GATT Article III:2 National Treatment  

Japan, the EU and the United States all claimed that the luxury tax exemptions of the National Car Program provided under the 1996 National Car program and the 1993 program (EU and US only) violated the first sentence of paragraph 2 of Article III.  The 1993 incentives program, after the 1995 and 1996 amendments, exempted from the luxury tax domestically manufactured sedans and stations wagons of less than 1,600 cc with a local content of more than 60 percent.  Passenger cars 1600cc and higher and passenger cars with less than 60% local contents were subject to a 35 percent luxury tax.  The February 1996 program exempted National Cars assembled in Indonesia by Pioneer companies as defined in the regulations and the June 1996 program exempted imported National Cars manufactured by Kia in Korea. 

Based on an earlier opinion of the WTO Appellate Body, the complainants proposed that the relevant criteria for finding a violation of the first sentence were set forth in the following sentence: 

The words of the first sentence require an examination of the conformity of an internal tax measure with Article III by determining, first, whether the taxed imported and domestic products are ‘like’ and, second, whether the taxes applied to the imported products are ‘in excess of those applied to the like domestic products. 

The complainants argued that the luxury tax was an internal tax, not an import charge.  They noted that the luxury tax is applied on the sale of all cars whether produced abroad or in Indonesia and it is not just applied “on” or “in connection” with importation of motor vehicles.  

Second, the complainants noted that while the WTO Appellate Body had set forth criteria for determining likeness for the purposes of Article III, paragraph 2, first sentence[1], it was unnecessary to discuss the criteria.  The Indonesian measures required that, even if a car were identical with an Indonesian National Car, it would still be treated differently if it were manufactured abroad and imported.  Nevertheless, the complainants argued that the following categories of products could be considered like products for purposes of Article III, paragraph 2, first sentence:  

Imported sedans of less than 1,600 cc and Indonesian made sedans of less than 1,600cc, including those with a local content of 60 percent or more; 

Imported motor vehicles and National Cars assembled in Indonesia by Pioneer companies, and

Imported parts, components and raw materials for the assembly of motor vehicles and Indonesian made parts, components and raw materials, including those incorporated into imported National Cars. 

The complainants said that imported motor vehicles are taxed “in excess of” domestic like products because they are always subject to the Sales Tax on Luxury Goods at a rate of 35 percent for sedans, whereas like domestic products can benefit from the exemption if their domestic content is more than 60 percent.  The complainants noted further that it did not matter if a domestic car with a domestic content of less than 60% were subject to the same luxury tax as like imported cars  As long as some imported cars were treated less favorably than some like domestic cars, there is a violation. 

Indonesia did not offer a specific defense to the claims, but instead relied on its general defense.

GATT Article III:4  

The complainants argued that the customs and tax benefits accorded to National Cars by the February and June 1996 programs violated GATT Article III, paragraph 4.  In addition, the EU and the United Sates argued that customs and tax benefits of the 1993 Incentives program also violated GATT Article III:4.  

The parties said that in order to establish a violation of paragraph 4, the Panel would need to answer the following questions:  

first, whether the measures at issue are “laws, regulations or requirements”;

second, whether they “affect the internal use” of parts and components for the assembly of motor vehicles;

  third, whether imported parts and components are “like” domestic parts 
  and components; and

fourth, whether the measures afford “less favourable treatment” to imported parts and components. 

The complainants said that the measures were clearly laws and regulations since they are set forth in Presidential instructions, government regulations and decrees.  The measures also affect “the internal use” of parts and components because they “modify adversely the conditions of competitions between domestic and imported parts and components by giving to Indonesian car manufacturers tax and tariff incentives for using local parts and components instead of like imported parts and components.  Use of imported parts and components would not give Indonesian car manufacturers the same benefits as use of local ones would and therefore imported parts and components are treated less favorably.  The complainants noted that the panel in the FIRA cases had come to a similar conclusion.

  
The TRIMs Agreement  

The complainants argued that the rules of the TRIMs agreement apply to the National Car Program since the program contains “investment measures related to trade” within the meaning of Article 1 of the TRIMs Agreement.  

