sought to get Indonesia to provide the same tax breaks provided to TPN and again in February indicated its readiness for a deal. 

The EU Approach -- The EU Commission also held a series of consultations.  In October, Commissioner for External Affairs Sir Leon Brittan blasted Indonesia’s national car policy when he said, “It is something of a paradox that with import tariffs as high as 125 percent, the Indonesian government still feels that it needs discriminatory measures to protect its industry.”[4]  The EU did not always speak with one voice.  The French Economic and Finance Minister, Jean Arthuis, speaking in Jakarta in July of 1996, said that Indonesia’s desire to have a national car policy was reasonable as it is a country in transition.  He also expressed France’s wish to participate in the development of the Indonesian car industry.  The European industry, like its Japanese and US counterparts, was looking for a negotiated settlement.      

The US Approach -- After the announcement of the revised National Car Program in early June 1996, a USTR official protested that the program violated the national treatment principle of the WTO and demand consultations.  These meetings took place in Manila the week of June 3, but according to Indonesian officials they only resulted in the clarification of positions. [5]  Another round of meetings was held in early July.  During the remainder of 1996 the United States and Indonesia engaged in a series of bilateral meetings in an effort to negotiate a deal that would be acceptable to the US auto industry.  These negotiations took place both at the level of the Assistant US Trade Representative for Asia or his deputy on the U.S. side and the Director General of the Indonesian Ministry of Trade and Industry.  Since the US negotiators also preferred to settle the case, at each stage in the dispute settlement process, they would only proceed to the next stage at the last moment when they knew that there was no chance of a new deal.  

The US automakers had a smaller stake in the Indonesian market than their Japanese and European counterparts, but the United States probably waged the most visible campaign of the three countries in an effort to resolve the dispute.  On October 1, in the context of the announcement of the annual Super 301 report on the Clinton Administration’s trade expansion priorities, the USTR announced that she was initiating a regular Section 301 investigation of Indonesia’s national car policy.  The Super 301 report stressed that: 

[T]he Clinton Administration has adopted a strategic enforcement strategy — aimed not only at challenging existing barriers but also at preventing the future adoption of similar barriers around the world.  Successful challenges to such measures will establish beneficial precedents not only for the United States, but for all WTO members. 

Application of the Administration’s strategic enforcement strategy is particularly appropriate in the automotive sector, where trade-related investment measures affect U.S. exports in many countries.  Manufacturing of autos and auto parts is a key industry for the United States and access to foreign markets is important for its future growth.  The U.S. auto industry has made enormous strides in competitiveness and productivity.  As a result of USTR’s monitoring of compliance with WTO agreements, the USTR has identified practices that are inhibiting U.S. exports of autos and auto parts and the creation of the jobs associated with those exports.  In many cases such practices appear to be inconsistent with WTO rules, including those under the WTO Agreement on Trade-Related Investment Measures (TRIMs).[6] 

The 1996 Super 301 report also announced the initiation of three other Section 301 investigations, of which two involved auto trade measures: (1) Brazil -- --reduced duties on assembled auto imports and other benefits if manufacturers export a certain amount, and (2) Australia -- subsidies on the export of leather seat covers.  The Australian investigation was launched in response to a petition filed by US manufacturers of leather auto seats covers.  In all four cases the USTR announced that, as the practices under investigations were covered by WTO agreements, she would initiate or continue WTO dispute settlement proceedings. 

The United States did not put as much pressure on Indonesia as it could have.  The year before the United States had threatened to identify Korea as a “priority foreign country” under the Super 301 statute if it did not agree to take steps to modify practices considered to be barriers to US auto exports.  In 1997, the United States actually did name Korea as a “priority foreign country” because of its failure to comply with the 1995 auto trade agreement.  

Having announced the Section 301 investigation of the National Car Program, the United States resumed bilateral consultations with Indonesia as the WTO consultations got underway.  In mid-October a US trade official noted that President Clinton planned to raise the car issue during bilateral meetings at the APEC summit in November.  The official added: “It’s one of the bigger bilateral issues at this point.”[7] 

Indonesian Strategy -- During the extended WTO consultations between Indonesia and the US, Japan and the EU, Tungky and State Secretary Moerdiono continued to imply in public that even if Japan, the EU and the US were to go to the WTO, it would still take until 1999 before a ruling would be brought against Indonesia and that by then, the National Car should be successfully launched.[8]  Tunkgy also assured the public that government “as facilitator, will provide whatever assistance they [TPN] needed, either in construction, licensing or other aspects of the industry.”  On the eve of WTO consultation in October of 1996, Tunkgy reassured his countrymen that WTO consultations were normal in trade disputes, “so there is no need for us to get fidgety”.[9]  