The complainants argued first that  the word “measure” is interpreted broadly and means any measure by a Member whether in the form of law, regulation, rule, procedure, decision, or administrative action. 

Second, the National Car Program is an “investment measure”.  Government Regulation No. 36/1996 states that the National Car program was established “with a view to supporting the development of the automotive industry”.[2]   One of the implementing regulations is entitled “Investment Provisions for Realization of the National Automobile Industry”.  The complainants also noted that at a meeting of the WTO Committee on Trade-Related Investment Measures in 1996, Indonesia had said that the National Car Program was to encourage car companies to increase their local content and thereby result in a rapid growth of investment.[3]  The measures in the National Car Program were trade-related because they encouraged the use of domestic parts and components over imported ones.  

The complainants also noted that the Illustrative List in the Annex to the TRIMS Agreement specifically includes local content requirements as TRIMs that are inconsistent with Article III:4 of GATT 1994.  Since the customs and luxury tax exemptions in the National Car Program are Indonesia measures that are contingent on compliance with local content requirements, they clearly constitute TRIMs as set forth in the illustrative list.   

The complainants further noted that while the TRIMs Agreement provides for notification and transition arrangements for developing countries, Indonesia did not take advantage of those arrangements.  Indonesia failed to notify within 90 days of the entry into force of the WTO Agreements (i.e., March 31, 1995) the portions of the 1993 program that provided tariff incentives.  Its notification of May 23, 1995 did not cover the luxury tax incentives in the 1993 program and the notification was subsequently withdrawn.  

Indonesia, in opposition to the three complainants, argued that since the measures did not violate Article III, they did not violate the TRIMs Agreement.  As stated earlier, Indonesia contended that GATT Article III and the SCM agreements are mutually exclusive.  The measures are covered by the SCM agreement, not Article III, and thus could not be found to violate it.  Indonesia said that the TRIMs Agreement did not impose any new rights and obligations on Members and only elaborated on the FIRA Panel’s decision regarding the coverage of Article III.  Therefore, if a measure does not violate Article III or Article XI, it cannot be said to violate the TRIMs Agreement.  

Indonesia also argued that the domestic content measures were not investment measures, but subsidies.  The only regulation that mentions “investment” is a minor one regarding the role of the Chairman of the Investment Coordination Board (BKPM) to look over the national car industry; it is not one of the principal regulations that give instructions to the Minister of Trade & Industry and the Minister of Finance. 

Indonesia’s General Defense to Article III and TRIMs Agreement Claims  

Indonesia claimed as a general defense to all of the Article III and TRIMs claims brought against it that the measures in question were subsidies.  Therefore, the only WTO provisions applicable are those regarding subsidies in GATT 1994 Article XVI and the SCM Agreement.  Indonesia argued that the provisions of GATT Articles III and I conflict with the SCM Agreement and that the conflict should be resolved by applying only the latter agreement.  Further, Indonesia argued that if GATT Article III is not applicable, then the TRIMs Agreement is not applicable. 

In particular, Indonesia showed that the local content measures were subsidies as defined in the SCM Agreement.  Indonesia then invoked the international law concept of “lex specialis” to argue that the SCM agreement dealt specifically with subsidies while Article III of GATT was more general and therefore the SCM provision should prevail since the two agreements were in conflict.   

The complainants disputed Indonesia’s contention that the SCM and GATT provisions were in conflict, but rather said that they were complementary.  A measure could be both a subsidy that is permitted by the SCM Agreement and measure that is inconsistent with Article III because it denies national treatment.  Since there was no conflict, the lex specialis  argument was wrong.  To accept Indonesia’s argument would mean that the SCM Agreement would make GATT Article III redundant. 

GATT Article I Most Favored Nation Treatment  

Japan, the EU and the United States claimed that the National Car Program violated GATT Article I, paragraph 1 because the customs and tax provisions resulted in some auto and parts imports being treated less favorably than others.  The complainants argued that the test should be whether the customs duty and luxury tax exemptions confer an advantage of the type covered by Article I:1 to imports of automotive parts and components from Korea but not to imports of like products from other WTO members.  

In particular, the following elements of the National Car Program were considered to violate Article I, paragraph 1: (1) the exemption from custom duties on imports of parts and components used in the assembly of National Cars in Indonesia; (2) the exemption from the luxury tax for National Cars assembled in Indonesia; (3) the exemption from the luxury tax (sales tax on luxury goods) for imported National Cars, and (4) the exemption from customs duties on imports of National Cars (June 1996 program).   

The complainants said that the February 1996 National Car Program resulted in unfairly favorable trading terms for Korea.  The exemption of National Cars produced in Korea from luxury tax meant that the imported parts and components used in them were being treated more favorably than parts and components used in other cars. 

Indonesia contended that neither the February 1996 nor the June 1996 program granted advantages to automobiles or parts originating in one country that were not granted to like products originating in other countries.  The national car producer, TPN, had the freedom to determine the source of technology, components and parts.  The National Car Program did not compel TPN to purchase parts and cars from Korea.  In GATT cases concerning violations of Article I, the government was compelled to favor products from one country over products from another.   

In rebuttal of Indonesia’s contention that the National Car Program did not violate Article I, Japan, the EU and United States argued that the Indonesia government knew that TPN had a relationship with Kia and that KIA auto, parts and components would be imported under the program.  In fact, the document authorizing the importation of built-up cars under the June 1996 program, Decree No. 140/MPP/6/1996, expressly authorized only the importation of the TIMOR Sedan/S515.     

Part III
Epilogue 

Conclusions of WTO Dispute Settlement Panel 

The Panel issued its report on July 2, 1998.  Since no party appealed the findings of the Panel, the WTO Dispute Settlement Body (the “DSB”) adopted the Panel Report on July 23, 1998.  The report is formally titled  “Indonesia – Certain Measures Affecting the Automobile Industry”.  This section summarizes the principal findings of the Panel with respect to the issues discussed above as well as the findings and reasoning of the Panel with respect to the SCM claims raised by the complaining parties.                       

Procedural Issues -- In regards to whether the private American lawyers could be included in the Indonesian delegation, the Panel ruled that: 

We conclude that it is for the Government of Indonesia to nominate the members of its delegation to meetings of this Panel, and we find no provision in the WTO Agreement or the DSU, including the standard rules of procedures included therein, which prevents a WTO member from determining the composition of its delegation to WTO panel meetings.[4] 

The Panel also stressed that “all members of parties’ delegations -- whether or not they are government employees-- are present as representatives of their governments, and as such are subject to the provisions of the DSU …  In particular, parties are required to treat as confidential all submissions to the Panel ...”[5] 

The Panel also rejected one of the key claims of the United States—that the Panel’s terms of reference covered the $690 million August 11, 1997 loan to TPN.  A consortium of four Indonesian government-owned banks made the loan and the United States claimed that the loan violated GATT Article III and the TRIMs Agreement and was subject to the serious prejudice provisions of the SCM Agreement.  The Panel noted that the United States clearly identified in its June 12, 1997 panel request the measures to be considered.  These measures did not include the $690 million loan.  The Panel therefore upheld Indonesia’s request that it not consider any claims relating to $690 million loan. 

Substantive Issues -- The Panel flatly rejected Indonesia’s general defense in saying that based on numerous panel rulings in the past GATT and WTO cases, “Article III and the SCM Agreement have generally different coverage and do not impose the same type of obligations.”[6]  The Panel later added “We consider rather that the obligations contained in the WTO Agreement are generally cumulative, can be complied with simultaneously and that different aspects and sometimes the same aspects of a legislative act can be subject to various provisions of the WTO Agreement.”[7] 

The Panel had to determine whether to examine the Indonesia domestic content measures in light of the TRIMs Agreement or in light of GATT Article III.  Because the TRIMs Agreement was more specific than GATT Article III, the Panel decided to consider first the applicability of its provisions to the domestic content measures. 