After Japan announced on April 17, 1997 its intention to request the formation of a WTO dispute settlement panel, President Soeharto reacted angrily and called for a halt to the bilateral negotiations.  The resort to the WTO apparently hurt Indonesian national pride.  Even after Japan announced its decisions, Indonesian officials still hoped to keep the National Car Program.  One commentator predicted that the United States and EU would not follow Japan’s lead.  The commentator also observed “Japan’s intention to take the case to the WTO panel is not a final decision.”  Considering Indonesia’s strong reaction to its move, Japan may rethink the decision. [10]     

May was a relatively quiet month as Japan waited for Indonesian assembly elections to take place before pressing its case further.[11]  Some Indonesian leaders remained confident that even if Indonesia lost in the WTO, it would have until 1999 to get the National Car Program successfully launched.  At the same time, others in the government were beginning to organize a team to defend Indonesia.[12]  Further, at least one Indonesian trade expert at a Jakarta think tank warned that Indonesia’s practices were inconsistent with the TRIMs Agreement and that the new WTO dispute settlement system was much more effective than its predecessor in getting offending parties to change practices inconsistent with the WTO.  He noted “thus far all members involved in dispute cases have adhered to panel decisions despite loopholes in national law that would allow them to ignore the decision”, but this was Indonesia’s first experience with the WTO dispute settlement system.[13]  The same commentator also warned that a panel might well rule against Indonesia on the merits and that Indonesia’s negotiating room had been narrowed by having the matter go to the WTO.[14] 

In early June of 1997, Indonesia appeared to be on the verge of reaching a negotiated settlement with Japan, the EU and the United States.  Indonesian business leaders attempted to generate support for a negotiated deal by sending in early June a team to Japan to lobby the influential Japanese Keidanren to oppose continuation of the WTO case.[15]  Indonesia was reportedly ready to offer to eliminate the import duty on car parts and the luxury tax on cars with engines larger than 3000ccs or on cars assembled in Indonesia.[16]  Tungky reported that Indonesian negotiating teams were being dispatched to the three countries and that Indonesia would negotiate the seven demands made by the United States.[17]  However, negotiations were complicated because every decision had to be cleared by President Soeharto.  All of Soeharto’s public statements indicated that he was determined not to surrender the special preferences given the national car and his son.  

In the end the parties could not negotiate a deal as President Soeharto was apparently not willing to eliminate the discriminatory preferences given to the National Car, the concession demanded by the foreign car companies.  By June 19, 1997 Tungky was much less forthcoming and, after reporting to President Soeharto, commented, “We should be careful because the local car industry has already achieved some progress.”  He added that lower car import taxes and duties could affect car production costs.

Dates for the various WTO consultations and requests for a panel are set forth in the following table: 

WTO Consultations with Indonesia 

Summary Table  

Part II
The WTO Panel Proceedings 

With the collapse of the bilateral talks in June of 1997, the WTO proceedings continued almost as if on autopilot.  While the consultation phase had continued much longer than the minimum time required by the DSU rules, the Panel proceeding itself adhered more closely to the guidelines set forth in the DSU.  The Panel met with the parties on December 3 and 4, 1997 and January 13 through 15 of 1998.  Nevertheless, because Japan, the EU and the United States requested the 60-day period for information gathering (provided under Annex V of the SCM Agreement), the panel proceeding was delayed by four months and took longer than the 6 months normally anticipated by the DSU for panel proceedings.

Procedural Issues 

The parties raised a number of procedural issues at the Panel’s first and second meetings, including the following:  

Participation of Private Sector Lawyers:  The United States objected to the presence in the Indonesian delegation of two American private lawyers.  The United States argued that the private lawyers might not be bound by the same disciplinary rules regarding keeping the proceedings confidential as a member of the government.  The United States also argued that including private lawyers could undermine the intergovernmental nature of the proceeding.  

Indonesia argued that it had a sovereign right to determine the composition of is delegation.  This sovereign right, Indonesia claimed, is based on the customary international law principle of the sovereign equality of states.  Indonesia also cited a WTO Appellate Body ruling in another case that nothing in the Marrakesh Agreement Establishing the World Trade Organization, the DSU, or the Working Procedures, or in customary international law or the prevailing practice of international tribunals, prevents a WTO Member from determining the composition of its delegation in Appellate Body proceedings.  

Indonesia noted that the right to determine the composition of delegations in dispute settlement proceedings is particularly important for developing countries since they do not have at their disposal specially trained and highly experienced WTO legal experts.   

Loan to TPN:  Indonesia also objected to a request of the United States that the Panel examine a $690 million loan.  The loan was made on August 11, 1997, to TPN by a consortium of four Indonesian government-owned banks.  The United States contended that the loan was made at the direction of the Government of Indonesia and, as a government-directed loan, violated paragraph 4 of GATT Article III and Article 2 of the TRIMs agreement.  The United States also claimed that the loan constituted a specific subsidy that caused serious prejudice to its interests.  Indonesia argued that the loan was not cited in the US June 12, 1997, requests for a panel and was not covered in the terms of reference of the Panel.[18]  Indonesia noted that Article 6.2 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the DSU) states that “[t]he request for the establishment of a panel ... shall identify the specific measures at issue.”  Indonesia also contended that, as the loan came after the formation of the Panel, it was not covered in the terms of reference of the Panel.