TRIMs Agreement 

With respect to the TRIMs Agreement, the Panel found that the legislation introducing the National Car measures clearly stated they were intended to promote the development of a domestic motor vehicle industry in Indonesia.  The Panel quickly concluded that the domestic content measures where “trade-related” because they “by definition, always favour the use of domestic products over imported products, and therefore affect trade”.[8] 

The Panel then found that the domestic content measures were covered by item 1(a) in the illustrative list of Trims in the ANNEX to the TRIMs Agreement.  As noted earlier, paragraph 1 of the Annex applies to measures which requires a person to comply in order to receive an advantage that are inconsistent with the national treatment provisions of GATT Article III:4, Sub-paragraph (a ) applies to such measures which require the purchase or use by an enterprise of products of domestic origin.  The Panel said: 

We note that all the various decrees and regulations implementing the Indonesian car programmes operate in the same manner.  They provide for tax advantages on finished motor vehicles using a certain percentage value of local content and additional customs duty advantages on imports of parts and components to be used in the finished motor vehicles using a certain percentage of local content.  We also note that under the June 1996 car programme, the local content envisaged in the February 1996 car programme could be performed through an undertaking by the foreign producer of National Cars to counter-purchase Indonesian parts and components.[9] 

The Panel concluded that “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.”[10]  In order for a domestic content measure to constitute a violation of Article 2, it must provide an “advantage”.  In this case, the Panel noted that the tax and tariff benefits provided by the Indonesian domestic content measures did constitute advantages and that they therefore did violate Article 2.  The Panel noted that the TRIMs Agreement did permit certain justifications in Articles 3, 4 and 5.  Indonesia had not, however, invoked any the general exceptions provided for in GATT, 1994 permitted by Article 3 of the TRIMs Agreement (i.e., exceptions for measures to protect regarding health and safety, public morals or national security).  In addition, Indonesia had not invoked the exemptions permitted by Article 4 of TRIMs for developing countries to promote infant industries or protect the balance of payments.  Lastly, Indonesia had not invoked the transitional period provided for in Article 5 that allows developing countries to maintain any TRIMs notified by March 31, 1995 that existed 180 days prior to January 1, 1995.  

GATT Article III:2 National Treatment –Internal Taxes 

In order to violate the first sentence of Article III, paragraph 2, the Panel said that Indonesia would have to tax an imported product higher than a like domestic product.  The Panel first noted, “Indonesia does not dispute that pursuant to the 1993 and 1996 car programs imported motor vehicles are taxed in excess of the domestic product.”[11]  Under the 1996 program National Cars are completely exempt from sales tax, and under the 1993 program domestic cars below 1600cc with greater than 60% local content are exempt while imported or domestic sedans with 60% or less local content pay a sales tax of 35%.  The Panel went through a detailed analysis to show that some imported models of Japanese and European cars were like the National Car, Timor.  The Panel therefore concluded that the tax provisions of the 1993 and 1996 Indonesian car programs violated the first sentence of Article III: 2.[12] 

The Panel decided that it did not have to address the claim that the Indonesian measures violated Article III, paragraph 4, regarding national treatment with respect to internal regulations, since the actions Indonesia  would have to take to comply with the TRIMs Agreement would also bring it into   compliance with Article III:4.[13] 

GATT Article I:1 Most Favored Nation Treatment 

With respect to the claims that the Indonesian car programs violated the most favored nation of GATT Article 1, paragraph 1, the Panel said that there must be an advantage of the type covered by Article which is not accorded unconditionally to all “like products” of all WTO members.  The Panel first found that the customs and tax benefits of the February and June 1996 car programs were advantages of the type covered by Article I. Article 1 explicitly refers to customs duties and all matters referred to in paragraphs 2 and 4 of Article III and the tax benefits were already found to be covered by Article III:2.  The Panel next found that, on the basis of its analysis with respect to GATT Article III, for the purpose of Article I National Cars and their parts and components imported into Indonesia from Korea were to be considered “like” products other similar motor vehicles and parts and components imported from other WTO Members. 

The Panel noted that the customs and tax benefits of the June 1996 National Car Program were conditioned on whether PT TPN had made a private contractual arrangement with an exporting company to produce National Cars.  The customs benefits of the February 1996 program were conditioned on parts and components being used in the assembly of National Cars in Indonesia and on finished cars and components meeting certain local content targets.  Since the foregoing conditions were not related to the imported parts, components and vehicles themselves, the Panel considered that the tax and customs advantages of June the 1996 car program and the customs advantages of the February 1996 program were not unconditional and were inconsistent with the provisions of Article I of GATT. 

SCM Agreement 

The Panel next addressed the EC and US claims regarding the SCM Agreement.  The EC and United States claimed that the tariff and luxury sales tax exemptions provided through the National Car Program caused “serious prejudice” to their interests within the meaning of Article 5 of the SCM agreement.  The EU and United States further claimed that they could bring a serious prejudice claim again Indonesia even though it was a developing country because the subsidies displaced or impeded imports of like products in the Indonesian market and caused significant price undercutting.  Such subsidies fall  within the provisions of Article 5 of the SCM Agreement and can be the subject of a serious prejudice claim.  Japan did not raise claims under the SCM Agreement.  

Existence of Subsidies:  Indonesia did not disagree with the claim that the tariff and tax exemptions in the National Car Program as elaborated in February 1996 and expanded in June 1996 represented specific subsidies.  Indonesia, the United States, and the EU agreed that the above measures represented government revenue forgone as defined in Article 1.1(a)(i)(ii) of the SCM Agreement and that the measures conferred a benefit on PT TPN within the meaning of Article 1.1(b) of the SCM Agreement.  The three parties also considered that because the measures are contingent upon the use of domestic over imported parts, they are deemed to be specific subsidies within the terms of Article 2 of the SCM Agreement.  The Panel concluded that the measures in question were specific subsidies within the meaning of Articles 1 and 2 of the SCM Agreement.[14]  

Serious prejudice:  In light of the general agreement on the specificity of the subsidies, the key question for the Panel was whether a serious prejudice complaint may be brought against Indonesia in view of its status as a developing country and the special and differential measures provisions in Article 27.  Again the EU, the US and Indonesia all agreed that Indonesia was a developing country and qualified for the benefits under Article 27.  

The Panel therefore had only to address the question whether the subsidies provided by Indonesia to PT TPN fell within the scope of the subsidies covered by the provisions of Article 6.1 (a).  If the subsidies were covered by Article 6.1(a), then Article 27.8 did not preclude the EU and US from bringing a complaint that the subsidies were causing serious prejudice to their interests and demonstrating by positive evidence that they caused serious prejudice.  

Presumption of serious prejudice:  In its serious prejudice inquiry, the Panel examined whether the subsidies fell within any of the categories of subsidies listed in Article 6.1.  The Panel noted that the EU submitted calculations showing that the ad valorem subsidization of Timors assembled in Indonesia ranged from 40 to 61 percent and that of Timors imported from Korea ranged from 156 to 460 percent.  The US also submitted calculations showing high rates of subsidization.  Indonesia provided calculations which showed a much lower rate of subsidization, but still higher than the five percent threshold provided in Article 6.1(a) for triggering the presumption of serious prejudice.  The Panel concluded that it did not have to resolve which calculations were correct, since all were well above the 5 percent threshold.  Furthermore, the Panel noted that because Indonesia exempted Timors from the 35 per cent luxury sales tax, the rate of subsidization was clearly in excess of 5 percent.   

Normally, a defending party would have to demonstrate that none of the effects listed in Article 6.3 had taken place in order to defeat the presumption that subsidies covered by Article 6.1(a) were causing serious prejudice.  However, since Indonesia was a developing country, the Panel concluded that the EU and US would have to show by positive evidence that one of the effects listed in Article 6.3 had occurred.    

The EU and US both argued that the Indonesian subsidies displaced or impeded their auto exports into the Indonesia market (effect identified in 6.3(a)) and also undercut the price of their autos in the Indonesian market (effect identified in 6.3(c)).  The key issue in making these determinations was which EU and US autos are like products to the Timor.  

Like Product:  The parties presented a variety of views as to which of their cars should be considered “like products” to the Timor and what should be the basis for making such a determination.  The Panel based its determination on the definition provided in the SCM Agreement:  

Throughout this Agreement the term “like product” (“produit similaire”) shall be interpreted to mean a product which is identical, i.e. alike in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration.[15] 

In short, cars which have “characteristics closely resembling” those of the Timor are like the Timor.  The Panel found this task particular challenging and observed that “[w]e are aware that there are innumerable differences among passenger car and that the identification of appropriate dividing lines between them may not be a simple task.” [16]  

The Panel ultimately decided that a reasonable way “to approach the ‘like product’ issue is to look at the manner in which the automotive industry itself analyzed market segmentation”.[17]  The Panel relied heavily on the market segmentation approach taken by the DRI Global Automotive Group as expressed in particular in DRI’s Asian Automotive Industry Forecast Report of June 1997.  Using the DRI approach as its foundation, the Panel first identified a category of autos that could be considered “like products”.  The Panel then independently examined a number of Indonesia’s arguments regarding which cars should be considered “like products”.  They concluded that the Opel Optima, the Ford Escort and the Peugot 306 were like products of the Timor.  