The United States in reply argued that the loan was covered by the terms of the reference for the Panel since it considered the loan subsidy to be a component of the National Car Program.  The United States contended that, because the Panel will have to make findings as to whether or not the $690 million government‑directed loan is merely one aspect of a single measure — the National Car Program, the Panel should not prejudge the outcome of this issue by making a ruling on a preliminary objection.  The United States further contended the standard practice is to defer such rulings until the final panel report.

Significance of terminated measures:  In the context of its effort to cope with the Asian Financial Crisis, Indonesia concluded an agreement with the International Monetary Fund for standby financing in the fall of 1997.  In order to get the financing, Indonesia committed to the IMF to implement a program over the next three years to address the fundamental causes of its current financial difficulties.  In its letter of commitment dated October 31, 1997, Indonesia stated that: 

The government aims to promote greater transparency in policy making and competition to support an ongoing restructuring of the economy that is necessary to promote growth.  To this end, the government intends to speed up its structural reform program through further trade and investment reform, and deregulation and privatization… 

…The government has a comprehensive program, which it introduced in 1995, to reduce most tariffs from 0–40 percent to 0–10 percent by 2003.  Over the program period, any remaining quantitative import restrictions, other than those that may be justified for health, safety, environment and security reasons, and other non-tariff barriers that protect domestic production, will be phased out.  Consistent with Indonesia's commitment to the WTO, the local content program for motor vehicles, which gives preferential tariff rates to vehicle manufacturers using a high percentage of local parts, will be phased out by 2000.  With respect to the National Car project, the Government of Indonesia will implement ahead of schedule the ruling of the WTO dispute panel.[19] 

On January 21, 1998, after the Panel had heard from the parties, but before it had begun its report, Indonesia revoked the Presidential Decree No 42/1996 of June 4, 1996 and thereby terminated the authority for the import duty and tax exemption provided in the National Car Program.  In addition, on February 25, 1998, Indonesia notified the WTO Subsidies Committee that, as of January 21, 1998, it had terminated all subsidies previously granted under the National Car Program.  On March 2, 1998, Indonesia notified the Panel and requested it to terminate the dispute settlement proceeding, at least as it relates to the 1996 National Car Program measures.  Indonesia cited a prior GATT case where a panel had refused to grant a party’s request for compensation because the measure had been withdrawn prior to the panel’s decision.  

Japan opposed Indonesia’s request on the grounds that it still did not believe that a mutually satisfactory solution had been achieved.  Unless such a mutually satisfactory solution is obtained between the parties, Japan contended, a panel is obliged to submit its findings to the DSB as described in Article 12:7 of the DSU.[20]  Japan and the EU noted that it was still not clear if all of the National Car Program measures had been terminated.  For instance, Presidential Instruction No. 2/1996 had not been revoked but merely declared “obsolete” by Presidential Decree Number 20/1998.  Japan claimed that the usual practice of GATT/WTO panels was to rule on measures effective at the time the panel’s terms of reference were fixed, even if such measures were withdrawn before the panel rendered its ruling.  In support of its position, Japan cited Article 3.2 of the DSU, which provides that “[t]he dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system.”  If a panel should not rule on this kind of occasion, Japan argued a WTO Member might easily evade the WTO reviews.  The EU and United States presented arguments along similar lines.  

Substantive Arguments of the Parties[21]  

Summary Table
Principal Indonesian Measures and Alleged WTO Violations

The complaining parties in their presentations to the Panel focused:  first, on the alleged violations of the national treatment provisions of GATT Article III; second, on the alleged WTO TRIMs Agreement violations; third, on the alleged violation of MFN provisions of paragraph 1 of GATT Article I, and finally, on the alleged violations of the SCM Agreement.  

In particular, the EU and the United States claimed that the local content requirements in the 1993 Incentives Program—which provided reduced duties and luxury taxes on imported parts and components if a manufacturer produced finished parts and vehicles whose domestic content exceeded a fixed percentage—violated GATT Article III paragraphs 2 and 4, and Article 2 of the TRIMs Agreement.  Japan did not file a complaint against the 1993 program.  

Japan, the EU and the United States all claimed that the domestic content requirements of the February and June 1996 National Car programs violated GATT Article I, GATT Article III, paragraphs 2 and 4, and Article 2 of the TRIMs agreement.  The EU and United States also claimed that the National Car Program caused serious prejudice within the meaning of Article 5(c) of the SCM Agreement.

top

Continue to Next Page