Cars considered like products of the Timor were generally imported to Indonesia in unassembled form (i.e., as completely knocked down (CKD) kits).  The Panel had to decide if a car imported in unassembled form could be considered a like product to a completed Timor.  Because the EU and US shipped to Indonesia “virtually completed CKD kits that were effectively ‘cars in a box’”, the Panel concluded they could properly be considered to have the characteristics closely resembling those of a completed car.[18] 

Claim based on products being produced in another country:  In response to questions from the Panel, the US acknowledged that cars deemed like products to the Timor would have been manufactured in Europe by US companies that intended to sell them in Indonesia (i.e., General Motors’ Optima and the Ford Escort).  In light of this admission, the Panel investigated whether a country could claim that it had suffered serious prejudice under the SCM Agreement with respect to a product that did not originate in its borders, but was the product of one of its companies.  The Panel concluded that a WTO Member couldn’t bring a complaint of adverse affects from subsidization and serious prejudice merely because its companies had been harmed where no products of the Member are involved.  Neither Article XVI of the GATT nor the relevant articles of the SCM Agreement suggest that the nationality of the producers of a product is relevant to establishing serious prejudice—only the origin of the products is relevant.[19] 

The Panel further concluded that a Member couldn’t bring a claim alleging that another Member had suffered serious prejudice.  The dispute settlement procedures in Article 7 of the SCM Agreement may only be invoked by a Member that believes it has itself suffered serious prejudice from subsidization.[20]  

Displacement or impedance of imports of EU or US products into the Indonesian market:  The Panel observed market share data in Indonesia for the US and EU vehicles considered like products of the Timor.  Indeed, the EU cars had suffered a substantial decline relative to the subsidized Timor following the Timor’s introduction.[21]  However, as the volume of EU sales did not change significantly while the overall market expanded, the Panel felt that a loss of market share did not constitute the positive evidence required by the SCM Agreement.  Further, the Panel also examined the actual sales data, which was much more inconclusive since it was incomplete and in many cases insufficient to be statistically significant.  The Panel concluded that the fall in EC market share was “not decisive evidence of displacement or impedance, as the data lent some credence to the Indonesian view that the introduction of the subsidized Timor created much of the market growth”.[22] 

The Panel also considered evidence offered by the EU and US that their auto manufacturers would have introduced new models and had higher sales if the subsidization of the Timor did not exist.  The Panel was very dissatisfied with the evidence, which consisted primarily of newspaper reports and statements of the auto companies regarding their intentions.  The Panel felt that such evidence did not constitute the positive evidence required by the SCM Agreement to demonstrate serious prejudice within the meaning of Article 6.3(a).[23] 

Existence of significant price undercutting or price suppression as a result of subsidization:  The Panel then examined the sales price data of European cars determined to be like products of the Timor.  The Panel took into account the standards set forth in paragraph 6.5 of the SCM Agreement, regarding sales at the same level of trade and at comparable times, and took due account of any other factors affecting price comparability.  The Panel found that the Timor enjoyed a 27.5-million ruppiah advantage over the lowest price Peugot 306 and 23.25-million ruppiah price advantage over the lowest price Opel Optima.  In other words the Timor sold for only 57 percent as much as the Peugot 306 and 60 percent as much as the Open Optima.[24] 

The Panel sought to consider differences in accessories and engine sizes and other factors that might affect the price consumers pay for cars.  While the Panel was dissatisfied with some of the data presented, it felt that the price difference was great, and was clearly caused by the subsidization.  There was sufficient evidence that price undercutting had occurred.[25]  The Panel further concluded that the degree price was sufficiently large to satisfy the requirement in Article 6.3(c), that the price undercutting be “significant”.[26]  The Panel noted that Indonesia had effectively conceded during the panel proceeding that the tariff and tax subsidies under the National Car Program were responsible for the significant level of price undercutting.  The Panel therefore concluded that these subsidies were causing serious prejudice to the interests of the European Communities. 

Summation of finding: With respect to the 1993 Program, the Panel found that the local content requirements linked to certain sales tax benefits and customs duty benefits violated the provisions of Article 2 of the Agreement on Trade-Related Investment Measures (the “TRIMs Agreement”) and that the sales tax discrimination aspects violated Article III:2 of the GATT 1994.  With respect to the 1996 National Car Program, the Panel found, inter alia, that Indonesia had acted inconsistently with Article 2 of the TRIMs Agreement and Articles I and III:2 of the GATT 1994, and that the European Communities had demonstrated that Indonesia had caused serious prejudice to the interests of the European Communities within Article 5(c) of the Agreement on Subsidies and Countervailing Measures.  As is the norm when measures are found to be inconsistent with WTO Agreements, the Panel at the conclusion of its report recommended “that the Dispute Settlement Body request Indonesia to bring its measures into conformity with its obligations under the WTO Agreement”.  This became the request of the DSB once the panel report was adopted. 

Implementation Issues and Arbitrator’s Ruling 

Following adoption of the report, Indonesia entered into negotiations with the complaining parties for the reasonable period of time to bring its measures into compliance with the Panel’s finding.  Indonesia contended, and the complaining parties did not disagree, that the measures taken on January 21, 1998 to repeal the February 1996 National Car Program constituted “appropriate implementation of the recommendations and rulings of the DSB” concerning the 1996 program.   

In order to bring the 1993 incentive program into compliance with the Panel’s ruling, Indonesia wanted 15 months from the date of adoption of the panel report—6 months for adoption of domestic regulations and 9 months for a transaction period.  The EU pushed for six months, the time required to complete the domestic rulemaking.  In the end the arbiter ruled: 

Indonesia is not only a developing country; it is a developing country that is currently in a dire economic and financial situation.  Indonesia itself states that its economy is “near collapse”.  In these very particular circumstances, I consider it appropriate to give full weight to matters affecting the interests of Indonesia as a developing country pursuant to the provisions of Article 21.2 of the DSU.  I, therefore, conclude that an additional period of six months over and above the six-month period required for the completion of Indonesia's domestic rule-making process constitutes a reasonable period of time for implementation of the recommendations and rulings of the DSB in this case.

The National Car Program Today 

In a document distributed to the DSP on July 15, 1999,[27] Indonesia stated that: 

[O]n  24 June 1999 the GOI [i.e., Government of Indonesia]has issued a new policy package on automotive industry (the 1999 Automotive Policy) comprising Government Regulation No. 59/1999, Decrees of the Minister for Industry and Trade No. 275/1999 and No. 276/1999 and Decree of the Minister for Finance No. 344/1999.  In accordance with the decision of the DSB adopted on 23 July 1998, the new policy has removed all WTO-inconsistent elements of the 1993 car program, i.e.: 

(a)            by abolishing the policy regarding the determination of local content levels of domestically made motor vehicles or components as stipulated by the Minister of Industry Decree No. 114/M/SK/6/1993 of 9 June 1993;

(b)        the sales tax discrimination aspects of the 1993 car policy in favour of domestic motor vehicles incorporating a certain value of domestic program;

(c)            the local content requirements which are linked to (1) sales tax benefit on finished motor vehicles incorporating a certain percentage value of domestic products and (ii) custom duty benefits for imported parts and components used in finished motor vehicles incorporating a certain percentage value of domestic products.

The 1999 Automotive Policy, which is mainly based on non-discriminatory and WTO-consistent tariff and tax measures, will be effective before the expiry of the reasonable period of time for implementation. 

By the entry into force of the 1999 Automotive Policy, Indonesia considers it has now fully implemented the recommendations and rulings of the DSB in the dispute regarding "Indonesia - Measures Affecting the Automotive Industry" adopted by the DSB on 23 July 1998. 

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